Business Finance Report: Analysis of Cash Flow and Profitability

This report provides a detailed analysis of business finance concepts, focusing on cash flow, profit, and working capital management. It includes a case study of Trend Ltd, examining profit and cash flow differences, working capital components, and recommendations for strengthening cash flows. The report also features a case study of Thorne Estates Ltd, constructing and analyzing a monthly cash budget to assess its financial stability and provide recommendations for efficient cash flow management. The analysis covers accounts receivable, accounts payable, and inventory management, offering key steps for improving financial outcomes and ensuring liquidity. The report emphasizes the importance of effective financial strategies and procedures for maintaining a strong financial position.

Business Finance
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Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
i. Explain;...............................................................................................................................3
Profit and Cash flow and how they are different....................................................................3
Meaning of working capital, inventory receivables and payables.........................................4
ii. Application of above disucssed concepts to resective company to exlpore in which manner
corporation is being managed taht might affect its financial results:.....................................5
iii. Analyse and recommending what key steps should be taken to strenghten company’s cash
flows by effective Working Capital management:.................................................................6
EXECUTIVE SUMMARY (Task 2)...............................................................................................6
TASK 2............................................................................................................................................6
Monthly cash budget:.............................................................................................................6
Analysis:.................................................................................................................................8
Key recommendations and observation to the management of Thorne Estates limited.........8
CONCLUSION................................................................................................................................9
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EXECUTIVE SUMMARY
Business finance relates to field of the finance which emphasizes primarily on the manner in
which, through making good usage of all capital, major businesses have the potential to produce
and retain certain worth; they are closely related to disciplines like economics and accounting.
The primary goal of corporate finance ownership is to increase value of company's stakeholders
or its owners (Bajo, Barbi and Hillier, 2020). The study covers mutiple elements of business
through specific case study of Trend Ltd and Thorne Estates Limited. The frist task of study
comprises report for Trend’s shareholders for addressing different issues by exploring concept of
Profit and Cash-flow, Working Capital etc.
TASK 1
i. Explain;
Profit and Cash flow and how they are different
Profit: After providing all costs as well as expenditures have been excluded from net revenue,
profit is positive benefit left for a company. Benefit is often known as net-profit/net earnings.
Profit is among most relevant measurements in assessing a corporation's survival and progress.
The estimation of benefit, however, may differ and other variables must be considered. Profit is
commonly characterized as amount obtained from the sale of a commodity, and should be
greater than the expense of the product (Bongini, Ferrando, Rossi and Rossolini, 2019). This is
the sum of profits from some form of economic operation. In brief, if product's sale price (SP) is
higher than product's cost price, so it is known to be gain or profit. This defines the financial
advantage gained if the company profits exceeds taxes, costs, and so forth that are included in the
management of business operations.
Cashflow: Cash flow is total sum of cash which over a span of period is obtained and disbursed
by an organization. For an enterprise to continue in operation, a positive amount of cash flow
should be sustained, although favorable cash-flows are often required to produce value for
stakeholders. A normal reporting cycle, like a monthly, quarter, or even year, is time period
during which cash flows is monitored. Cash inflows originate from sources below:
Operations: It's indeed cash spent by consumers for entity's services or products.
Financing Activities: Loans acquired by an organization is an instance of this source.
Investment activities. The gains on invested funds is key example of this source.
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Cash outflows derive from following sources:
Operations: These are expenses, like payroll, the expense of products sold, leasing, and utilities,
produced as aspect of the usual course of business operations.
Financing activities: Interests and principal contributions made by corporation, or the buy back
of shares of company, or issuing dividends etc. are major instances.
Investment Activities: Payouts placed into investment accounts, loans put to other companies, or
the acquisition of capital assets are instances.
Difference between profit and cash-flow:
The primary difference among cash flows and profit is that in business cash flow
represents net cash flows into and out-of organization, while profit represents the sum left over
after providing all expenditures. This is not compulosry thta there would be positive cash flow
when business is enjoying profit and vise-versa. Thus, these are two different concepts, as in
business profit shows actual profitability psoition of business while cash-flows represents actual
liquidity position of business. Moreover, in compuation of profit, business applies accural
accounting system while in derving cash flows businss uses cash accounting system (Connolly
and Jackman, 2017).
Meaning of working capital, inventory receivables and payables.
Working capital: This is defined as form of capital that is employed by a corporation to deal with
everyday expenses. That's the gap between existing assets and business's current liabilities in
monetary terms. In attempt to complete financial expenditures, businesses should have ample
working capital. Practically, this is intended for shorter-term expenditures, and for amount of
large expenses should not be used. The accessibility of the working capital within company
depends on different types of variables, such as cash volume, stock, accounts receivables, and
plenty more.
Accounts receivables: Accounts receivables arise in a corporation as products are sold to
consumers on credit basis. This is practically regarded as current asset for business when
customers or debtors repay the money in lesser than one year. Collection of debtors in an
organization depends on different forms of credit purchases. However, it is necessary for
businesses to recover sums within single year across all debtors.
