Business Finance: Working Capital Management and Financial Performance

Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
PART 1............................................................................................................................................3
I...............................................................................................................................................3
a. Presenting meaning of Profit and cash flow and explaining their differences...................3
b. Presenting meaning of working capital and receivables, inventory and payables.............4
c. The effects of working capital changes over cash flow......................................................4
2. Financial position management by the different concepts.................................................5
3. Ways to improve the cash flow by working capital management......................................6
PART-2............................................................................................................................................6
1.a Explaining the component that each of the ratio depicts in relation to financial
performance............................................................................................................................6
1.b. Computing the ratios for 3 years.....................................................................................7
1.c. Interpreting the results by showing the reasons for the change in each of the ratio over the
years........................................................................................................................................9
2. Assessment and the recommendations in respect of the financial performance of an entity10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Business finance refers to money and credit invested in business for the effective and
efficient growth of the company. The report is conducted in 2 parts. In 1 part Flashy product Ltd
company is taken which is a manufacturer company produce sport equipment. They manufacture
the products in UK & China and sell in different countries such as UK, south Asia and Australia.
The report highlights the importance of financial statements in management company financial
results. In the second part of the report it explains the different financial ratio and their changing
trend of Farringdon Pharma Ltd. Company.
MAIN BODY
PART 1
I.
a. Presenting meaning of Profit and cash flow and explaining their differences
Profit:for na organisation can be understood as financial gain which is earned by
company which is basically the difference between the amount earned and expenditure made for
generating such revenues. The profits are the real earning of a firm which is reached after
deducting all operation and financial expenses for the overall activities of business.
Cash flow: of a business is the total inflow and out flow of the cash within business
operation for a specific time period (Cash Flows from Operating Activities, 2019). This is
basically the incoming and outgoing of the cash from the operating, financing and investing
activities of the business. The cash flow depicts the changes in holding of cash over an income
year through the incoming and outgoings of cash form company within same period.
Difference between profit and cash flow:
Cash and profits are both crucial aspects of a business and required for successful
operations in the long term. A company is required to generate profits while operating with
positive cash flow. Cash flow is inflow and outflow of cash form the business which is required
to meet daily expenses of the business such as purchase of inventory, taxes, paying employees
and others. On the other had profits are the surplus after all the expenses are met and the total is
deducted from the overall revenues earned (Are a Firm's Cash Flow and Profit Different, 2019).
Cash flow is basically the way through which cash flows in business and company can have a
positive cash flow with having no profits. On other others hand a company can have negative
cash floes while having large profits, so the one of the major difference between both profits

realization depends on accounting basis while cash flow depends on sources of the cash
transactions.
b. Presenting meaning of working capital and receivables, inventory and payables
Working capital: for a business is a financial metrics representing operating liquidity of
company which depicts the ability of firm in meeting short term obligations of organisation. WC
is calculated as deducting current liabilities from current assets. Under normal trade cycle
working capital is equals to working assets.
Receivables: or account receivables reflecting at asset side of balance sheet depicts the
balance of money due to the firm for the goods and services delivers to its consumers which is
not yet paid by the users. This is the money owned by consumers to the organisation and the
quantum of amount and its rotation shows the credit sales made by company also the capacity of
organisation in realising the dues form consumers.
Payables: or account payables reflects of liability side of balance sheet of a company and
this shows the amount that is owed by the company to its suppliers and creditors. This quantum
shows the credit purchase of goods and services made by company. This is short term debt of the
company classified under current liability of organisation.
Inventory: for a business includes raw material used for production of goods, work in
progress and the finished goods. This is basically the merchandise, goods and material held by
the business for selling to consumer (finished goods), or make the final products after processing
(raw material and work in progress) in order to generate profits.
c. The effects of working capital changes over cash flow
Working capital of a business is represented as difference between current asset and
current liability of the business (Working capital finance,2019). Changes in the working capital
are reflected in the cash flow statement of company, which can be explained with some
examples:
 When a transaction reflects an increase in current asset and current liability with same
amount there is no change in the working capital.
 In case of decrease in assets, cash floe from operations will increase while reducing the
working capital.
 Also, an increase in account receivables shows that there is less collection by company
and this effects the cash flow negatively while increasing the working capital.