Understanding Financial Terms and their Impact on Cash Flow

MOD003319 BUSINESS
FINANCE

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
1. a. Profit and Cash flow............................................................................................................4
b. Working capital and receivable, inventory and payable..........................................................4
c. Impact of working capital on cash flow...................................................................................5
2. Application and analysis..........................................................................................................5
3. Recommendation of the steps to be taken...............................................................................6
EXECUTIVE SUMMARY.............................................................................................................7
i. Purpose of budget preparation..................................................................................................8
ii. Demonstrating the applicability of budgeting methods to plan future cost management.......9
iii. Analysing which method is appropriate for Phonus Plc......................................................10
REFERENCES................................................................................................................................1

EXECUTIVE SUMMARY
In this report, some of the important financial terms have been explained and their
relevance in the business like cashflow, profit, working capital and so forth. It also examines the
impact of changes in the working capital over the cash flow of the Fitt Ltd. Based on the
findings, some of the steps that can eb undertaken by Fitt Ltd are recommended for improving its
cash flow.

PART 1
1. a. Profit and Cash flow
The term profit indicates the net warning that a company or an organisation is able to earn
after deducting all the expenses from the revenue that is earned (Aktas, Croci and Petmezas,
2015). The gross profit and net profit are the two distinctions in the profits where the gross profit
indicates the profit after only direct expenses are deducted from the sale revenue that is earned
while net profit on the other hand is indicated by the profit that is earned after deducting all the
other expenses as well where the taxes and the operating expenses are also deducted from the
revenue.
Cash flow is a statement that indicates the overall cash inflow and outflow that is earned
in a company over a period of time. The cash income that is earned is indicated by the cash
inflow and the overall expenses that are earned are indicated by the term of cash outflow
(Weetman, 2010). It mainly acts as a decision making matrix where the managers can use the
data available to take decisions regarding investments to be made and the decisions that are to be
taken.
The difference between the two of them is that while the cash flow simply shows the inflow and
outflow of cash, profit on the other hand is the earnings that are earned after deduction of all the
expenses (Atrill and McLaney, 2008). Further the cash flow helps in presenting a long term
outlook regarding the financial status, the same is not the case for the profit as it indicates the
present success or failure of a business.
b. Working capital and receivable, inventory and payable
The term working capital refers to the calculation of the net short terms that are available
in the business after all the short term obligations have been met. Working capital indicates the
net difference between the current assets of the company and current liabilities. If the difference
is positive then it is said that the working capital is favourable and in case of negative difference,
it is negative (Watson and Head, 2010). This working capital can be used to complete the daily
activities in a business and is also used in the cash operating cycle.
Receivables: Receivables indicate those short assets of a company from which payment is yet to
be recovered. This is against the goods or services sold on credit for a short period i.e. it is
usually lesser than 1 year. The receivables are recorded as an asset in the company’s balance
sheet usually.