Analysis of Cash Flow, Working Capital, and Budgeting for Businesses

This report provides a comprehensive analysis of cash flow and working capital management. It begins by defining profit and cash flow, differentiating between the two, and explaining the components of working capital. The report then examines the impact of working capital on cash flow and analyzes the specific challenges faced by Trend Ltd, a gym clothes and footwear manufacturer, including high debt, outstanding payments, and inventory management issues. Furthermore, the report outlines steps for improving cash flow and working capital management at Trend Ltd, including cash management strategies, working capital optimization, the use of budgeting tools, and dispute resolution. Finally, the report drafts a cash budget for Thorne Estates Ltd, a company involved in selling residential properties, and interprets the findings to recommend strategies for better performance, emphasizing the importance of cash budgeting for evaluating financial performance and managing seasonal variations.

BUSINESS

EXECUTIVE SUMMARY
This report en-light about cash flow and working capital management, there requirement
for business firm to improve liquidity and cash balance of an organization. It also presents
impact of cash flow and working-capital management may make to achieve effective production
function and help in reduction in debt part that are increased for payment of current liabilities.
Also show importance of cash-budget, that cash budgeting may applied for better cash
management and working-cycle and how it will work to solve short term obligation of company.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
TASK.1 ..........................................................................................................................................2
(I) Define Profit, Cash flow and discuss difference -.................................................................2
(a)Profit.......................................................................................................................................2
Cash Flow ..................................................................................................................................2
Difference between Profit and Cash Flow..................................................................................2
Explain working capital and its component .............................................................................3
Working capital .........................................................................................................................3
(c) Impact of Working Capital on Cash Flow............................................................................4
(II) Impact on Trend Ltd of Cash Flow and Working Capital ..................................................4
(III)Step for Improvement in Cash Flow and Working capital Management on Trend Ltd......5
TASK. 2..........................................................................................................................................6
1. Drafting cash budget Thorne Estates Ltd ..............................................................................6
2. Interpreting findings from cash budget and recommending strategies to Thorne Estate for
better performance .....................................................................................................................9
REFERENCES..............................................................................................................................11
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TASK.1
(I) Define Profit, Cash flow and discuss difference -
(a)Profit
Profit is a financial term which define return that have been earning from business
activities by an organization. In simple words profit is something extra that is received due to
business operation (Li, P and et.al 2021). Every business is start and run by organizations with
motive to earn maximum profit by business function, all employees, management and director
are working with one common motive that is profit. All companies have various types of profit
classifications gross, operating, and net profit.
Profit= Revenue- All Expense
Cash Flow
Cash flows means flow of cash transaction that is made by an organization in particular
time period to find out net cash balance. It can be find out by summarizing operating, investing
and financing activities with taking help form financial statements (Ni, Y and et.al 2019). Cash
flows is useful when finding net present value for any project, internal rate of return can also be
find out, it defines present liquidity position of business.
Difference between Profit and Cash Flow
Basis of difference Profit Cash flow
Used Profit is useful for company as
well as for investors perspective,
but company will not consider is
in short run they concern for long
term. Investors always look for
profit.
Cash flow is useful for
management to forecast future cash
need and project determination.
determinants Profit is calculated by revenue less
expenses.
In can be find out after determining
profit and financial statements.
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Form operating, investing, and
financial activities.
preparation Profit is calculated by the help of
profit and loss statement/income
statement.
Cash flow is prepared with the help
of profit and loss statement, as cash
flow statement.
Explain working capital and its component
Working capital
Working Capital is a part of capital that is deployed is operating activities to make
production activities more efficient and provide operating liquidity to company. Simple in can
be defined as combination of inventory, cash, trade bills, debtors and creditors etc. Working is a
very important part of overall business activities, however a company's profitability is more
reliable on working capital management. It guides management, how to mange short term debt
part of organization to make less default in payment by using current assets effectively. Some
component of working capital are-
Receivables- Accounts receivable are payment outstanding for goods/services delivered
to customer by organization. This is a part of trade activities of business where goods/services
are provided on credit, and also known as debtors in some firm and reflect in balance sheet at the
end of every year. Receivable played very crucial role in working capital to decided average
receivable period, it helps to make cycle easy and allow firm to hold less cash balance. This will
make use of cash as other activities to earn more profit, So it is necessary to maintain less or
average receivables.
