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Concepts that Affect Business Financial Results

   

Added on  2020-06-03

14 Pages3259 Words37 Views
Root & Cook Ltd

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Part 1................................................................................................................................................11. Different terms of accounting.............................................................................................12. Concepts that affect business financial results...................................................................23. Recommendations to improve the financial position by managing working capital.........3Part 2................................................................................................................................................41. Explaining the term capital budgeting and process............................................................4Merits and demerits of investment appraisal methods...........................................................52. Calculation of investment options......................................................................................73. Recommendation to select investment venture................................................................11CONCLUSION..............................................................................................................................11REFERENCES..............................................................................................................................11

INTRODUCTIONFinance is required in every business so that it may be able to carry out day-to-day tasksin effective way. Present report deals with RCL LTD which is engaged in producing gardentractors and ride-on lawn movers. Report discusses importance of working capital and how itshould be managed to carry out tasks. Moreover, WCC is also explained with example. Apartfrom this, capital budgeting process and techniques are discussed relevant for expansion purpose.In relation to this, investment appraisal techniques such as payback period, IRR, NPV arecalculated for selecting best options available to company. Part 11. Different terms of accountingProfit: Profits are the surplus for firm in which all the expenses are deducted from the revenueseffectively. Profit is also a base for tac calculation which describe the overall picture of firmefficiently. Profits such as net profit operating profit and gross profit. All of them in a positivenumerical form represents the performance of business operational activities and produceinformation. The absence of profit affect the cash flow. In addition to this, business has incurredexpenditures more than income, then it is called net loss. This implies that organisation has toinitiate control over expenses to generate sufficient profits.Cash flow: Cash flow refers to the inflow and outflow of money which will be done by Root andCook Ltd. Cash flow management is important for the business in order to manage and controldifferent operational activities such as operating cost, salary paid to workers, purchasinginventories and taxes etc. Cash flow in positive manner defines the increasing liquid assets andnegative cash flow define decreasing liquid assets. On the other hand, cash outflow meansbusiness makes payment to suppliers, rent for premises and all expenditures are allocated underaccounts payables. DIFFERENCE BETWEEN PROFIT AND CASH FLOWProfitCash flowProfit is determined by deducting all thevariable and fixed expenses from revenue andthus, the net income of Root and Cook Ltd isCash flow accounts are for a specific period inorder to derive it effectively. Cash flowdeduction are made from the cash inflow and1

derived in efficient way. outflow.There are some company obligations that itshould make profitability in order to attaineffective cash position.It can be said that firm can be profitable if ithas an inadequate cash flow which may beinsolvent as short term obligation are notcreated in a stipulated time period.Profits scope is wider than the cash flows thatfirms need effective net income in order to getbetter position in liquidity.It can be said that cash flow has a narrow scopeand dependent on business ability in order tomake profits which will help to pay liabilitieseasily.2. Working capital: Working capital is very crucial for the firm in order to manage and controlits daily operational activities. Working capital calculated from current assets minus currentliabilities. Working capital also help Root and Cook Ltd to determine its ability towardsachieving the desired goals and short term obligations (Damodaran, 2016). There are varioussources of working capital such as long term loans, net income, stakeholders funds and sale ofcapital assets effectively. It is important particularly as it includes accounts payable, receivablesand inventory which should be ideally used by business so that it may be able to pay offliabilities and liquidity and solvency position may be strengthened effectively.3. Working capital changes affects the cash flowChanges in working capital affects the cash flow and specifically operational activities.Positive cash flow describe that business have sufficient working capital to meet the short termrequirements and objectives. On the other hand, negative cash flow affect the liquidity positionof firm. Thus, it can be said that working capital and cash flow are connected to each other.2. Concepts that affect business financial resultsIt can be said that working capital has a important role in firm. In respect to this, it isnecessary for RCL Ltd to increase its solvency and liquidity position in order to pay liabilitieswhich will also help to achieve the short term requirements of the firm such as cash needs.Business is able to provide strengthen to working capital by quickly converting the net assetsinto cash which will help to increase the liquidity aspects (Mathuva, 2015). The conversion cycleis known a Working capital cycle. 2

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