Business Finance Report: Profit, Cash Flow, Working Capital Analysis

This report delves into core business finance concepts, contrasting profit and cash flow and examining their implications for business decision-making. It explores working capital management, including receivables, inventory, and payables, and how changes in these areas affect cash flow. The report analyzes the current working capital arrangements of Trend Ltd, identifying potential financial impacts and recommending strategies for improvement. Furthermore, the report includes the preparation of a monthly cash budget for Thorne Estates Limited, summarizing key findings and suggesting strategies to address financial deficits. The analysis emphasizes the importance of effective cash flow management, highlighting the need for businesses to consider factors impacting cash flows and income levels when formulating strategies to achieve organizational goals and objectives.

Business Finance

Executive summary
Business finance implies for the monetary assistance provided to the firm when situation
of capital shortage exists. In the context of business unit, it is the accountability of manager to
develop competent plan for fund raising and management. The present report is based on the
different case scenarios which will provide deeper insight about the extent to which profit and
cash flow differs from each other. Further, it will also shed light on the significance of cash
budget with regards to Thorne Estates Ltd. Report also entails prominent measures which firm
need to undertake for growth and getting high profitability.
By summing up this report, it can be concluded that significant difference takes place in
the profitability and cash flow. Hence, while taking business decisions and formulating strategies
manager of Trend Ltd should keep in mind factors that impact cash flows and income level.
Besides this, it can be inferred from the evaluation that cash flow is affected to a great extent
when working capital fluctuates. Thus, Trend ltd should follow working capital models so that
cash position can be improved. Along with this, it has been articulated that Thorne Estates Ltd
needs to take significant measures so that deficit can be converted into surplus. Accordingly, by
revising current strategies Thorne Estates Ltd can fulfill organizational goals and objectives.

TABLE OF CONTENTS
TASK 1............................................................................................................................................4
i....................................................................................................................................................4
a. Defining profit and cash-flow and difference between them...................................................4
b. Stating the meaning of working capital, receivables, inventory and payables........................6
c. Presenting how changes in working capital affect Cash-flow.................................................6
ii. Presenting how company’s current arrangement related to WCM might affect its financial
results...........................................................................................................................................7
iii. Analyzing and recommending steps for better working Capital management in the context
of Trend Ltd.................................................................................................................................8
TASK 2............................................................................................................................................9
1. Preparing a monthly cash budget for Thorne Estates Limited................................................9
2. Summarizing key findings from cash budget and recommending strategies for improvement
...................................................................................................................................................11
REFERENCES..............................................................................................................................13

TASK 1
i.
a. Defining profit and cash-flow and difference between them
Profit: In the context of business unit, profit implies for the net income generated through
sales after deducting or subtracting all the expenditure pertaining to particular time period (Wu
and Wang, 2020). Profitability aspect is derived or segregated in three forms namely gross,
operating and net profit margin.
Cash-flow: It represents inflow and outflow of money under three categories such as
operating, investing and financing. Hence, cashflow entails money that owner has for meeting
current and other obligations (Ramachandran and Kakani, 2020). In other words, cashflow
clearly exhibits net closing balance referring all movements in and out at specific point of time.
Difference between profit and cashflow is enumerated below:
Basis of difference Profit Cashflow
Indication It indicates how much money
earned by business through
sales.
Comparatively, it represents
sources where money
generated and invested during
particular period.
Assessed By deducting both direct &
indirect expenses from sales
one can calculate net income
(What’s the Difference
Between Cash Flow and
Profit?, 2021).
It represents balance between
cash inflows and outcome.
Effect Business unit may be
profitable when negative cash
flow occurs.
Unlike profit, earning
generated through revenue
may not results into increase

in cash flow.
Analysis In long run, it provides
assistance in analyzing
whether company will
generate positive cash flow or
not.
On the other side, cashflow
management helps in
ascertaining time when cash-
flow maximizes profitability
(The critical differences
between revenue, profit, and
cash flow, 2021).
Survival In this, company can survive
for longer time period
irrespective of having negative
income.
In comparison to profit,
negative cash flows in long
run leads to firm’s demise.
Importance It is highly significant which
present company’s earnings in
against to the amount spent for
staying in business.
Cash flow enables firm to
make payment of expenditure
on time related to rent,
insurance and other
operational expenses.
On the basis of above assessment, it can be mentioned that cash flow and profit are two
different parameters but highly required for the smooth functioning of business. However, both
profit and cash-flow is vital for business survival. In the short run, businesses struggle or face
problem of having inadequate cash-flows or profit. Along with this, rapid growth of business
also leads negative cash flow or profit. Hence, at the time of strategy formulation about business
aspects management team of Trends Ltd should keep in mind such aspects.
https://www.thebalancesmb.com/are-a-firm-s-cash-flow-and-profit-different-393585