Inventory- It means all the stock of fir, that is held with company which are not sold,
like Finished goods, work-in-progress and material held for production these all combined
become as inventory. It is a important factor when determining working capital and cash budget
because if an organization is holding more inventory in working capital. That means company
will need more cash balance to make payment to creators due to excessive part of assets is held
as idle in inventory. It is difficult to maintain less inventory in some-time due to less sales, it will
increase size of finished goods and lead to more burden on liquidity part.
Payable- another factor that have influence on working capital management on any
organization, it is the payment that company needs to pay due to credit purchase made by
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organization and payment is outstanding. Also known as creditors, they are important is
calculation of average payment period to find out at what cash is needed. If there is dis-balance
in receivable and payable period than it need to be resolved, because this dis-balance lead to
make extra cash requirement. A good working capital management always have approx same
period in receivable and payable.
A good working capital management will address all these factors that are discussed to
make better utilization of funds. This will be possible when company is maintaining lower level
goods in work-in-progress and finished goods to reduce more cash balance. And receivable
period needs to reduce at minimum level and payable period have to extent at best possible days
(c) Impact of Working Capital on Cash Flow
Working capital includes short term assets and liabilities and cash flow is deal with long
term assets of organization but working capital has indirect impact on cash flow. Major part of
cash that has in ans out flow is needed is working capital, some-times transaction with same
amount of asset and liabilities were held than there will be no impact on working capital but will
impact cash flow (Golovchenko, and Dmitriev, 2019). Operating activities are directly link with
working capital and its will have a significant role on cash flow, all purchase and sales of assets
are also impacted both. example of these is, if a company purchase a new machinery or plant it
decreased cash in current assets and also make out flow of cash and vice-versa. Another
example, if company is purchasing raw material with cash that will have no impact on cash but
affect cash flow.
Company's cash flow preparation need balance of activities total of working capital, however
more part in company is relating to current assets and liabilities. So before preparing cash flow it
is required to evaluate working capital to find out value of operating profit and flow of cash.
(II) Impact on Trend Ltd of Cash Flow and Working Capital
Trend Ltd is working as Gym clothes and footwear in manufacturing industry, so more
focused must be made on manufacture(operation) part rather than investment part. Company has
euro 60 million profit before interest and tax than need to be increased by making better use of
cash flow and working capital management (Mazzarol and Reboud, 2020). Trend Ltd has to
address point relating to working capital and cash flow that are following -
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Company need to look into working capital because their debt is also increased up to 35
million euro dollar that is big concern for shareholders. Another point is payment to be received
Tkechers Ltd that is outstanding from last year and 12.5 million euro dollar from Sadidas Ltd.
One supplier's payment is due and his is threatening to go legally for payment. Company make
payment of 5 million euro as advance fee for acquiring supply of product. Company need to
make inventory management tool to improve optimum stock level that will define and check
quality of stock as well as raw material. It is important to avoid dispute about quality of material.
These issue can be solved by cash and working capital management, if Trend Ltd make debtors
turnover period less than timely payment can be received and made to suppliers. One more thing
is that quality of product that can be address by quality check of good received from supplier
and at the time of supply at return (Kasmiati and Santosa, 2019). So need to make dispute this all
can't only be possible only with working capital, also need effective cash flow management. All
information relating to cash are available in cash flow.
(III)Step for Improvement in Cash Flow and Working capital Management on Trend Ltd
Trend Ltd is increased is debt part due to not receiving payment form debtors timely but
company need to make payment to creditors. Company liquidity position is not very good, so
they need to look for effectively use cash and working capital.
Cash Management-Company need to increase its operating profit by making optimum
use of resources, they may look for cash management by cash flow statement to find out how
much part of cash not used effectively (NGUYEN and et.al 2020). If Trend Ltd make better cash
flow then they will be in position to look for future objective and project that are profitable. So
cash flows is most effective tool for improvement cash and liquidity of Trend Ltd.
