Understanding Profit and Cash Flow in an Organisation

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