b. Stating the meaning of working capital, receivables, inventory and payables
Working capital: It refers to the money or cash which company has in order to operate
and conduct business affairs prominently. WC is assessed as the most effectual measure which
helps in analyzing or evaluating overall profitability and financial health of business through the
means of liquidity ratio (Pirttilä and et.al., 2020). With regards to Trends Ltd effective WCM
ensures that business unit has ability to meet short term obligation and debt on time. Moreover,
sometime situation of working capital shortage may result into business failure. Hence, by
subtracting current liabilities from assets efficiency to fulfill obligations can be derived.
Working capital = Current assets – Current liabilities
Specifically, there are three elements which have greater influence on working capital
aspects or management such as:
Receivables or debtors: In finance, receivables imply for the amount that customers owe
to a company due to the credit sales. Debtor turnover period helps in assessing the time within
which customer will pay amount to the company (Working capital and its element, 220). For
ensuring WCM, company needs to collect owed amount from customer timely so that obligations
and costs can be fulfilled.
Inventory: Stock is recognized as one of the most important assets of an organization
which need to be converted in to sales. This ratio or period measures company’s ability of selling
and replacing stock. In addition to this, investors also consider this element while evaluating
company’s efficiency in relation to manufacturing or purchasing and sales.
Payables: This is key element of working capital management because it refers to the
liability of firm in relation to paying short term debts (Boisjoly, Conine Jr and McDonald IV,
2020). With regards to this, companies make efforts in relation to balancing payments from
receivables.
c. Presenting how changes in working capital affect Cash-flow
Through research, it has identified that cash flow of the firm significantly affected when
changes take place in working capital aspect. Hence, increasing trend in working capital shows
that firm is investing resources for term. Meanwhile, cash availability from operating, investing

and financing activities decreases (NGUYEN, PHAM and NGUYEN, 2020). On the other side,
cash flow of Trend Ltd will increase when business unit relies upon short-term borrowings
through financing activities for raising funds. In this case, working capital decreases due to the
rise in current liabilities.
ii. Presenting how company’s current arrangement related to WCM might affect its financial
results
According to given case situation, Trend Ltd offers wide range of gym clothing and
footwear to the customers. Case scenario clearly presents that working capital management of
Trend Ltd is not highly effectual. Moreover, two customers of business unit namely Tkechers
and Sadidas are making default in paying amount owed to them. On the basis of case study
outstanding Dispur of £12.5 million is not settled yet. On the other side, Trend ltd completed
order for products or services in 2019. Due to this, company’s working capital affected adversely
due to blockage of huge amount such as £12.5million. In addition to this, other customer such as
Tkechers not made payment of £10 million in against to the order places for products and
services. Referring the overall aspects, it can be depicted that due to the allowance of more credit
period firm’s capital affected adversely.
Now, discussion about pending amount is due between business organization and
concerned customers. Hence, current management of firm pertaining to financial aspects cannot
said to be sound. The rationale behind this, firm will have more working capital for managing
day to day operations if receives payment from debtors timely. In addition to this, amount which
is due from the side of customers are too higher which in turn adversely impacts company’s
performance. Moreover, if Trends Ltd receives amount within suitable time frame then it has
opportunity to invest funds in other productive activities which contributes in the enhancement
of profitability aspect. Along with this, company’s liquidity position can said to be sound when it
has enough funds for meeting current obligations. Nevertheless, due to having defaulters
company is not highly able to cope up with current liabilities arise at that point of time. Hence,
for improving current position and ensuring effectual working capital management Trends Ltd
requires to come up with sound strategic framework. Moreover, ineffective management is
placing direct impact on working capital and thereby profitability as well.

iii. Analyzing and recommending steps for better working Capital management in the context of
Trend Ltd
For improving liquidity aspects and meeting current obligations Trend Ltd can take
following measures such as:
 For better inventory management company should focus on undertaking immense
advertisement strategy. By this, Trend Ltd can ensure conversion of inventory into sales
promptly. Further, by taking into account stock management tools such as LIFO, FIFO,
JIT etc manager of Trend Ltd can improve inventory turnover ratio and thereby liquidity.
Moreover, when company maintains more stock as compared to the current requirement
level then it may result into wastage of financial resources. Moreover, by maintaining
enough stock Trend Ltd can use excessive cash in other profitable investment option. On
the other side, high chances of losing customers take place when firm maintains less
products over demand. In this way, by managing suitable stock Trend Ltd can improve
working capital.
 In addition to this, manager of Trend Ltd is advised to tighten credit policies so that
defaults in payment can be avoided. Manager should offer credit to debtors after
evaluating or checking their creditworthiness. Manager of Trend Ltd should undertake
metric pertaining to days’ sales outstanding which in turn reveals average time taken by
debtors for paying due amount. Hence, by using this, company can form competent
strategies and thereby become able to collect cash in a timely way. Moreover, currently
firm is facing difficulty in collecting funds from debtors. Thus, rather than following
liberal credit policy management team of Trend Ltd needs to focus on doing changes in
sales and debt collection policy. By this, situation of default can be avoided to a great
extent and results into more cash for making payment of operating cost (Wang, Akbar
and Akbar, 2020).
 In terms of payables, company should contact to the suppliers who give credit for longer
duration. By this, company can ensure availability of funds that can be used for
managing business operations. In this regard, Trend Ltd needs to make focus on
maintaining effective relationship with suppliers and creating good credit rating as well.

