Understanding Profit and Cash Flow in an Organisation

This document provides a detailed explanation of profit and cash flow in an organisation. It discusses the meaning of profit and cash flow, their differences, working capital, receivables, inventory, payables, and how changes in working capital affect cash flow. It also includes a financial analysis of a specific organisation and suggestions for improving cash flows through effective working capital management.

Business Report

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
TASK 1............................................................................................................................................3
P1 Meaning of Profit and cash flow alongside their differences................................................3
P2 Working capital and meaning of receivables, inventory and payables..................................4
P3 Manner in which Changes in working capital affect cash flow in an organisation...............5
P4 Financial analysis of the respective organisation...................................................................5
P5 Suggestions for improvisations in cash flows through effective working capital
management................................................................................................................................6
Executive Summary.........................................................................................................................6
TASK 2............................................................................................................................................7
P6 Preparation of cash budget from 1st Jan till 30 April of Thorne Estates Limited.................7
P7 Recommendations in reference to Thorne Estates by analysing cash budget......................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

EXECUTIVE SUMMARY
Cash flow and profit are two key factors for an organisation which needs to be monitored
on regular basis for keeping up with the quality and consistency of organisational activities. In
general form, cash flow is characterized by the flow of money from in or out from an
organisation. Whereas profit is ultimate leftover amount from total revenue after deducting total
expenditure or cost from such revenue. These elements are used to evaluate financial
performance of an organisation. Here these concepts will be discussed in detail with reference to
the provided case study.
TASK 1
P1 Meaning of Profit and cash flow alongside their differences
Profit: It is a term which reflects financial stability of an organisation. It is important to
understand the manner in which organisation will organise its expenses to hold back maximum
profit-margins. Profits are ultimate source of income for which an organisation is working out.
Therefore, more profitability will justify effectiveness of an organisational operations (Salehi and
et. al., 2020).
Cash flow: It relates to movement of cash balance inwards or outwards of an
organisation at a particular period of time. There could be positive or negative cash flow.
Positive cash-flow signifies that company has optimum level of cash availability. Whereas
negative cash-flow signifies that it has shortcoming of cash to pay off debt or operate its
activities in effective manner (Lin, 2018).
Differences between profit and cash flows
Basis of Distinction Profit Cash Flows
Meaning It is referred to the ultimate
balance of revenue being
earned by an organisation after
deduction of business
expenditure (Rani and Kumar,
2020).
It is basically management of
cash inflows and outflows in
an organisation.
Approach In order to identify profits in To determine cash inflow and

an organisation, incomes
statements are being prepared.
outflow, cash flow statement is
developed by an organisation.
Purpose The main purpose for
recognising profits in an
organisation is to determine
actual earning capacity of an
organisation.
It is determined in order to
manage liquidity in an
organisation and make
necessary modifications in its
operations if needed (Sajeesh,
Hada and Raju, 2020).
P2 Working capital and meaning of receivables, inventory and payables
Working capital: It is an essential element of company's day to day operations. It is
determined through difference between operating current assets and operating current liabilities
in order to identify organisational liquidity in that particular period of time. Also it suggests
whether financial health of an organisation is up to date or it needs to make certain modifications
in its relevant operations. It is believed that an organisation has negative working capital if
current asset to current liabilities ratio is said to be lower than one. Also an organisation should
not have excess of working capital which may signifies that it is not operating efficient and it
have large volume of inventory and not making any effective investments. This may harm long
term sustainability of respective company which could be unhealthy for long term period in such
competitive environment. Various considerable factors in working capital could be receivables,
inventory, payables and so on which will be discussed later in the report.
Accounts Receivables: Accounts receivables is current asset of an organisation which is
derived from customers who have not paid their debts yet for delivered services or products
(Wengraf, 2018). It is considered as operating asset for an organisation which needs speedy
recovery in order to balance it respective efficiency of operations in the given period of time. It is
one of the important portion of operating assets whose optimisation is essential in order to
maintain adequate working capital flow.
Inventory: It is said to be stock which is produced by an organisation for ultimate sale.
This is produced by converting raw resources into saleable products through which an
organisation can produce maximum of effective results. Inventory management is also

