Business Finance: Practices and Recommendations for Cash Flow Management

Business finance
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Table of Contents
Executive Summary ........................................................................................................................3
Task 1...............................................................................................................................................3
1. Explain....................................................................................................................................3
2. Impact of company's operational management on financial results.......................................5
3. Steps recommended to improve company's cash flow through better working capital
management................................................................................................................................5
Executive Summary.........................................................................................................................7
Task 2...............................................................................................................................................7
1. Monthly cash budgets from 1st Jan to 30th April 2021..........................................................7
2. Recommendations to the management of Thorne Estates Limited.........................................7
References......................................................................................................................................10
Appendix........................................................................................................................................11
Monthly cash budgets...............................................................................................................11
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Executive Summary
Business finance involves taking up financial management of the business concerns. It
includes both revenue and capital management in order to ensure smooth financial health of the
business (Burns and Dewhurst, 2016). This report aims to cover business finance practices of
Trend Ltd (TL) which manufactures gym clothing and footwear. For Trend Ltd, concepts such as
profit, cash flow, working capital, receivables, inventories and payables are discussed and their
impact over the financial results of the company are determined. Steps to improve company's
cash flow through better working capital management are also discussed.
Task 1
1. Explain
A. Profit and cash flow
Profit - Profit is any revenue in excess of cost. In accounting, profit refers to the financial
benefit that is derived when total revenue of the business exceeds over the total expenses of the
company. It is either retained by a company to provide for future operations or is distributed to
shareholders as dividend. It is obtained in profit and loss account which is also known as Income
Statement. A company divides its profit and loss account into various stages - first is
manufacturing profit which is known as gross profit. Further, other administrative and selling
expenses are reduced from the gross profit to arrive at operating profit. Furthermore, all non-
operating expenses and income are adjusted to arrive at the final figure of net profit, also known
as net income. This profit is then adjusted with corporate tax to arrive at the figure of profit after
tax. This amount is said to be profit available for shareholders.
Cash flow - Cash flow refers to the total flow of cash in a business concern over a
specific period. Cash receipts are taken as inflow while cash payments are taken as outflow.
When inflow of cash exceeds outflow in a business, it is known as favourable position for the
business and company is able to generate more value for the stakeholders. Cash flow
management is extremely important for companies to ensure smooth business operations.
Therefore, companies prepare cash budgets to act as standards for operations. These budgets are
monitored and reviewed periodically like monthly, quarterly, semi-annually or annually, to make
necessary adjustments. Further cash flow statement is prepared as a part of financial statements
of a company to assess overall cash inflow-outflow position during the year or reported period.
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Cash flow statement is divided into three parts - cash flow from operating activities, cash flow
from investing activities and cash flow from financing activities. Operating activities includes
activities related to sales, purchase, payroll, etc. Investing activities takes into consideration
inflow and outflow related to investments of the company, loans forwarded, interest received,
fixed assets sale - purchase, etc. Financing activities takes into account change in capital
structure, loans availed, interest paid, dividend paid, etc.
Difference between two - Most primary difference between profit and cash flow is that
the profit is only an accounting entity which is used to report net income generated in business
while cash flows represents inflow and outflow of real cash. In other words, profit represents
profitability of the business while cash flow represents liquidity of the business. Another
difference is that profit of a company is generated using accrual accounting system while cash
flow of the business is determined using cash accounting system.
B. Working Capital, receivables, inventories and payables
Working Capital - Working capital includes two components - current assets such as
cash, receivables, etc. and current liabilities like payables, short-term loans, etc. and is
represented as the net difference of the two. When current assets exceeds current liabilities, it is
taken as positive working capital of the business (Cheng, Li and Tong, 2016).
Receivables - Account receivables represents those people who owe money to business
such as trade debtors. These are currents assets of the company and reflects such amount that
will generate revenue for company in near future. Company maintains a separate system for
negotiating with trade debtors to manage debtors payment cycle.
Inventories - Inventories refers to all the merchandise that a company manufactures and
trades in. It is held by company between manufacturing or ordering till order fulfilment for
delivery. It can be either in form of raw materials, intermediate products or finished goods.
Payables - Account payables represents those people who business owe money to, such
as trade creditors. These are currents liabilities of the company and reflects such amount that will
have to be paid by company in near future. Company maintains a separate system for negotiating
with trade creditors to manage creditors' payment cycle.
C. Impact of change in working capital on cash flow
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