Working Capital Management-Working capital that can reduce debt part and make
effective use of cash balance, for that company firstly make receivable period shorter because it
will increase cash and liquidity (Shubita, 2019). This leads to better cash position and company
need not increase debt for making payment for current liabilities, moreover they will have
opportunities to reduce debt.
Budgeting Tools- Company may implement capital budgeting tools to forecasting future
cash requirement and working capital management (Devalkar, and Krishnan, 2019). Another
way that will make some improvement is inventory management that will make proper quality
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check and overall management of inventory (Eiser, 2020). It will able company to check raw
material and its quality checkup, so company has option to return material that is not up to mark
for further production and need to return. Trend Ltd not to face any legal action from supplier's
side and show them reality about bad condition and have proof if legal action is taken for that.
Dispute settlement-Better management company need to resolve all dispute that are
been held with customer and supplier, however it changes focused of management form
production activities to resolving dispute and taking legal action for them. So less dispute will
create a healthy and friendly working environment.
TASK. 2
1. Drafting cash budget Thorne Estates Ltd
Cash budget entails estimated in and outflows associated with business operations over a
specific time period. Cited case situation presents that Thorne Estate Ltd is involved in the
selling of residential properties. For analyzing and evaluating information about business firm
prepares cash budget (Carroll, and 2020.). Moreover, it provides input to the firm in relation to
assessing loopholes by doing comparison of current performance in against to the benchmarks
(What is a Cash Budget?, 2021). Hence, through preparing cash budget firm can assess sources
from where it is generating income. Along with this, cash budget also highlights areas where
money spent by the business unit. Hence, by preparing this, company can identify areas where
controlling measures need to be undertaken for improving cash position or balance.
Advantages that may be gain by Thorne Estate Ltd by using cash budgeting-
Self-Evaluation- Company is made for short period that means they need to make
maximum profitability form operation for that they need to set some reasonable and achievable
target. This can be possible through budgeting and this will also provide comparison for actual
result with foretasting. For company like Thorne Estate Ltd it is essential to evaluate
performance for them to decide about fulfillment of objectives.
Seasonal Variation- Short period can be considered as seasonal business, it is important
to make all arrangement for seasonal for make maximum profitability. Some-business have
specified period for profitability, so they need to be prepared in advance about all requirement
for that period that is possible through budgeting. So it is essential for company to decided in
advance about all planing to meet future without facing problem.
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Effective cash management- Management of cash need to be address by organization to
face future goals in effective manner. Cash budget allow and show effective management and
requirement of cash this will to make company to make arrangement for cash before in need. It
will lead to make better use of cash, cash may be utilized for any other activities. So Thorne
Estate will beneficial to handle cash in effectively.
Financial budget of Thorne Estates Ltd from Jan to April is as follows:
Month Jan Feb March April
Cash Inflows
Opening Cash Flow -40000 -25,550 -6,600 30,050
Sales commission
(refer working note:
2)
54,000 63,000 99,000 144,000
Sale of vehicles 20,000
Total cash inflows 14,000 37,450 92,400 194,050
Cash Outflow
Variable Expenses 9,000 13,500 22,500 27,000
Salary 26250 26250 26250 26250
Bonus 6300 12600
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Fixed overheads 4300 4300 4300 4300
Loan Interest 3000
Outstanding tax
liability 95800
Total cash outflows 39,550 44,050 62,350 165,950
Cash deficit /
surplus or closing
cash balance
-25,550 -6,600 30,050 28,100
Working note;
1. Computation of properties amount sold during the period of 4 months:
Particulars /
Month Jan Feb March April
Units Sold 10 15 25 30
Price per unit 180,000 180,000 180,000 180,000
Total value of
properties sold 1800000 2700000 4500000 5400000
2. Calculation of earnings generated through commission
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Particulars / Month Jan Feb March April
1% in current month 18,000 27,000 45,000 54,000
2% past month 36,000 36,000 54,000 90,000
Total Commission 54,000 63,000 99,000 144,000
2. Interpreting findings from cash budget and recommending strategies to Thorne Estate for
better performance
By evaluating company’s transactions, it has identified that sales generated by Thorne
Estate Ltd through selling of properties increased over the months. In month of Jan sales
accounts for £1800000 respectively and reached at £5400000 at the end of April. However,
company is offering credit period to the customers in relation to paying commission to it for the
sales done. Hence, as a result of increasing sales pattern commission income of Thorne Estate
ltd also inclined from £54000 to £144000 significantly. However, irrespective of generating
higher income business unit suffered from the position of deficit in the month of Jan and Feb.
