Business Finance: Cash Flow, Working Capital, and Budget Analysis

This report delves into key business finance concepts, differentiating between profit and cash flow, and exploring the components of working capital (receivables, inventory, and payables). It examines how changes in working capital impact cash flow and highlights financial accounting concepts that can improve company management. The report analyzes a case study of Trend Ltd, a gym clothing and footwear manufacturer, identifying areas for improvement in working capital management, and suggests strategies like cash flow forecasting, electronic invoicing, and inventory management. Additionally, the report presents a cash budget for Thorne Estates Limited over four months, offering observations and recommendations based on the financial analysis. The report emphasizes the importance of cash flow management and provides practical insights for enhancing financial performance.

Business Finance

Table of Contents
TASK 1............................................................................................................................................3
Profit and Cash flow and their difference:..................................................................................3
Working Capital, Receivables, Inventory and Payables:............................................................3
Effect on Cash Flow due to working capital changes:................................................................4
Application of financial accounting concepts which can improve the management of the
company:.....................................................................................................................................4
Steps that can be taken to improve the cash flow of the company through working capital
management:...............................................................................................................................5
TASK 2............................................................................................................................................6
Cash Budget of Thorne Estates Limited for four consecutive months:......................................6
Observation and recommendation to Thorne Estates Limited arising from this analysis:.......10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

TASK 1
Profit and Cash flow and their difference:
Cash flow and profit are two different terms in financial context. They both are important
financial tools used in any business. It is important for the reader to understand the difference
between them.
Cash flow: There is a continuous flow of cash in the business. When a manufacturer
buys raw material for its products the cash flows out of the business to its providers. When the
manufacturer sells its products to other people, let's say wholesalers then there is an inflow of
cash in the business (Hague, M. and et. al, 2020). Other activities like paying of utility bills,
salaries, maintenance also involves inflow and outflow of cash in the business. Cash flow refers
to the net amount of cash inflow and outflow of a business in a specific period or at a certain
point of time.
Profit: Profit refers to the balance obtained by subtracting all the operating expenses
from the revenues of the business. It is the remaining amount that is left after subtracting
expenses from the proceeds of the business (Gebre, T., 2019).
Working Capital, Receivables, Inventory and Payables:
Working Capital: Working capital is the difference between all the current assets and
current liabilities of the business. Current assets may include; cash, receivables, inventories of
raw material, work in progress and finished goods etc. Current liabilities may include; account
payables, short-term borrowings etc. It depicts liquidity of the business by evaluating its current
assets and current liabilities.
Receivables: Receivables are the accounts that are maintained by the business in its
financial accounts which depicts the credit balance due in favour of the business. Receivables or
debtors are generally customers who have purchase the products and services from the business
and availed the same with the promise to pay such amount in the future (Inci, A. C. and
Saraoglu, H., 2019).
Inventory: Inventory refers to the stock of good which the business holds or
manufactures and sells the same with or without value addition. Inventory may be classified into
three basic categories; raw material, work in progress and finished goods. This is considered as
an asset for the business (Ahmed, M. I., 2019).

Payables: Payables are the accounts that are maintained by the business in its financial
accounts which depicts the credit balance due to the suppliers or the third party of the business.
Payables or creditors are generally suppliers who have supplied the business with some sought of
inventory. The business promises to pay such amount to the creditors in the future. It is a current
liability of the business (Hashmi, S. D. and et. al, 2020).
Effect on Cash Flow due to working capital changes:
Cash is an important component in the calculation of working capital and cash flow. In
any business there is continuous inflow and outflow of cash which results in changing working
capital and as a result cash flow of the business is affected.
For example if the business advances a long term debt from a bank then there will be a
change in the working capital due to the inflow of cash in the business. As a result inflow of cash
will also increase resulting in a positive cash flow (Weber, O. and ElAlfy, A., 2019).
Another example can be considered in which the business buys a fixed asset, let's say a
machine or a building. There will be an outflow of cash which will result in decreased balance of
current assets which will further decrease the working capital of the business. Also as a result
outflow of cash will increase resulting in negative cash flow (Elert, N., Henrekson, M. and
Sanders, M., 2019).
Application of financial accounting concepts which can improve the management of the
company:
Trend Ltd (TL) is manufacturer of gym clothing and footwear. The management have
basic knowledge about the above explained concepts of financial accounting but the application
and implementation of this knowledge is not executed properly.
The company has a positive cash flow but most of the cash inflow is from the financing
activities of the business. Trend Ltd has borrowed £35 million more as long-term debt. Which
has certainly boosted up the cash inflow of the business.
TL ha made few investing decisions as well which has certainly increased the profit of
the company. With new facilities and new machines, the company will be able to produce more
of the specified products and increase the cash flow of the business.
Debtors of the company also owes the company an amount of £10 million and £12.5
million, which reflects poor account receivables management system and long term account
receivable conversion period.