Accounts payables: The nature of accounts payables in accounts is entirely distinct from
accounts receivables. When they buy products on credits from vendors, accounts payables incur
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in business. These accounts payables are deemed to be existing corporate liabilities and ought to
be changed within single year. Since it is form of liability, businesses should aim to minimize
their trade payables as lower as practicable.
Inventory- -Each organization has various types of inventories that could be raw materials, work-
in-progress, or final inventory. All three kinds of stocks are used in production organizations. In
other words, inventories are referred to as the products or materials owned by a resale business.
In attempt to understand a corporation 's efficiency in handling its inventory levels, stock
turnover proportion is assessed (Gordon, 2019).
ii. Application of above disucssed concepts to resective company to exlpore in which manner
corporation is being managed taht might affect its financial results:
Profit: Based on above concpets this has been analysed that, in given case scenerio Trend Ltd’s
Operating profit of £60 million last year which is before provding interest and taxes. This figure
shows that business is running in profit. Althiugh, this is operating profit but this is actual profit
before considering interets and tax amount. The positive figure of profit represent that business is
effiient to generate profit.
Cash flows: In given case scenerio, if Trend Ltd’s revenue is assumed to be in cash then cash
flow form operation of business owuld be £300 million. Also company’s debt increased from 60
to 95 million indicating cash flow from financing activities amounting 35 million. Investment of
£20 million for acquiring shares of other comapny can be regarded as cash out flow from
investing activties.
Accounts Receivable: Major aspect which could affect account receivable balance of business is
that a pending dispute over £ 12.5 million supply to Sadidas executed in year 2019 is still
unresolved. It has contributed to the withholding of fees as talks between lawyers as well as
industry consultants begin. There is another question that Arpha feels the Sadidas dilemma
occurred due to supplier's availability of sub-standard products in year 2018. The supplier, who
is now taking court action, has declined to pay (Klopotan, Zoroja and Meško, 2018).
Accounts Payable: There is also considerable asept that might affect business’s accounts payable
balance that for a number of huge orders made by Tkechers, the business is owed amount of £ 10
million in last year.
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Inventory: Morrover, the corporation's London warehouse have acquired a significant supply of
products and equipment. Arpha maintains that until the conflict is settled, the business wants to
have this amount of stock. He is reluctant to press such too hard on his key clients for payment.
iii. Analyse and recommending what key steps should be taken to strenghten company’s cash
flows by effective Working Capital management:
 As soon as possible, settle conflicts with consumers and suppliers. Ensure that this
is settled without further time if a matter goes to arbitration, ensuring that excessive
litigation fees are not sustained. Receivables kept up due to conflicts are a serious source
of issue for enterprise.
 By generating higher profits/earnings, selling business shares taking more loans, and
selling investments for cash, the working capital situation can still be strengthened. These
methods should, though, only be viewed as last resort.
 Do not overstock the inventories. Making sure finished goods has been sold as quickly as
possible and aren't in warehouse idling around. Cut non-performing goods and facilities.
 Offer consumers who pays on time incentives. Early detection of delinquency and timely
action would discourage unnecessary ageing of accounts. Should not conduct business
with clients with history of defaulting (Ylhäinen, 2017).
EXECUTIVE SUMMARY (Task 2)
In the report, second part is based on case study of corporation Thorne Estates Ltd. As given
in case study, the corporation is operating in real-estate industry as well as engaged in selling of
properties of customers as an agent. In this part, a comprehensive cash budget has been framed
for a period of 4 months. Based on formulated cash budget this has been summarised that
company Thorne Estates’ cash flows are positive in this period, although there has been quite
declining trend in cash flows, which is considerable aspect for company. Moreover, for efficient
cash-flow management corporation should adopt effective strategies and procedures which will
also assist company in sustaining their liquidity position.
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TASK 2
Monthly cash budget:
Cash budget: In business context, this could be characterized as a type of budget formulated with
the intention of finding the total amount of cash accessible after subtracting overall cash
expenditure from cash receipts. Essentially, it is essential for businesses to plan this budget since,
by doing so, they will calculate their financial stability and determine to choose whether
to accept credit sales. There is standard method by which cash flows is managed and in which
gross cash collections are rendered and the total volume of cash spending is minimized. After
this, ultimate results are incorporated in business’s cash budget. In business, ignorance of this
budget can lead to adverse liquidity position as without help of this budget, this would be quite
difficult for management to allocate cash-movement in enterprise and determine cash position as
on particular date.
Normally in business, no formal or specific time interval has been specified anywhere for
preparing business’s cash budget within corporation. Although, mostly businesses form cash
budget on annual basis but in large corporations can be made by managers on monthly or
quarterly period. This is crucial for business to make cash budgets over four months, like in the
case of the above-mentioned Thorne Estates Ltd. Through doing that, they will be capable of
knowing cash level at end of each month. In addition to recognize the amount of cash
expenditures and cash revenue operations, this mechanism would assist them. On this premise,
fresh policies and plans will be developed or formulated for coming cycle in attempt to cope with
the uncertainty and scarcity of cash flows supply in different business operations (Mian and Sufi,
2018).
