Cash Flow and Liquidity Problems | Project Report
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Added on 2019-12-28
Cash Flow and Liquidity Problems | Project Report
Added on 2019-12-28
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Table of ContentsINTRODUCTION ..............................................................................................................................3SCENARIO ONE.................................................................................................................................3SCENARIO TWO................................................................................................................................6CONCLUSION..................................................................................................................................10REFERENCES...................................................................................................................................112
INTRODUCTION Looking at the present age of fierce competition, it is essential for the organizations tomaintain effective administration of funds so as to run operations successfully. Business finance isthe process of gathering required quantity of funds at less finance costs and utilize it in an effectivemanner. The present project report is based upon the cash flow and liquidity problems with takingcorrective actions to overcome from any cash shortage. In the present business world, companiesalso need to make some capital investment in fixed assets such as plant and machinery. Report willdescribe the role of investment appraisal techniques which helps to assess the attractiveness of thecapital projects and identify most viable options for the firm. SCENARIO ONEPresent scenario depicts that Event Planners Ltd is a newly established business having onlytwo shareholders. It is specialized in planning for events like wedding ceremony, birthday partiesand christenings. Initial year of the firm was unprofitable with high overdraft balance. Moreover,company is not able to pay timely to their suppliers. However, in order to fulfil customer demand,management regularly insisted to buy luxurious cars and incurred a hefty entertainment bill. Itarisen operational difficulties due to lack of appropriate quantity of cash funds and liquidity concernin the business. Following of the ways can be suggested to improve profitability and cash flowposition by Event Planner Ltd to remove operational hazards. Distinguish between cash flow and profitCash flow take into consideration cash inflow and cash outflow over the period by EventPlanner Ltd. Event Planner will generate cash inflow through sale their services while cash outflowcomprises payment to suppliers, personnel salary, premises rent, insurance, and other direct as wellas indirect expenses. Net cash flow is the surplus or deficit of total cash available over cashdisbursement (Berger and et.al., 2011). Without having adequate availability of funds, Event PlanneLtd can not operate effectively and may face some operational difficulties. On contrary to it,profitability consider all the revenues and expenditures whether generated or paid in cash or not.Internal as well as external stakeholders evaluate business profits to take strategic businessdecisions.From above, it can be said that following are the difference between cash flow and profit, givenbelow:Cash flow take into account only the cash based transactions however, profitability reflectssurplus of total revenue over expenditures and take into account non-cash relatedtransactions as well. 3
Stakeholders usually evaluate business profits not the cash flows. Firm which profit and lossaccount reflects less profitability or loss will not be able to attract investors due to lesspotential return (Columba and et.al., 2010). On the other hand, internally, managementframe policies and working capital strategies to maintain effective administration of cashfunds. So that, it will run successfully without any hazards. Characteristics of liquidity and profitabilityBoth the terms are widely watched by investors to gauge performance of Event Planner Ltd.The characteristics are given below:Profitability refers to the excess which Event Planner made by generating larger revenuethan incurred expenditures. It is require for business survival and growth. Whereas,liquidity refers to the cash availability that Event planner have at any point of time. Withreference to Event Planner, it is unprofitable and also unable to meet supplier's paymenttimely. Liquidity is the sign which indicates that Event Planner Ltd have enough resources or not todischarge their current obligations specially their suppliers (Parikh, 2014). Hence, it helps tomeasure financial strength of the Event Planner. On contrary, profitability is a sign ofoperational result which can be generated by margin between turnover and cost of sales. Gross profit, net profit, operating profit, return on equity and return on capital employed aresome of the ratios which helps to assess profitability analysis of Event planner ltd. Whereas,current ratio, acid test ratio and cash coverage ratio are helps to evaluate liquidity position ofthe Event planner. It may be possible that a firm who have enough profitability but still may face someliquidity problems because of investing large amount of funds into projects (Cole, 2013).On contrary, firm who has sufficient cash available may be unprofitable due to lack ofopportunities to put idle cash. Liquidity aspect take into account operational, investing and financing activities. Whilst,profitability only take into account revenue nature transactions not the capital transactions. Liquidity position is based upon the cash principles because it is highly dependent upon cashsources available for use (Brunnermeier and et.al., 2009). However, profitability is basedupon accrual principles because it records all the revenues and expenditures at the timewhen they incurred. Reasons for cash shortage with adequate availability of profits There are two reasons in which firms can report profit but be short of cash, explaining hereas under:4
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