Business Finance Report: Cash Flow, Working Capital Management

This report provides a comprehensive analysis of business finance, focusing on the critical concepts of cash flow and working capital management. It explores the differences between cash flow and profitability, detailing the components of working capital like accounts receivables, inventory, and payables, and how changes in these elements impact cash flow. The report further examines how a company's management strategies affect its financial results, using Trend Ltd. as a case study to illustrate these points. It offers recommendations for effective working capital management, including cash flow forecasting, the creation of cash budgets, and the analysis of accounts receivable and inventory. The report also includes the preparation of a monthly cash budget for Trend Ltd. from January to April 2021, providing practical insights into financial planning and control. The content is supported by a detailed executive summary and concludes with recommendations for maximizing cash position and improving overall financial health.

Business Finance

Table of Contents
Executive summary..........................................................................................................................3
1. a. Explaining the difference between cash flow and profitability...........................................3
b. Explaining the working capital, account receivables, inventory and payables........................4
c. Identification of changing working capital on cash flow.........................................................4
2. Determining the steps through which company is being managed affect its financial results 5
3. Recommendation related to the effective working capital management.................................5
Executive summary..........................................................................................................................6
TASK 2............................................................................................................................................6
Preparing monthly cash budget for four month from 1st Jan to 30 April 2021...........................6
Recommendation.........................................................................................................................8
REFERENCES..............................................................................................................................10

Executive summary
Profit refers to revenue generated in the company at specific period of time and cash flow
is the rise in the cash position of the company by the end of the year. Working capital is
difference between the current asset and current liability of company. Changes in working capital
affect the cash floe through many changes in the management.
1. a. Explaining the difference between cash flow and profitability
Profit- This concern with the financial benefits that is realized when revenue is generated
from the point of business activities that exceed the expensed, cost involved in any functions and
activities. This is calculated as total revenue less total expenses from it and it is money that pulls
after calculating all expenses(Cherep, Helman and Lynenko, 2019). There are types of profit
such as gross profit, operating profit and net-profit that is exist in income statements. This is
important part of every organisation where analyst used to identify them carefully and compared
with other organisation.
Cash flow- This is net amount of cash which is transferred into and out of business and it
is important for the company to generate positive cash flow and ensure maximising of free cash
flow. This refers that firm is able to add to its cash reserves and pay money to its shareholders
and settle its debts. There are of three types such as Operating, Investing and financing. Free
cash flow usually measure by analyst to identify the profitability of the organisation and supports
the operations to maintain capital assets.
Difference between profit and cash flow
Basis Cash flow Profit
Meaning This concern with money that
flows into and out of business
during the period (BRAUER
and SROUFE, 2020).
This also known as revenue of
the organisation which is
beneficial for the future
growth.
Purpose Its objective is to identify the
liquidity status of the company
and its day to day activities.
To analyse the financial
position of company and its
productivity in future.
Calculation Cash flow is define the cash This is difference between the

inflow and cash outflow and
prepared by cash flow
statements.
selling and cost of production.
b. Explaining the working capital, account receivables, inventory and payables
Working capital- This is measure the liquidity, operational efficiency and short term
financial health of the company and if an organisation has substantial positive working capital
than this depicts that they have potential to invest and grow. High in the working is also not good
and this shows that it has overstock or too much inventory and it is not investing the cash.
Account receivables- This is balance of money which is due to firm for goods or
services and that was not paid by customers. They are treated as current asset in balance sheet
that shows that money is due to company in short- term (Mutura, 2020).
Inventory- They are important part of business as turnover of inventory represents the
primary sources of revenue generation and able to provide income to the shareholders.
Account Payable- This is account that depicts the obligation of company to pay off
short-term debt to its creditors or suppliers. The sum of all outstanding amounts that owed by
vendors is reflect as amounts payable balance on the company's balance sheet. If management
wants to increase its cash reserves for specific period than they can extend the time business
takes to pay all outstanding accounts.
c. Identification of changing working capital on cash flow
Working capital refers to the difference between current asset and current liability and it
also called as the net working capital of company (Elo and Vincze, 2019). The major impact on
cash flow through working capital is if there is increase in transaction in current asset and current
liabilities by same amount then there will be no changes in working capital. If an organisation
received cash from short-term debt that has to be paid in 60 days than there is increase in the
cash flow statement. If company purchased fixed asset such as machinery, building than the cash
in company will decrease. In that company's working capital will also decrease as cash portion of
cash asset would reduced. In company, if there is purchased inventory with cash, there will be no
change in working capital because inventory and cash are both come under current asset.

