Business Finance Report

This business finance report provides an analysis of profit and cash flow, the impact of working capital on cash flow, and recommendations for improvement. It also includes a monthly cash budget for Thorne Co and observations/recommendations based on the analysis.

Business finance report

TABLE OF CONTENTS
TASK 1............................................................................................................................................3
I). A. Profit and Cash flow...........................................................................................................3
B. Working capital and receivable, inventory and payable.........................................................4
c. Impact of working capital on cash flow...................................................................................5
ii. Application and analysis..........................................................................................................5
iii. Recommendation of the steps to be taken..............................................................................6
TASK 2............................................................................................................................................7
1. Monthly cash budget for Thorne Co........................................................................................7
2. Observation or recommendation from the analysis of the budget...........................................8
REFERENCES..............................................................................................................................10

TASK 1
I). A. Profit and Cash flow
Cash flow is the net amount of cash and cash equivalent which is transfer in and out from
business for activities. Cash inflows shows the cashed received by company and cash outflow
refers to cash spend by company. Company need to maintain positive cash flow statement that
determine by ability to shareholders. Free cash flow refers to cash flow by business that is
generated from the normal business operation after removing expenditure spend on capital.
These are generated through all main activities of business. These activities are purchasing of
capital assert and invest in other business venture. The financing cash also include issuing debt,
equity made by company for payment or gained(NGUYEN and NGUYEN, 2020).
The cash recovered from interest, investment, royalties or licensing agreement are
included in cash inflow by company. Whereas, spending cash on selling products, credits and
other expenditure are included in the cash outflow. The positive cash flow of company shows the
company liquidity asserts are increasing, returns to shareholders, paying all expenses of company
and reserves against future financial challenges (Saleem and Ahmed, 2020). While cash flow
doesn't show the performance of company and only shows the company expenditures and return
which are gained by company. There are various cash flows in company which include, cash
flow from operation, cash flow from investment and cash flow from financial activities.
Profit refers to financial benefits realized when revenue generated from business
activities where profit is shown after including all expenditures, cost and taxes paid by company.
The profits of business are gained by owner of business which may further reinvested by owner
in business. Profits can be calculated from total revenue earned less total expenses. Thee primary
activity of business to earn money to gain profits from it. There are various types of profit which
are shown in company's financial statements. The Gross profits shows revenue generated from
sales less cost of good sold by company. Second profits is operating profits which shows
operating profits by company. Operating profits is calculated as gross profit less operating
expenses. Third one is net profit which shows the final profit of company left over all expenses
like taxes and other expenses.
They both are different from each other as cash flow statement and both are important
metric for business. Profit indicates the final amount of money that is remained after all expenses

ow and profit is tare deducted and paid by company whereas cash flow statement shows the net
flow of cash in and out in origination. Cash flow can be negative and still company can operate
in market without it but negative profit shows the company is unable to achieve their target and
not longer survive in market (Boisjoly, Conine Jr, and McDonald IV, 2020). The inflow and
outflow of cash is occurred frequently where company's profits are shown after the one year.
Cash flow Statement shows each expense and income of company with details while profits are
shown overall by reducing all expense of company which are known after the balance sheet is
prepared.
B. Working capital and receivable, inventory and payable Working capital: It is a difference between current asserts of company which include
account receivable, cash, inventories of raw material and finished goods. On the other
side current liabilities are shows account payables. Net operating working capitals are
calculated through company's liquidity and difference between operating current asserts
and current liabilities. Receivables: This are refers to account receivables and debts own to company by its
customers for goods and services they are dealing in are delivered to customers but not
paid to company. It means company selling products on credit to its customers for goods
and service they provided (Dey, and et.al., 2021).These are notes on receivable at a time
of sale and noted as credit sales. This also considered as liquid asserts as they can be used
for collateral to secure loan and help company to meet short term loans. Inventory: It refers to goods available for sale to consumers and raw material used to
produce goods available for sale. It is one of the most important asserts of company as
turnover of inventory shows the primary sources to generate receive and earn profits by
company. Inventory is considered as a current assert on company's balance sheet. This
inventory carries cost to convert raw material into finished goods which are considered as
Cost of good sold.
 Payables: Account payable is an account within ledger of company that shows the
liabilities to pay off short term loans to creditors or payment to suppliers. The sum of
vendor amount is shows on the account of balance sheet liability side as account payable.
If there is any increase or decrease in account payables, then it is shown on cash flow
statements. Major amount in account payables are shown of outstanding bills paid to