considered as most important technique through which inventory of an organisation is managed
through LIFO, FIFO methods in order to promote efficient business operations.
Accounts Payables: It referred to document which is formulated when purchase made by
respective organisation on credit basis. It is a form of current liabilities which an organisation
needs to repay in the given period of time. Generally such kind of liabilities needs to be paid
within a year or less. It is included in operating liability of an organisation. It is assumed that if
an organisation is getting appropriate time to repay its debts is considered as good for
organisational liquidity (D’Adamo and et. al., 2021). Also in mean time, if organisation is not
paying its debts on time it may harm organisational brand image in the terms of its survival. An
organisation should not assemble unnecessary debts as it could lead to lower sales and less
profitability in the long term.
P3 Manner in which Changes in working capital affect cash flow in an organisation
Changes in working capital could affect firm's cash balances significantly. This is being
represented in cash flow statements prepared by organisation in order to identify related
fluctuations in working capital of an organisation. It is important to analyse related changes in
working capital so that adequate flow of working capital can be managed in effective manner
(Dou, Ji and Wu, 2021).
P4 Financial analysis of the respective organisation
In reference to Trend Ltd, it has been observed that the company has made profits during
year which also includes owed funds which needs to be repaid by the company on time. In
context to its profitability, cash flows and working capital following reflections can be
produced:
Profits: Respective Company has made optimum profitability but it still needs to make
certain improvisation in respect to debt financing in order to advance profitability. There is
lack of communications with debtors and creditors which is harmful for overall profits of the
company.
Cash flows: It consists of various components which analyse cash generated by an
organisation after reviewing its cash inflows and outflows. Therefore it is important to keep
track of all cash related activities in order to increase overall productivity and efficiency of
organisational tasks (Betz-Hamilton and et. al., 2019).

Working capital: It is mainly concerned with current assets and liabilities of the company. In
respect to Trend ltd. it is determined that it needs to keep track of its relevant transactions in
reference to current assets and liabilities in order to maintain appropriate level of
productivity. It is important to manage the flow of working capital in order to achieve set
targets by an organisation in relevant period of time.
P5 Suggestions for improvisations in cash flows through effective working capital management
There is a need of maintenance of effective cash flows by keeping track of working capital
in an organisation. Working capital is an operational based element of an organisation which
needs to be managed in appropriate manner. Cash flows are mainly affected through
improper working capital structures in an organisation which could hamper organisational
working. In respect of Trend Ltd it has been analysed that the company has been facing
shortage of funds which needs to be fulfilled through admission on new shareholders in the
organisation. Also organisation has inappropriate ratio of debt and profits as it has reported
increase in its respective debts from 60 million pounds to 95 million pounds which is not a
positive sign in context of long term survival. Further, the company is lacking in repayment
of debts which could damage its brand image in eyes of respective customer base. In the
meantime, its customers are making up to date payments to the organisation which may
hamper its operational activities in the long term. It is important to adopt standard structure
where organisation needs to keep up to date record of its receipts and payments so that
optimum results can be drawn from such techniques. For the above mentioned organisations
following are the recommendations in order to introduce effective working capital
management system:
 By eliminating the gap between payables and receivables, an organisation can definitely
perform better than usual by making optimum use of liquid assets in order to maintain
flexibility of operations.
 Speedy dispute resolving system should be adopted by the company between customer
and suppliers so that efficiency of tasks can be maintained. It is important to build healthy
relations with stakeholder of an organisation in order to promote long term productivity.
 Adequate management between debts and assets of the company so that profits can be
generated in more effective manner. It is believed that a company should not go for more

debt financing so it may be unsafe for long term prospects. Therefore, debts should be in
adequate ratio with assets of the company.
Executive Summary
In this part, organisational need of cash budget formulation is being discussed in detail. It
is significantly important to prepare cash budgets which will be helpful for future reference.
Various elements of budget needs to be evaluated in order to conclude its ultimate requirement
for an organisation. In the given case study, Thorne Estate is required to be analysed by
preparation of cash budget so that its finances can be managed appropriately which will be
helpful for organisational growth and profitability.
TASK 2
P6 Preparation of cash budget from 1st Jan till 30 April of Thorne Estates Limited

