Business Finance: Working Capital and Cash Flow Analysis

Business Finance

Table of Contents
EXECUTIVE SUMMERY..............................................................................................................1
PART 1............................................................................................................................................1
Question 1...................................................................................................................................1
Question 2...................................................................................................................................3
Question 3 .................................................................................................................................3
PART 2............................................................................................................................................4
EXECUTIVE SUMMARY:............................................................................................................4
Question 1...................................................................................................................................5
REFERENCES ...............................................................................................................................9

EXECUTIVE SUMMERY
Business finance refers to those activities which are related with acquisition and
allocation of monetary funds require by company. In other words, it is a systematic process of
planning organizing allocating and controlling of monetary funds. Business finance play
important role in running organisation it helps in achieve competitive advantage to the
organisation.
In order to understand concept of business finance in a better way, Mediterranean Delights Ltd
has been taken. In this report concept of working capital and their related elements, has been
defined, how changes in working capital effect on the result of financial activities has been
analysis.
PART 1
Question 1
A) Explanation of meaning of profit and cash flow and their differences:
Profit: It defines as differences between cost of goods sold and selling amount of a
product. Profit refers as incentive mechanism of capital invested in a project.
Cash flow: Net value generated through cash inflow and cash outflow related activities
are define as value of cash flow. In other words, cash flow refers as the amount generated
through cash and cash equivalent transactions (Bassemir and Novotny‐Farkas, 2018).
Many people define profit and cash flow as equivalent term but there are huge differences
between profit and cash flow, these differences are mention below:
Particular Profit Cash flow
Definition Net value of monetary
transaction an organisation
generates through their
operating activities
Net amount of Inflow and
outflow of cash related
transactions.
Objective Main objective of
calculating profit is to
enhance capital growth in
market place.
Main objective of preparing
cash flow statement is to
analysis activities which
help in accumulation of
monetary fund.

Period Profit transactions recorded
on accrual basis (Benlemlih
and Girerd‐Potin, 2017.)
Inflow and out flow of cash
related activities are
recorded in ledger when
company receive or pay
actual amount of cash.
B) Explanation of working capital, account receivables, account payable and
inventory:
Working capital: It defines as total computed value of current assets of an organization.
Working capital is an essential term used in day to day transaction of an organization.
Manager uses working capital to fulfill basic needs of their running business transactions.
Gross working capital is the sum up of current asset and net working capital is the differences
between current assets and current liabilities of an organization. Working capital uses to
identify s operational level efficiency and short term financial health of an entity.
Account receivables: This term refers as total amount organizations claim on their
customers due to nonpayment of products and services acquire by them. It treated as current
assets of business organizations. Ratio of debtor receivables are used by managers to identify
efficiency level of their customers to pay their debt amount.
Account payable: This term defines as sum up value of monetary fund’s owned by business
entities from their creditors to run their business successfully. It generated liabilities on
business organization. This term shows at the liability side of balance sheet. Managers use
this term to identify net amount of short term liabilities of an organization (Brooks and
Oikonomou, 2018 ).
Inventory: In accounting term inventory has been defined as net value of raw materials and
other tools and equipment’s require by an organization to produces goods and services to
their customer. It is also known as stock. It is essential part of current assets of an
organization.
C) Effect of changes of working capital on cash flow:
Managers use working capital to regulate their day to day activities of business. Working
capital ratio can be calculated by dividing current assets upon current liabilities. Higher
working capital ratio negatively impact on cash flow as cash out flow activities are increase