2. Determining the steps through which company is being managed affect its financial results
Trend Ltd deals in manufacturing gym cloth and footwear and this supplies many design
to the companies and after they market the clothes and shoes under their own brands. The
company has achieved turnover in excess of 300 pound dollar. Following are the way through
which they can managed financial results-
 Profit- In the organisation, Trend Ltd has earn profit of 60 million pound last year which
is depicts the better financial position of company. Due to this, it need to be reduce the
tax liability and interest payable on borrowing liability will help the company to get
better profit for future period of time (Lawson, 2020).
 Cash flow- Company should use the new policies such as offering discount price to its
customer and using effective bill paying. Company should clear out its debts as soon as
possible to maintain the better cash flow statements as this will keep proper cash inflow
in the management.
 Payable- Company need to be increase the value of current asset to cover the expenses of
current liabilities as they required sufficient amount of money to pay of the obligation. As
company' s debt has increased to 95 million pounds from 60 million pound year before,
which shows the company is more liable to pay its debt more than before. So, to reduce
that manager of the company has looking for the shareholders investment that might
reduce the debt in the company.
 Working capital- This states that day to day liquidity of the organisation which deals
with the profitability of the company. Ratio in working capital reduces due to loosing the
potential customers and less supply in the raw material to its suppliers. The amount of
working capital can be managed through proper delivery of supply and timely payment
from supplier ensure the effective balance in working capital. To increase the current
asset in organisation needs to be done by company to keep the balance of cash.
3. Recommendation related to the effective working capital management
Working capital management is useful tool that helps the companies to make efficient use
of current asset, helping the companies to maintain proper cash flows to meet the goals (Arrieta-
Paredes, Hallsworth and Coca-Stefaniak, 2020). This is important to use effective method to
develop the cash flow in the management of the company. Trend Ltd can use certain way to
maintained cash flow are -

 Forecasting of cash flow- Through proper prediction of future cash flows such as
payables and receivables in company will facilitates in better decisions regarding
investment and other important activities.
 Create cash budget- This is direct method that give useful insight into the cash flow of
the company. This will depicts the proper position of cash outflow and inflow and will
help the organisation to take effective steps in future and can take measurable action.
This is used by cash managers and will support them to make policies and rules.
 Analysis of account receivable- This act as useful asset for the company and this need to
be use effectively by manager to ensure that they get timely payment from customer. This
required to strengthen the credit policies which will increase the early payment and
carefully analyse the financial health (Siba, 2019). This will improve the cash flow of
organisation as this enhance overall cash position in management.
 Review of supply and inventory- This also could be use by the company to improve its
cash flow as proper supply of inventory to the suppliers will also increases the
effectiveness in the organisation. This will ensure the worthiness of firm and will reduces
the chances of conflict with the loyal supplier as this happens with Trend Ltd. This assure
that company is properly supplying its inventory on time to increase the cash inflow in
firm.
Executive summary
Cash budget which refers to the estimation of cash receipts and payments in specific
period of time. It helps in determining the exact cash position of the organisation and include
bills paid, account receivable for loans (Zusmelia, Firdaus, and Ansofino, 2019). The analysis of
cash budget in the selected company and recommendation has been made to maximise the cash
position and methods to improve the cash position.
TASK 2
Preparing monthly cash budget for four month from 1st Jan to 30 April 2021
Cash budget- This is the estimation of cash flows of business over specific period of time
and it is determined according to the weekly, monthly, quarterly or annual budget. This provides
the useful insight to the requirement of cash needs and helps on determine whether they have
sufficient cash to continue operating period in given time. Companies use sales and production