suppliers of company which are supplying raw material to company (Ptashchenko and
Korniienko, 2020).
c. Impact of working capital on cash flow
The change in working capital can affect cash flow statement as working capital is
associated with balance sheet of company whereas cash flow is associated with cash flow
statements if financial statement of company. If increase in transaction in company occurred,
there will no change in working capital of company but it will affect the cash flow statement.
Same as when company purchase fixed asserts like building or machine it will decrease the cash
flow Statement and also in current asserts of working capital. But there is not change in current
liabilities. Also, selling of fixed asserts will increase working capital and cash flow statement.
ii. Application and analysis
The financial results may be affected of trend Ltd manufacturing as working capital of
company is increasing with year by year with high amount. Before company is having £65
million debt in and increase to £95 million. Company is miss managed in financial resource as
they have high inventory remain in company and having outstanding delivery dispute of £12.5
million completed in 2019. They are having operating profit of £60 million which shows
reasonable profits and may affect the future operating activities of company. Inspite of having
the problem of cash flow and working capital, the company acquired the 30% stake within the
clothes and sandals company and it also invested £20 mn into the firm for acquiring the shares
and apart from this, it also paid an advance amount pertaining to the exclusive supply of the
specific products. This resulted into increase in the debt of the company affecting the working
capital of company negatively as with every borrowing the liability of the company also
increases (Panda and Nanda, 2018). One of the corporate customer of Trend Ltd, name Tkechers
placed a large order amounting to £10 million last year which is still outstanding. This shows the
inability of the collection team of firm to timely recover the due amount from the debtors.
Further addition to this, Trend Ltd believes that the issue arose with the corporate client
Sadidas because of the supply of the lower quality material by its vendor in the year 2018 and
therefore, the firm denied to make payment to the supplier which has threatened for the legal
action. Thus, all these factors have together states that the financial and the liquidity position of
the company is not good and all this is because of improper management of its account

receivables and payables and ineffective strategic business decision. Thus, as of now, it better for
Trend Ltd to stop making any further payment in respect to acquisition and mergers. It should
better try for selling its inventory as soon as possible for recovering the blocked amount.
Otherwise, it is put question on the growth and survival of the organization.
iii. Recommendation of the steps to be taken
By analysing the financial position of Trend Ltd it can be stated that there is an
immediate for the company to undertaken corrective measures for controlling the functioning of
the business, otherwise, it may result into affecting the survival of the entity. Following are
certain recommended strategies which if implemented by Trend Ltd would result into improving
the situation of the company.
 Trend Ltd can introduce automated online system which will help it in collecting the due
amount from the debtors on time without any delay (Gonçalves, Gaio and Robles, 2018).
In addition to this, through the way of providing proper and effective training to its
collection team will support the organization in recovering the amount from its customer
in a better resulting increasing the cashflow of the company and declining the chances of
bad debts.
 It is also suggested to Trend Ltd to establish an effective relationship with its suppliers
which will help it in getting attracting discounts in purchases being made. Along with
that, such relationships will also help in firm during the time of crisis in terms of making
payment after sometime etc.
 The organization can also implement a discount system for its customers who will make
payment of the due amount, early in time. This will attract customer to grab the discounts
resulting into paying the due amount on time.
 Another important measure which can be undertaken by Trend Ltd is that, it should
review its debt and interest payment (Singh, Kumar and Colombage, 2017). If possible,
the company can make changes in its amount of instalment being paid for repayment of
loan as this will help in effectively making payment of the debt so that it will reduce the
burden of interest on the firm leading to saving money which can be used or business
operation.

 It is also recommended to Trend Ltd to quickly resolve its legal disputes as it is having a
huge impact over its working capital. The legal expenses costs huge amount which if
used in the business dealings will be beneficial for it.
 It is also analysed that the firm has stocked huge amount of inventory in its warehouse
which are unsold and is expected to be sold in future which is uncertain. The inventory is
sitting on the shelf adding no value to the business but if Trend Ltd sells it in the market
even at the lower price will add some money to the business instead of nothing in the
future. This will result into increasing the liquidity of the business and improving the
working capital.
TASK 2
1. Monthly cash budget for Thorne Co
Particulars January February March April
Receipts £ £ £ £
Cash fees 18000 27000 45000 54000
Credit fees 36000 36000 54000 90000
Sale of assets 20000
Total receipts 54000 63000 99000 164000
Payments
Salaries 26250 26250 26250 26250
Bonus 6300 12600
Variable
expenses
9000 13500 22500 27000
Fixed overheads 4300 4300 4300 4300
Interest on loan 3000
Tax liability 95800
Total payments 39550 44050 62350 165950
Net cash flow 14450 18950 36650 (1950)
Opening balance (40000) (25550) (6600) 30050
Closing balance (25550) (6600) 30050 28100
Working note:

Month December January February March April
Units sold 10 10 15 25 30
Sales value
($000)
1800 1800 2700 4500 5400
Cash fees at
1% (£)
18000 18000 27000 45000 54000
Credit fees at
2% (£)
36000 36000 54000 90000 108000
Variable cost
at 0.5% (£)
9000 13500 22500 27000
Monthly salary cost = (35,000 × 9)/12 = £26,250
Bonus for March = (25 - 20) *140*9 = £6300
Bonus for April = (30 - 20) * 140*9 = £12600
2. Observation or recommendation from the analysis of the budget
It can be observed from the cash budget that there has been an increase in the sales of
the of the Thorne Co over the period of time and this also suggests higher sales as the spring
season approaches. This can be stated due to the change in the number of properties being sold
every month which clearly depicts the company experiences seasonal trends. In addition, it can
be said that the sale of property was lower in winter and is expected to increase as the spring is
coming. A proportion of the surplus cash flow is most likely to short term which is because some
cash will be needed when the sales are at the lower level (Rahman, Rozsa and Cepel, 2018).
Even though the net cash flow is estimated to be positive in the month of January, which is the
month having lowest level of number of properties being sold. In addition to this, the negative
cash opening balance depicts that there must be months before December to faced much lower
sales in contrast to December.
It is recommended that the Thorne Co should invest its short-term cash surplus which is
having no risk of loss of capital. This drawback indicates that the company should look for
various risk free investment option which includes treasury bills, certificates of deposit, short-
dated gilts or the bank deposits. It is crucial for the organization to considers various factors
while choosing among the various instruments for investment such as the length of time the

surplus is available for. In addition to this, the size of surplus also matters as few of the
instruments are having minimum investment levels, also the yield offered, level of risk it
involves or any sort of penalty for early withdrawal. Pertaining to the company like Thorne Co
which is small in size having turnover of less than £1 million is most likely to prefer bank
deposits for investing the short term surpluses.
In addition to this, the company must account for how to invest the long term surpluses
since the organization is new and it requires funds for expanding its business. But, since its new
company and small in size would be requiring looking for new sources of funds apart from the
bank borrowings and its retained earnings (Augustine and Jacob, 2017). Therefore, it requires the
need for protecting against the chances of capital loss while investing cash which is intended to
meet with the business expansion requirements in the future date. Apart from this, as the retail
property market is very competitive, the investment related options should be selected with due
care and the retained earnings of the company Thorne Co should be put into the short to medium
term investment option till the time investment opportunities are made available.
It can also be inferred from the above that in the 4 months of the cash budget, the
organization was have cash deficit for the 2 months with the higher cash deficit being the
opening cash balance of £40000 and it is important to note that this deficit has occurred even
though the company was carrying a loan of £200000 which is expected to be financed as the
bank overdraft. The main advantage of the bank overdraft is that it is flexible and easiest way of
getting finance because it can be utilized as and when needed but keeping in mind its limit.
Along with that, Thomas Co. will only have to make payment of the interest on the overdraft
amount utilized in which interest is charged at the rate which is linked to the base rate. It is also
recommended that the company distinguish between fixed and variable cost in better way and
effectively analyse each of these costs so that it can identify the area where the improvement is
required and measures can be undertaken to reduce to the cost which will help in attain cash
surplus.

REFERENCES
Books and Journals
Augustine, N. I. and Jacob, I. A., 2017. Cash management and performance of listed firms in
Nigeria. Journal of Economics, Management and Trade. pp.1-13.
Boisjoly, R.P., Conine Jr, T.E. and McDonald IV, M.B., 2020. Working capital management:
Financial and valuation impacts. Journal of Business Research, 108, pp.1-8.
Dey, B.K., Pareek, S., Tayyab, M. and Sarkar, B., 2021. Autonomation policy to control work-
in-process inventory in a smart production system. International Journal of Production
Research, 59(4), pp.1258-1280.
Gonçalves, T., Gaio, C. and Robles, F., 2018. The impact of Working Capital Management on
firm profitability in different economic cycles: Evidence from the United
Kingdom. Economics and Business Letters. 7(2). pp.70-75.
NGUYEN, D.D. and NGUYEN, A.H., 2020. The impact of cash flow statement on lending
decision of commercial banks: Evidence from Vietnam. The Journal of Asian Finance,
Economics, and Business, 7(6), pp.85-93.
Panda, A. K. and Nanda, S., 2018. Working capital financing and corporate profitability of
Indian manufacturing firms. Management Decision.
Ptashchenko, L. and Korniienko, D., 2020. Tools for assessing of business receivables and
payables. ЕКОНОМІКА І РЕГІОН Науковий вісник, (2 (77)), pp.37-42.
Rahman, A., Rozsa, Z. and Cepel, M., 2018. Trade credit and bank finance–evidence from the
Visegrad Group. Journal of Competitiveness.
Saleem, K.S.A. and Ahmed, E.Y., Does Cash Flow Have An Impact On Profit Quality?.
Singh, H. P., Kumar, S. and Colombage, S., 2017. Working capital management and firm
profitability: a meta-analysis. Qualitative Research in Financial Markets.