Through this, firm would become able to decrease payable turnover ratio so that
receivable can be used in other business activities.
TASK 2
1. Preparing a monthly cash budget for Thorne Estates Limited
Cash budget may be defined as a financial framework or plan which contains information
receipts and disbursements associated with particular period (Kamau and Mungai, 2020). With
the motive to manage cash inflows and outflows effectually manager of Thorne Estates Ltd
emphasizes on preparing cash budget. Moreover, it provides high level of assistance to the
manager in assessing deviations that take place in the current performance. Hence, by
undertaking cash budget and using budgetary control tools firm can take suitable measures for
performance improvement within appropriate time (Cash Budget, 2021).
Significance of cash budget with regards to Thorne Estates Ltd is as follows:
 By preparing cash budget business unit can efficiently utilize funds in productive
activities which enhances profitability. Moreover, it clearly depicts cash position, deficit
or surplus, and thereby assists in business planning.
 Through this, firm can also ascertain funds needed for ensuring smooth functioning of
operations in the near future.
 Along with this, cash budget may be served as the most effectual measure for
performance evaluation and control. By this, manager can assess reasons due to which
concerned department failed to meet budgeted figures (Cash Budget - Meaning, Features
and Importance, 2021). Accordingly, through taking performance improvement measures
Thorne Estates Ltd can get desired level of outcome or success.
 Facilitates maintenance of ample cash balance for dealing with contingencies that occur
in the near future.
Cash budget of Thorne Estates Ltd for the period of four months from 1st Jan to 30th April is
enumerated below:
Month January (in £) February March (in April (in £)

(in £) £)
Cash Inflows
Sales commission
Refer w. n. 1
1% in current month 18,000 27,000 45,000 54,000
2% past month 36,000 36,000 54,000 90,000
Sale of vehicles 20,000
Sum of cash
Inflows 54,000 63,000 99,000 164,000
Cash Outflows
Variable
Expenditures 9,000 13,500 22,500 27,000
Salary 26250 26250 26250 26250
Bonus 6300 12600
Fixed overheads 4300 4300 4300 4300
Interest on loan 3000
Outstanding tax
liability 95800
Sum of Cash
Outflows 39,550 44,050 62,350 165,950
Cash surplus /
deficit 14,450 18,950 36,650 -1,950
Opening Cash Flow -40000 -25,550 -6,600 30,050
Closing cash
balance -25,550 -6,600 30,050 28,100
Working notes:
1. Calculation of properties sold
Month January February 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. Summarizing key findings from cash budget and recommending strategies for improvement
Analysis of cash budget
The above depicted cash budget clearly exhibits increasing trend in the earnings of firm
from £54000 to £164000 respectively. By doing assessment, it has found that Thorne Estates Ltd
is generating enough commission from the sales of properties. In term of cash outflows, business
unit managed its all the expenditure effectually excluding the month of April. Moreover, in order
to decrease liabilities firm made payment of outstanding tax such as £95800 significantly.
Meanwhile, Thorne Estates Ltd gained loss in the month of April. From Jan to March, business
faced situation of loss due to not having enough working capital. Hence, in the month of Jan
Thorne Estates Ltd faced situation of high losses due to having negative opening cash balance.
Referring all these aspects it can be presented that company’s management pertaining to cash
and other aspects is not good. Thus, competent strategic and policy framework need to be
undertaken by Thorne Estates Ltd for making optimum utilization of funds.
For enhancing cash flows or getting surplus management team of Thorne Estates Ltd
should undertake below mentioned measures:
 Manager of Thorne Estate Ltd is required to employ working capital management tools
which in turn helps in improving liquidity position. As per ideal framework, firm must
have 2 current assets for meeting short term obligations. Hence, through managing
enough working capital organization can ensure cash surplus.
 For increasing customer reach and thereby commission owner of Thorne Ltd advised to
use social media marketing tools. Accordingly, by placing advertisements on social
media sites such as Facebook, Twitter, Instagram etc business owner can attract more
customers and revenue as well.

 Company should lay focus on using modern budgeting methods such as zero base budget
while preparing financial plan. Moreover, ZBB emphasizes on evaluating each and every
activity that need to be performed within particular period. In this way, by assessing and
evaluating best way to perform activities manager can develop competent plan (Gomoi,
2020). Meanwhile, company can exert control over expenses and thereby improve
profitability aspect.
 In addition to this, manager should focus on reviewing current performance in against to
the predetermined standards. Through this, business unit can easily find out areas where
corrective measures need to be undertaken. Thus, by doing modifications in the current
framework Thorne Estates Ltd can get desired outcome.