Observations in reference to Thorne Estates by analysing Cash budget
Cash budget is referred to a planned cash receipts and payables which are made during
the particular period. It reflects inflows and outflows of cash which will be made at future date. It
is important for an organisation to prepare cash budget so that sales, purchases and other capital
expenditure can be represented in an accurate manner which further will not affect company's
performance (Brown, 2019). It is highly followed technique by organisation which is helpful in
generation of efficient results. It helps in elimination of cash shortages during a specific period of
time in order to promote healthy liquidity conditions of an organisation. In reference to Thorne
Estates, it is observed that it has made various cash transactions during the month of January till
April that it during of four months. Being an property dealer, the company has tried to identify
its respective cash inflows and outflows by considering various activities in order to maintain
productivity of business operations. Its transactions occurred during the specified period can be
evaluated in the following manner:
Cash Sales: It is an amount which is receivable at the time of sale. It helps in maintaining
flexibility and liquidity of an organisation in the long term. Sales made is cash is much more
easy to handle and it increases productivity of organisational activities in the long term. In
context to Thornes Estates Ltd, it is seen that the company has been receiving cash commission
over sale of units in particular month at 1% and 2% in the later month of sale. This way it can
manage its liquidity and credit in an effective manner in the long term. It is important for an
organisation to examine its cash flows in order to promote healthy business environment.
Credit Sales: It is considered as current asset of an organisation which is recovered
during a short span of time so that liquidity in an organisation can be managed adequately. It is
an amount which is not paid by customers at the time of delivery of product or a service but
recovered by organisation on later date. An organisation prepares cash budget to ensure that its
credit is recovered at correct time and manner. In respect of given organisation, the credit sales it
managed by it in appropriate manner through preparation of cash budget so that relevant cash
and credit sales can be identified appropriately.
Salaries paid: Each organisation has a culture of paying their respective workforce in
adequate manner so that they feel encouraged and provide effective and efficient results for
growth of an organisation (Beckmann and Ragothaman, 2020). In respect of Thorne Estates,
employee are given adequate weight-age so that efficiency of operations can be maintained

properly. It is considered in budget so that proper records can be kept in regard to cash
disbursements by the company. It is necessary to keep track of each cash withdrawals and
balances to eliminate any further mismanagement related to cash for ultimate survival. Therefore
salary forms part of current liabilities which must be paid at particular time in order to motivate
employees in long term.
Bonus Paid: It is a practice being adopted by various organisation in order to encourage
employees by facilitating them with benefits and compensations for their extra efforts towards
companies ultimate profitability. It is considered as extra pay of fringe benefit which has been
provided to employees so that more efficient results can be produced by them. Thorne Estates
Ltd has been taking care of its respective workforce by giving proper cash incentives or bonus in
reference to sale of more than 20 units in each particular month. This way enhanced efficiency of
employees is achieved by the company in order to generate maximum profit-margins by
increasing target of a month. As bonus creates underlying loyalty of customers towards an
organisation so it is required to promote such culture in business units.
Fixed overhead: Fixed overhead are classified as a class of cost which is not variable for
business operations (Chen and et. al., 2020). It is fixed in nature and promotes healthy
management of business units in order to produce trenchant activities for ultimate success of a
business. There are several kinds of fixed overheads which are insurance cost, administration
expenditure, depreciation, salaries and so on. In respect of Thorne Estates, it has considered fixed
overhead in its cash budget so that provisional fixed amount can be kept aside for activities of
organisation. Through this way, it becomes easier to manage various activities in an organisation
having fixed basis of expenditure.
Interest charges: It is component of current liability which must be paid in a particular
time period. Interest is mainly charged over short term or long term borrowings of an
organisation. It is necessary to keep evidence of each cash payable to other party so that least
chances of errors are occurred (Washbourne, 2017). In Thorne Estate, is is observed that the
company is paying interest over three months loan which must be included in cash budget so that
chances of mistakes are eliminated from company's hand. This way it becomes easier to develop
good brand image and earn credit worthiness in the market over the relevant period.
Taxes: It is termed as revenue being collected by government authorities in order to
provide adequate facilities to the society. It is important to pay taxes on the right time and in

correct manner in order to eliminate chances of penalties being charged on late payments.
Organisations are adhering to compliances with laws in order to create justifiable contribution to
overall development of an economy (Chen and et. al., 2020). In this respect, Thorne Estates are
managing tax liabilities in adequate manner by keeping record of monthly tax payments so that
chances of late payments are reduced. It forms part in current liability of an organisation which
has to be time during specified time so that proper operations can be carried.
P7 Recommendations in reference to Thorne Estates by analysing cash budget
By analysing above cash budget, a conclusion can be drawn that organisation needs to
manage its operating activities in proper way by analysing its current assets and liabilities. This
way effective results could be achieved by the company. For the Thorne Estates, it is
recommended that cash budgets should be formulated as it will be helpful in retaining resources
in optimum proportion so that they can be utilised in case of contingencies. Also the company
will be in touch with reality through estimating its expenses and incomes in order to meet
business obligations. In order to maintain sound financial position it is required by the company
to prepare necessary statements of budgets like cash budget which will be helpful for its potential
growth.
CONCLUSION
In above report, it has been analysed that a business consists of various forms of
statements which needs to be prepared in order to promote healthy business operations so that
ultimate goal can be achieved by the company. Importance of cash flows, profits and cash
budgets are evaluated in above statements as these are considerably important for organisational
financial position.

REFERENCES
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