Understanding Profit, Cash Flow, and Working Capital for Better Financial Management

Project

TABLE OF CONTENTS
Executive Summary.........................................................................................................................3
TASK 1............................................................................................................................................4
I. ......................................................................................................................................................4
a. Defining profit and cash flow and difference between the two..............................................4
b. Defining working capital, receivables, inventory and payables..............................................4
c. Changes in working capital affecting the cash flow................................................................5
ii.......................................................................................................................................................6
Current management of the company might affect its financial results......................................6
iii......................................................................................................................................................6
Improving cash flow by way of better working capital management..........................................6
Executive Summary.........................................................................................................................8
TASK 2............................................................................................................................................9
1. Monthly cash budget (4 months).............................................................................................9
2. Recommendations for management of Thorne Estates based on analysis............................10
REFERENCES..............................................................................................................................13

Executive Summary
The Task 1 is addressed to the shareholders which defines the key financial terms
important for understanding performance of the company. It also incorporates the effect of
change in working capital over the cash flow and the steps that can be taken for improving the
company's cash flow.

TASK 1
I.
a. Defining profit and cash flow and difference between the two
Profit
The profit refers to the amount which is being derived after meeting with all the
expenditure pertaining to the month or year. It is the balance amount which is being left after
reducing all the expenditure from the revenue for a specific period (Boyd, 2020). For calculating
it, profit and loss statement is prepared which involves both cash and non-cash expenditure as
well, for example, depreciation is deducted from the revenue which lead to reduction in profits.
Cash flow
The cash flow basically refers to the amount which is being transferred in and out of the
business. It can be positive or negative. Positive when company adds money to the business and
negative when money is withdrawn from the business. It involves the usage of income statement
and balance sheet and includes only cash transactions. For example, depreciation and credit sales
and purchase are not accounted for.
Difference between profit and cash flow
Profit Cash flow
It accounts for the money which is being left
after deducting all the costs from the sales
figure.
It basically represents cash flow from the
various sources such as the investing, financing
and operational activities.
Profit is determined even before the money is
received.
Cash flow is calculated after the cash is
received.
It is not critical for the survival of the firm. This is important for the survival of the entity.
It follows accrual basis of accounting principle. It follows cash basis of accounting principle.
b. Defining working capital, receivables, inventory and payables
Working capital
The working capital basically refers to the difference between the current assets and
current liability and is also a measuring tool for determining the short term liquidity of the entity