Due to having negative opening cash balance deficit of 25550 GBP found in the month of Jan.
Thereafter, cash position of firm improved significantly from -6600 to 28100 GBP in the month
of April. Along with income level, expenditures of Thorne Estate Ltd also increased to a great
extent. Overall assessment clearly exhibits that due to having adverse balance cash position of
Thorne Estate Ltd was not good during the concerned months. In addition to this, occurrence of
outstanding tax liability also affected company’s cash position in negative manner. Hence,
business unit is required to take significant measures for making improvement in cash position
and thereby overall performance.
Recommendation for Thorne Estate Ltd
Company is made with short term objective and for short period, so company need to
prepare cash budget for tome to for rest of its life period. Moreover, if company is getting result
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by cash-budget as their deficit balance become positive in two months without reducing its
expenses, also help in making control over expenses and cost.
Thorne Estate Ltd need to use cost management tools like marginal costing and
absorption costing to reduce expenses that are controllable and strict action. They will have to
manage working capital to improve cash balance to avoid less liquidity position and to manage
flow of cash to reduce deficit balance. As shown company is made for short period, but sales of
company increased rapidly so company need to think about long term plan of business and
expatiation. Company may think about increment in sales by promotion and sales activities to
avoid reduction in sales and revenue, it becomes necessary to promote company because in
attract more customer base for company.
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REFERENCES
Books and Journals
Carroll, M., and et.al., 2020. Budgeting for federal insurance and retirement programmes: Cash
or Accrual. OECD Journal on Budgeting.20(2).
Dbouk, W., Moussawi-Haidar, L. and Jaber, M.Y., 2020. The effect of economic uncertainty on
inventory and working capital for manufacturing firms. International Journal of
Production Economics. 230. p.107888.
Devalkar, S.K. and Krishnan, H., 2019. The impact of working capital financing costs on the
efficiency of trade credit. Production and Operations Management. 28(4). pp.878-889.
Eiser, D., 2020. Will the benefits of fiscal devolution outweigh the costs? Considering
Scotland’s new fiscal framework. Regional Studies. 54(10). pp.1457-1468.
Golovchenko, A. V. and Dmitriev, N. D., 2019. Management of cash flow of the
enterprise. Modern Science. (5-4). pp.47-49.
Kasmiati, M. and Santosa, P. W., 2019. The effect of earning information, cash flow
componens, firnancing decision, and Stock Return: Empirical Evidence on Indonesia
stock exchange. Journal of Economics, Business & Accountancy Ventura. 22(2).
pp.157-166.
Li, P., and et.al., 2021. Pricing strategies and profit coordination under a double echelon green
supply chain. Journal of Cleaner Production. 278. p.123694.
Mazzarol, T. and Reboud, S., 2020. Work Book: Cash Flow, Profit and Working Capital. In
Workbook for Small Business Management (pp. 117-125). Springer, Singapore.
NGUYEN, A.H., and et.al., 2020. Impact of working capital management on firm's profitability:
Empirical evidence from Vietnam. The Journal of Asian Finance, Economics, and
Business. 7(3). pp.115-125.
Ni, Y., and et.al., 2019. Cash flow statements and firm value: Evidence from Taiwan. The
Quarterly Review of Economics and Finance. 71. pp.280-290.
Shubita, M. F., 2019. The impact of working capital management on cash holdings of large and
small firms: Evidence from Jordan. Investment Management and Financial
Innovations. 16(3). pp.76-86.
Online
Cash Budget. 2021. [Online]. Available
through:<https://efinancemanagement.com/budgeting/cash-budget>
Cash Flow vs. Profit: What's The Difference? 2021. [Online]. Available through:
<https://online.hbs.edu/blog/post/cash-flow-vs-profit>.
Working Capital Management. 2021 [Online]. Available through:
<https://www.edupristine.com/blog/working-capital-management>
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