Cash budget of Thorne Estates Limited:
Particulars
January
£
February
£
March
£ April £
Cash receipts
Fee charges 54000 63000 99000 144000
Dispose of surplus
vehicles 0 0 0 20000
cash balance 40000 0 0 0
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Total of cash receipts 94000 63000 99000 164000
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 127750
Net cash flow
£
63450 £ 32450
£
55750
£
36250
Analysis:
Based on aforementioned cash budget, prepared based on given facts in case study of
company Thorne Estates, this has been evaluated that business must emphasis towards
consistency of cash-flows of cash receipts transactions as cash-receipts in business has been
declined over the 4 months. This declining trend in cash receipts is primary trigger factor for
fluctuations in the net cash-flows during each month.
The above stated statement of cash budget exhibit that during the Jan. month company’s net cash
flow level is at £ 63450 that has been further decreased to £ 32450 during Feb. month. Further
the net-cash flow level reached to the level of £ 55750 in March as well as gain with a major
decline the level reached to £ 36250 in April month. The overall analysis indicates that there is
net cash inflow during entire period with fluctuating overall declining trend during 4 months’
period. Such kind of trend presents ambiguous picture of cash liquidity position as well as doubt
about cash availability in near future.
This is quite significant for business to handle discussed issues relating to the cash budget within
a reasonable time-frame. If they're not doing so, this could cause a number of potential problems,
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including a shortage of working capital in business and unproductive day-to-day operations.
Moreover, Company’s cash expenses specially tax liabilities are also key reasons of adverse
changes or fluctuations in overall cash flows.
Key recommendations and observation to the management of Thorne Estates limited.
Based on above stated critical analysis of company’s cash budget, this would be
recommended to company that respective corporation should emphasise on optimising their cash
expenses while improving overall cash inflows. As in given scenario, during March and April
months there are additional expenses to be incurred by company which is key reason for
declining cash-flows. Several main recommendations are in this regard has been listed below,
which should be adopted by the corporation Thorne Estates, as follows:
 Company should strive to optimize those expenses that resulted to more cash
outflows in cash budget. For this, business need to seek out some possibility which may
result to least cash usage. They could select those clients who offer more as commission
for selling properties.
 In conjunction to this, other way to maximize the above-mentioned corporation 's
cash flows are to abolish certain activities that result in additional cash costs. The above
business, for example, will reduce its fixed expenditures. For corporation, this is vital
since if fixed expenses are decreased, the business would have to pay fewer cash for
various types of tasks or activities (Terry, Macy, Owens and Vinyard, 2020).
 In addition, business need to find new sources of revenue that could be used
as core activity for the next span of period. When they do that, more opportunities will
be open to generate cash receipts/revenue than there would be. Firstly, to do just that,
they have to identify new buyers and strive to negotiate with larger assets on that they
can receive higher commission income.
 As last option the respective business should attempt to boost their
commission rates so that cash receipts could be enhanced. Business should raise their
rates phase by phase in attempt to do that, since if prices are unexpectedly raised,
then number of customers may be decrease.
Thus, these are several key relevant ways that could be adapted by respective corporation in
attempt to handle the cash-flows as well as monitor cash-flows as to retain and improve cash
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flows over the selected period. In addition, it is significant to consider that all such recommend
actions can be well adopted in business only when business key personnel and staff will put their
efforts towards implementation of such actions.
CONCLUSION
Form the aforementioned study report this has been articulated that in business, finance
should be managed efficiently since any kind of mismanagement in case of business finance can
lead to adverse conditions for business. The study comprises two different sections wherein first
part articulates that Trade limited should focus towards on contingent liability which can affect
their cash-flows as well as towards inventory management. Whereas the second part articulates
that Thorne Estates Ltd must improve their cash flow management since there is major changes
in cash flows which point out towards contingency of future. Provided recommendation in study
will assist corporation to deal with this issue.
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References
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Bajo, E., Barbi, M. and Hillier, D., 2020. Where should I publish to get promoted? A finance
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Bongini, P., Ferrando, A., Rossi, E. and Rossolini, M., 2019. SME access to market-based
finance across Eurozone countries. Small Business Economics, pp.1-31.
Connolly, E. and Jackman, B., 2017. The Availability of Business Finance. RBA Bulletin,
December, pp.55-66.
Gordon, H., 2019. EMERGING TRENDS IN BUSINESS FINANCE: AFIA
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Klopotan, I., Zoroja, J. and Meško, M., 2018. Early warning system in business, finance, and
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Mian, A. and Sufi, A., 2018. Finance and business cycles: the credit-driven household demand
channel. Journal of Economic Perspectives, 32(3), pp.31-58.
Terry, N., Macy, A., Owens, J. and Vinyard, M., 2020. Business Program Capstone Results in
Finance. The Journal of Global Business Management, 16(1), pp.53-59.
Ylhäinen, I., 2017. Life-cycle effects in small business finance. Journal of Banking &
Finance, 77, pp.176-196.
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