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Significance of Profit in Business- Report

Added on - 03 Feb 2020

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Business Finance1
Table of ContentsINTRODUCTION...............................................................................................................................3SCENATRIO 1.....................................................................................................................................31. Stating the importance of cash as well as profit and identifying the methods which helps indealing with the cash flow problems...............................................................................................3SCENATRIO 2.....................................................................................................................................62. Defining the types and process of capital budgeting along with the pros and cons....................6CONCLUSION....................................................................................................................................9References..........................................................................................................................................102
INTRODUCTIONBusiness finance implies for the activities which are highly associated with the procurementand utilization of fund. Company can carry out its business operations and functions in a smoothmanner when they effectively make use of fund which is available to it. Business finance placesmore emphasis on debt management which helps organization in building effective image in themind of creditors and other stakeholders (Cole, 2013). Besides this, cash or profit is one of the mainfactors which influences the growth and success of firm. This project report is based upon the casescenarios which help in understating the significance of cash or profit in context of businesssurvival. It will also describe the ways through which business entity can effectively deal with thecash flow problems. Further, report will also depict the extent to which investment appraisaltechniques help in making suitable business decisions.SCENATRIO 1According to the given case scenario, Event planners Ltd is a new established businesswhich have two shareholders. Firm has specialization in planning the events such as wedding,christening, birthday etc. In the first year, firm had failed to get desired profit or outcome due tocondition of high overdraft. In addition to this, company is not in condition to make payment to thecreditors on time. In addition to this, Event Company is planning to purchase a new luxurious carwith an aim to show venues to the clients. Further, owner of Event organization is also planning tomake expenditure on entertainment aspect. All these expenses may result to the less profit and highoverdraft. Thus, business situation of Event Planning Ltd. is highly critical. Therefore, enterpriseneeds to manage its cash flow in more effectual manner. Following mentioned aspects can help newbusiness in managing its profitability and liquidity in against the long standing business.1. Stating the importance of cash as well as profit and identifying the methods which help in dealingwith the cash flow problemsDifference between the cash and profitThere is significant differences in between the cash and profit. Cash flow clearly reflects theincome which is received by the firm during the accounting year. Further, it also presents theexpenditure made by the business organization. Thus, cash reflects the balance of inflow andoutflow on the periodical basis such as monthly, quarterly or annually. With the help of thismeasure, Event Planning Ltd. is able to evaluate their working or strategies to a significant level.On contrary to this, profit includes the revenue which is generated by the firm through organizing orplanning the different events. By subtracting the expenses from the income, business entity can3
easily identify that whether they acquire profit or loss (Beery, 2016). On the basis of this aspect, itcan be stated that profit involves all the transactions including income which is received in cash ornot. For instance: company has accrued income of 20 million then business entity includes thisincome in the profitability aspect. This aspect includes all the monetary and non-monetaryelements. In comparison to this, cash flow includes all the income and expenditures which arehighly related to the financial aspects. In addition to this, cash is one of the most significant factorswhich is highly required to make payment to the creditors, staff etc.Further, cash is also needed to meet out the daily business operations and functions. EventPlanning Ltd. also requires to make focus on enhancing the profitability aspect which helps them inmaintaining the faith or trust of existing or potential investors. Hence, on the basis of givenscenario, company needs to make balance in the cash flow. Thus, by managing the cash flow,company is able to reduce the amount of overdraft to a significant level (Kraemer-Eis, Lang andGvetadze, 2013). Besides this, it also enables business organization to make payment to theirsuppliers within the suitable time frame.Liquidity and profitability characteristics:Liquidity is the measure which shows financial capability of the firm in relation to meettheir short term or current financial obligations. Thus, liquidity aspect is heavily influencedby the cash which is available within the business organization. If firm has sufficient amountof cash to meet the current financial obligations, then it is considered as highly liquid (Bank,2014). On the basis of give case, Event Planning Ltd. is unable to make payment to theircreditors on time. Thus, liquidity aspect of the firm is sound. In against to this, profitabilityis the measure which shows that revenue is generated by the firm by making sales over theexpenditure. If company has acquired high amount of profit then it shows that company cansurvive in the strategic business arena for a long run.Liquidity and profitability aspect of the firm are influenced by the accounting principles andconventions. On the basis of accounting principles, business entity records receipt andpayment that are occurred in monetary terms. On contrary to this, profitability measurefollows accounting conventions. Thus, on the basis of accrual concept, Event planners Ltd.needs to record income and expenses at the time of their occurrence irrespective that theyare received in cash or not (Tocker and et.al., 2013).Further, cash flow includes all the investing, financing and operating activities. Therefore,liquidity aspect of the firm is highly dependent on the activities which are performed by thebusiness unit during the accounting year. Whereas, profitability measure includes monetaryactivities which are associated with the operational aspects.4
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