Steps that can be taken to improve the cash flow of the company through working capital
management:
Working capital management helps the business to maintain cash flow which can be used
to comply with short term financial obligation and other monetary needs of the business. This
management involves effective use of current assets so that the business can earn more profit and
can have enough cash to carry out its operations. It prevents the use of external borrowings and
further these funds can be used in the growth of the business (Wu, Q. and Zhang, B., 2020).
Working capital is of great significance for every business and organisation. Trend Ltd
needs to maintain enough cash so that it can cover the planed and unplanned expenses. The
company must also use the available funds with efficiency. All of this can be achieved by
managing receivables, payables, inventories and cash.
Working capital management is supported by various tools and solutions, few of them
are:
 Cash Flow Forecasting: This method involves assessing such cash flows which
can occur in the future. For example account payables and account receivables
can be easily predicted and the time duration of such payments can also be
assessed. By assessing this the company can plan and predict the cash that it will
need in the future and also determine the shortfall or excess of cash. The more
accurate the prediction, the better will be the company's working capital
decisions.
 Electronic Invoicing: This refers to the process of providing the customer with
an electronic invoice. This type of activity can greatly benefit Trend Ltd as
electronic invoicing process will reduce the risk of errors and miscalculation. This
will automate the invoice cycle and the customers will receive invoices as soon as
possible. This will further help the company to receive the payments quickly and
increase its cash flow. This method is more convenient than the traditional one as
4.1 Explain your market research with references, Using primary and secondary
research. Provide a questionnaire with 5 suitable questions and state the objective
of said questions.Trend Ltd can easily record and turn purchases into finished
goods and then into sales, the system will generate invoices by itself as per the
sale data provided by the employee.

 Inventory Management: This is a major element of working capital management
which helps the company to perform its operations with high efficiency and
managing high working capital. This method enables the company to maintain
sufficient level of inventory on hand so that consumer demands can be met and
excess inventory stock can be avoided as it blocks cash and makes working
capital more rigid. Trend Ltd can use inventory turnover ratio to monitor and
maintain the stock of inventory. The inventory turnover ratio is calculated by
dividing revenues by inventory cost. This ratio determines how quickly can
inventory of the company be replenished and sold. The ratio is further compared
to other businesses in the same industry. Comparatively high ratio indicate low or
inadequate level of inventory and low ratio indicates high level of inventory
(Miller, R. L. and Cross, F. B., 2019).
TASK 2
Cash Budget of Thorne Estates Limited for four consecutive months:
Cash Budget basically predicts the future cash position of the company. A cash budget or
plan records expected cash inflow and outflow during a certain period of time. Cash inflow and
outflow may contain revenues collected, expenses paid and loans receipts and payments.
Cash Budgets are used by the management so that it can manage the cash flows of the
business. The management ensures that there is enough cash balance to carry out operations and
pay bills when they come due. For example employee salary must be paid every month along
with the utility bills. Cash Budgets assists the management to determine the shortfall in the cash
balance of the company so that the problems can be solved before payments are to be made.
Cash Budget has following advantages:
 It restricts the spend of an organisation: Cash budget helps the business and
companies to limit their spendings and prevents it to borrow funds from the
market or any other lender. Cash budget is the estimation and prediction of the
future cash inflow and outflow of the upcoming period. With the help of this
prediction and forecast, the management will be able to determine how much
money the business has to spend (Tao, X. and Li, S., 2020). This restricts the

business to avoid discretionary spending of cash so that it can be used on other
items and processes which are of a greater significance.
 It empowers critical thinking within the organisation: Cash budget induce the
company and its employees to critically think about the financial position of the
company and develop certain plans which can help in the upliftment of the
financial situation. With the given budget and amount to carry out task the
employees have to allocate funds carefully in order to not waste any cash on an
unnecessary activity or task. This will improve their decision making skills and
make them more effective and motivated to accept such challenges.
Following are the cash budgets of Throne Estates Limited for the months of January, February,
March and April of the year 2021 (working notes are at the end of the budget):
Cash Budget of Thorne Estates Limited for the month of January 2021
Particulars January(£)
Cash Inflow:
Income via Fees charged 54000
Receipts via sale of vehicle -
________
Total Cash Inflow (A) 54000
Cash Outflow
Employee Salary 26250
Variable Expenses 9000
Fixed Overheads 4300
Interest on loan -
Outstanding Tax Liability -
Total Cash Outflow (B) 39550
Net Cash Flow ( A - B) 14450
Add: Bank balance at start of the month -40000

________
Bank balance at the end of the month −25550
Cash Budget of Thorne Estates Limited for the month of February 2021
Particulars February(£)
Cash Inflow:
Income via Fees charged 63000
Receipts via sale of vehicle -
________
Total Cash Inflow (A) 63000
Cash Outflow
Employee Salary 26250
Variable Expenses 13500
Fixed Overheads 4300
Interest on loan -
Outstanding Tax Liability -
Total Cash Outflow (B) 44050
Net Cash Flow ( A - B) 18950
Add: Bank balance at start of the month −25550
________
Bank balance at the end of the month −6600
Cash Budget of Thorne Estates Limited for the month of March 2021
Particulars March(£)
Cash Inflow:

Income via Fees charged 99000
Receipts via sale of vehicle -
________
Total Cash Inflow (A) 99000
Cash Outflow
Employee Salary 32550
Variable Expenses 22500
Fixed Overheads 4300
Interest on loan 3000
Outstanding Tax Liability -
Total Cash Outflow (B) 62350
Net Cash Flow ( A - B) 36650
Add: Bank balance at start of the month −6600
________
Bank balance at the end of the month 30050
Cash Budget of Thorne Estates Limited for the month of April 2021
Particulars April(£)
Cash Inflow:
Income via Fees charged 144000
Receipts via sale of vehicle 20000
________
Total Cash Inflow (A) 164000
Cash Outflow
Employee Salary 38850

Variable Expenses 27000
Fixed Overheads 4300
Interest on loan -
Outstanding Tax Liability 95800
Total Cash Outflow (B) 165950
Net Cash Flow ( A - B) −1950
Add: Bank balance at start of the month 30050
________
Bank balance at the end of the month 28100
Working Notes:
1. Calculation of Income via Fees charged:
1. For the month of January = (2% of 180000*10) + ( 1% of 180000*10)
= £54000
2. For the month of February= (2% of 180000*10) + ( 1% of 180000*15)
= £63000
3. For the month of March = (2% of 180000*15) + ( 1% of 180000*25)
= £99000
4. For the month of April = (2% of 180000*25) + ( 1% of 180000*30)
= £144000
2. Calculation of Employee Salary:
1. For the month of January = 35000 / 12 * 9
= £26250
2. For the month of February= 35000 / 12 * 9
= £26250
3. For the month of March = (35000 / 12 * 9) + (140*5)
= £32550
4. For the month of April = (35000 / 12 * 9) + (140*5)
= £38850

3. Calculation of Variable Expenses:
1. For the month of January = 0.5% of 180000*10
= £9000
2. For the month of February= 0.5% of 180000*15
= £13500
3. For the month of March = 0.5% of 180000*25
= £22500
4. For the month of April = 0.5% of 180000*30
= £27000
4. Calculation of Interest on loan to be paid in March:
Interest on loan to be paid in march
= 6% of 200000/4
= £3000
Observation and recommendation to Thorne Estates Limited arising from this analysis:
Thorne Estates limited has recently started the business of advertising and selling
residential property on behalf of its customers. The company is doing exceptionally well even in
the starting days of the business. Making and considering Cash Budget was a really good
decision as it will help the business in managing inflow and outflow of the cash.
As per the analysis and observation of the author it is clear that there are some changes
which can be made in the approach and management of the company to be more profitable ,
generate more revenue and increase cash inflow. The company can increase its commission from
3% to 4-5%. A nominal change like this can have a huge impact over the cash inflow and
profitability of the business. It can further make a new policy of receiving the entire commission
in the month of sale, so that it can have more funds to spare and carry out all the necessary
business operations.

CONCLUSION
The above report conclude that Cash flow and profit are extremely important financial
tools used in any business. There are various tools and solutions which can be used to maintain
stability and increase profits and cash flow of the business. Working capital management is one
such tool which has various tools and solutions within it. Cash Budget play a significant role in
the management of cash in the organisation. It helps predict all the necessary areas where cash
will be needed and by what source will the business receive cash.

REFERENCES
Books and Journals
Ahmed, M. I. (2019). The progress to allow fully fledged interest free banking business in
Ethiopia. European Journal of Islamic Finance. (14).
Elert, N., Henrekson, M. and Sanders, M. (2019). Savings, finance, and capital for
entrepreneurial ventures. In The Entrepreneurial Society (pp. 53-72). Springer, Berlin,
Heidelberg.
Gebre, T., 2019. COLLEGE OF BUSINESS AND ECONOMICS ACCOUNTING AND
FINANCE DEPARTMENT (Doctoral dissertation, Addis Ababa University Addis Ababa,
Ethiopia).
Hague, M. and et. al (2020). The development impact of concessional finance to agri-business.
Hashmi, S. D. and et. al (2020). Sensitivity of firm size measures to practices of corporate
finance: evidence from BRICS. Future Business Journal. 6. pp.1-19.
Inci, A. C. and Saraoglu, H. (2019). Two Diagrams with Many Stories: Incorporating Finance
into Teaching Global Strategy. Journal of Teaching in International Business. 30(4). pp.314-341.
Miller, R. L. and Cross, F. B. (2019). BLAW 2203–Legal Environment of Business College of
Business Fall Term 2019 Dept. of Accounting, Finance & MIS.
Tao, X. and Li, S. (2020). The developing influence of Chinese culture on finance: A literature
review and case-study illustration. Research in International Business and Finance. 54.
p.101302.
Weber, O. and ElAlfy, A. (2019). The development of green finance by sector. In The Rise of
Green Finance in Europe (pp. 53-78). Palgrave Macmillan, Cham.
Wu, Q. and Zhang, B., (2020), December. The Influence of Internet Finance on the Traditional
Business of Commercial Banks. In Proceedings of the 2020 International Conference on
Cyberspace Innovation of Advanced Technologies (pp. 570-575).