forecasting to formulate the cash budget. Cash budget is important to assess that whether they
have sufficient balance to operate the operational activities and functions. This include all
expected inflows of cash that involve income and non income sources such as receipts from sale
and bonds. This is important to understand that the principle of cash budget as it facilitate the
cash position in future period and helps in predict cash surplus to permit the financial planing in
advance (Marín and Schwabe, 2019). This ensure that there is proper allocation of resources in
the requirement of firm and using idle cash properly. This is extremely important tool that is
available for the manager to plan the fund requirement and control cash position in the company.
This act as planning devise for the company and manager draw appropriate cash requirement and
indicate most time to undertake financing process and there will be effective financial structure.
The cash budget provides the opportunities to invest in the idle cash into marketable securities
and with the help of this finance manager can maintain better liquidity in the profitability of the
company. Apart from that this helps manager to decide which funds is most likely to be more
profitable and should obtained. Cash budget is conducive to formulate sound dividend policy of
the company and adequate amount of cash is necessary for dividend payments. This is useful
devise to establish the sound basis for current control of the cash position and periodically
manager can compare the actual receipts and expenditure with the estimated figures. This is
useful in taking measurable actions and decision regarding the future investment and policies as
this reflects that what need to be done or not in the context of cash expenditure. This is useful in
forecasting the future needs and identify the most useful resources and create the maintenance of
ample cash balance and regulate the exceeded budgeted limit and helps in controlling the various
departments in the firms. Evaluating the performance is also the main functions of the cash
budget and it test the overall efficiency of the company (Addae, 2020). It plans the sound
dividend policy to shareholders, consistent with liquid position of the firm will strengthen the
choices of company and make it more easy to find the suitable one options. This create the
overview of investment and will help in maintaining the long term-term planning and
coordination. This is important form of planning the cash level to check the uncertainties of cash
outflow. In the preparation of cash flow the need to understand the cash position is very
necessary and making summary of estimated cash flow will help the company to plan the future
of cash availability. If there is large cash balance indicate that they has to dealt with financing
budget where suitable investment is required to balance the cash position. If there is negative

balance in cash budget, this indicate that there is lack in timing and amount in debt and equity
that need to be balance (Domnikov, Antipova and Domnikova, 2019). Some necessary were
used to made after proper evaluation of cash budget and than take further steps to avoid the
future circumstances and requires to be assess thoroughly. The need of cash budget is very
essential in the organisation to make further decisions.
Cash budget of Thorne Estates Limited:
Particulars January February March April
Cash receipts
Fee charges 54000 63000 99000
14400
0
Dispose of surplus
vehicles 0 0 0 20000
cash balance 40000 0 0 0
Total of cash receipts 94000 63000 99000
16400
0
Cash expenses 0 0 0 0
Salary of employee 26250 26250 26250 26250
Bonus 0 0 700 1400
Variable expense 0 0 0 0
Fixed over heads 4300 4300 4300 4300
Interest on loan 0 0 12000 0
outstanding tax liability 0 0 0 95800
Total of cash payments 30550 30550 43250
12775
0
Analysis- From the above calculation it is determined that Throne Estates Limited, it has
been evaluated that cash flow from the January to the April the cash flow is fluctuating and
changing according to the different months. In the month of January, the cash outflow is 63450

and than it reduces to the 32450 in the February and it again rises to the amount of 55750 in the
month of March. After in the fourth month the amount comes down to the 36250 which depicts
the major fluctuation in the amount of Net cash flow in the period of four month. Some
indication shows that cash budget is has to be increase by reducing the short term expenses and
increasing the cash receipts and that could be achieved by the raisin the overall sales during each
months. The need to analyse the whole process some changes can be made by the company to
increase the cash flow the lower down of expenses is important to maintain the effective cash
position of organisation (Levine, 2019). Increasing in the expenses has decrease the cash position
and organisation is focusing on paying the expense amount and that reduces the cash position.
Recommendation
In the concern organisation, the cash outflow has been reducing in first two month and
than increase in third month and decrease in the fourth month of the year. It has observed that
organisation is not adequate cash balance and improper cash management. This is important to
maintain the effective cash position to fulfil the obligation and debt of the company (Baidoo,
Sakyi and Aidoo, 2020). It is recommended that manager should use the effective method to
maintain the proper cash position by taking implementing the policies regarding the payment to
the creditors and proper evaluation of account receivables in the company. Some necessary
changes need to be make in operational activities and functions to formulate the funds for the
firm. The need to proper planning is important to maintained the cash position and accurate
outlook revenue and management will have to estimate the volume of revenue for the money and
credits based on previous experience. Cash inflow duration through the credit transaction relies
on sales factors and previous actions of the consumer in servicing debt. To approximately
changes the needs is necessary to execute the proper changes and transaction in the value of
money to maximises the revenue to reduce the cash expenses. In the view of balancing the cash
position the requirement is to increase the investment in shareholders and encourages to invest in
the company and properly execute the supply of inventory and supplies to the customers. The
need to strengthen the credit policy and maintaining the effectiveness is important to manage the
balance between the cash position. The proper payment by the supplier in right time will also
help the company to increase their cash position and maintaining the good relationship with them
will also help them in achieving the appropriate Net cash flow.

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