Business Finance Report: Analysis of Cash Flow and Working Capital

This report provides a comprehensive analysis of key business finance concepts, focusing on the relationship between profit and cash flow, along with a detailed examination of working capital management. The report begins by differentiating between profit and cash flow, highlighting their individual significance in assessing a business's financial health. It then delves into the components of working capital, including receivables, inventory, and payables, and how changes in working capital impact cash flow statements. The report also includes a practical application through a case study of Thorne Estates Limited, presenting a cash budget analysis and offering recommendations for improving financial performance. The report concludes with suggestions for Trend Ltd. to manage its liquidity, profitability, and working capital effectively. The report also provides insights into how companies can better manage expenses, improve cash flow, and manage inventory. The report is designed to give a clear understanding of the concepts to improve the financial position of the business.

Business Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Task 1...............................................................................................................................................3
(i)..................................................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCE...................................................................................................................................5

INTRODUCTION
Finance is an activity which manage all monetary term of company where company
makes budgets to all department. This is monetary terms which is used to earn profit and paid
expense. Cash budget is activity of company where company estimate the cash inflow and
outflow of cash over a specific period of time. These are used by company to determine weather
company is having sufficient cash to complete the task. In this report of it will discuss profit and
cash flow of company and there difference and other terms like working capital, receivables and
inventory. Ways how working capital affect cash flow statement. On the other hand Thorne
Estates Limited cash budget is being prepared and some recommendation and observation is
being mention that increase the profit and reduce the cost of operation of company.
MAIN BODY
Task 1
(i)
(a)
Profit is a financial benefits to the company when the business are operate by the
managers and other members in an effective and efficient manner. The profit is the difference
between the all expenses of the company and all income. Cash flows are the inflow and outflow
of the company which is measured in the monetary term. Cash flows is measured on the basis of
three activities such as operating, investing and financing activities. The cash flow and the profit
are different from each other but important in their own ways to analyse the financial health of
the business (Bian and et.al., 2018). As profit will show the immediate success of the business,
the cash flows on the other hand will help the business in determining the long term success of
the business. While calculating profit all the cash and non-cash activities is considered such as
depreciation. But in the case of cash flows only cash transaction is considered not non-cash
activities. The profit and cash flow do not define each other. It is because any company can have
earn profit even if their business have poor cash flows.
(b)
Meaning of working capital

It is a matrix or indicator with the help of which the company can analyse the short term
position of the business. This is used to measure the overall efficiency of the company (Manuti,
Curci and van der Heijden, 2018). WC is calculated by subtracting the current liabilities of the
business from current assets.
WC = Current Assets – Current Liabilities
Meaning of Receivables
Receivables are also known as debtors of the company. They are the customers of the
business, buy the product and services of the company on credit basis (Padmanegara, Irwansyah
and Kasmadi, 2020). Receivables are recorded in the assets side of the balance sheet when the
goods are delivered to the customers but the payment is not yet received by the business.
Meaning of Inventory
Inventory are the raw material which is used by the company in processing, work in
progress which is yet not converted into finished goods and the goods which are available for
sale to the customers. This are the assets of the company and considered as primary source of
revenue generation for the business. The revenue company earn from the inventory is also used
to distribute to the shareholder's (Pinheiro, Bendassolli and Borges, 2017).
Meaning of Payables
Payables are also known as the creditors of the company. They are basically the supplier
of the company, sells the raw material to company on credit basis. They are shown in the
liabilities side of the company. Payables can enjoy the bargaining power of supply if they are
only supplier of any business.
(c)
As the cash flow denotes the in and out of the cash from the businesses and working
capital is recorded and associated in the balance sheet of the company. Any changes in the
working capital affects the cash flows of the business such as if the company purchase any fixed
assets such as plant, building etc. then the cash flow of the businesses decreases. But if any
transaction increases the current assets and current liabilities of the company, then such
transaction do not put any effect on the cash flow of the business. For example; if a company
take short term loan from a bank for a period of 60 days, then in such case there would no effect
on the working capital because proceed from loan is a current assets and short term loan is a

current liability of the business (Banchuenvijit, 2017). But it affect the cash flow by increasing
the cash flow of the businesses. Example of the impact of change in the working capital on the
cash flow statement of the business is that when company sell its fixed asset in the market, it
increases the working capital as well as the cash flow of the company.
(ii)
In the section (i), many concepts such as profit, cash flow, working capital and its elements has
been discussed. So, Trend Ltd. by adopting and implementing these concepts into its business
can be able to manage its liquidity, profitability and working capital also. To carry out profit
figure, company can undertake to prepare profit and loss statements in which various operating
and non-operating expenses are mentioned. So, companies can identify the cost drivers easily
and accordingly control can be established by taking corrective steps to avoid and minimise the
same in timely manner. Another statement is the balance sheet indicating the financial health of a
company which can be prepared by Trend limited to identify its assets and liabilities along with
the capital structure consisting of debt and equity. Therefore, any access liquidity through
working capital can be determined easily and earliest (Harris and Roark, 2019). In addition to
this, as Trend Limited has excess financial obligations in terms of highly debt oriented capital
structure which it can identify easily if prepared its financial position statement at regular time
intervals. Also, cash flow statement are helpful in determining liquidity position of the company.
Early determination of cash crisis always helpful in identifying liquidity crisis that a company is
going to face in the nearer future which would be problematic for company in meeting its short
term financial commitments. So, it is advisable for company's to prepare their financial
statements in a just and fair manner by following standards of ACCA, ICAEW, IFRS,etc. and
must avoid the act of window dressing which is helpful in enhancing relevancy and reliability of
financial statements making it much suitable for financial decision making and thus helps in
improving financial results of the company. The statements above so advised to be prepared by
Trend limited must be free from the element of misleading.
(iii)
As the company is facing problems of working capital mismanagement in terms of weak
liquidity and piled up stock at their warehouses. So to manage their working capital efficiently
and improve their cash flow position they can tackle this issues in the following ways:

1. By establishing an appropriate inventory management system, company can sort out its
problem of piled up inventories. Inventories has a great contribution in the overall
working capital of the company as its inability to sell inventory causes problem of getting
back that liquidity which is stuck in the piled up stock of inventories (Easton and et.al.,
2018).
2. Managing and rearranging expenses can always be proved to be beneficial in improving
cash flows of the company. By having better predictions for future inflows and outflows
at the right time would be helpful in improving working capital status of the company
and accordingly the company can manage its working capital efficiently.
3. Trend limited is facing problem in recovering payments from its key customers so it can
adopt and apply the strategy of incentivize receivables, where relationship is such
between businesses and customers is very supportive where company can obtain its
payment immediately as and when a need arises by allowing for just a small amount of
discounts (Easton and et.al., 2018).
4. Also, Trend limited by working with those vendors and suppliers who are offering
discounts and good deals to its customers which helps in getting good deal of discounts
along with establishing trustful relationship with the vendors and suppliers. Thus,
company's can obtain their guidance and support in times of crisis, so that their working
capital management can be improved accordingly.
5. Trend limited can undertake to resolve any kind of issues and disputes with their vendors
and customers in order to arrange impressive negotiation from them when they face with
any kind of problem in associated with their working capital requirements.
Task 2
1. Cash Budget
The following are the cash budget of Thorne Estates Limited which shows last four
month of company.
2020 2021 2021 2021 2021
Month Dec Jan Feb March April
Unit sold 10 10 15 25 30

Cash Budget:
Cash budget of Thorne Estates Limited for the period ending 31st January
2021
Cash Balance at the beginning 40000
Cash collection
Sales 1800000
Charged Fee @1% 18000
Charged Fee @2%of
month December 36000
Grand Total 1814000
Less: Variable Expenses 9000
Less: Salary to employees 26250
Less: Fixed overhead 4300
Grand Total 39550
Cash Balance at the end 1774450
Cash budget of Thorne Estates Limited for the period ending 28th February
2021
Cash Balance at the beginning 1774450
Cash collection
Sales 2700000
Charged Fee @1% 27000
Charged Fee @2%of
(January) 36000
Total 4537450
Less: Variable Expenses 13500
Less: Salary of employees 26250
Less: Fixed overhead 4300
Grand Total 44050
Cash Balance at end 4493400

Cash budget of Thorne Estates Limited for the period ending 31st Mar,2021
Cash Balance at the beginning 4493400
Cash collection
Sales 4500000
Charged Fee @1% 45000
Charged Fee @2%of
February Month 54000
Total 9092400
Less: Variable Expenses 22500
Less: Salary of employees 32550
Less: Fixed overhead 4300
Grand Total 59350
Balance 9033050
Less: Interest on loan 3000
Cash Balance at the end 9030050
Cash budget of Thorne Estates Limited for the period ending 30st April 2021
Cash Balance at the beginning 9030050
Cash collection
Sales 5400000
Fee charged@1% 54000
Fee charged@2%of
(March) 90000
Profit from the selling of
vehicles 5000
Grand Total 14579050
Variable Expenses 27000
Salary of employees 38850
Fixed overhead 4300
Grand Total 70150

Balance 14508900
Less: O/S tax liability 95800
Cash Balance at the end 14413100
Recommendation and Observations
6. The company is shown negative balance in January 2021 with £40,000 which shows the
previous year operation is not up to the mark and ineffective working of company in
market that leads to deficit balance sheet in January. The company management showed
not up to managing the expense in effective manner that leads to incurred high expenses
of company. The sale revenue from advertisement and selling properties are not in proper
manner that leads to face loss by company. The profit margin of company need to be
revised and whole strategies need to be planned and executive again to earn more profits
and cover all the cost which are occurred from the operating activities (NGUYEN, and
NGUYEN, 2020).
7. The company is sales is same for 2 months I.e. in month of December and January which
is being sold 10 units while increase in sales from 15 units from February, 25 unit in
march and 30 units in April. This company management are expecting to increase in
budget of company and activities which are needed more budget to complete their task in
cost effective manner and to get the best output from it. However, budget should be
increased by company for meet the expenses and to earn more profits from activities
which are operated by Thorne Estates Limited.
8. After increasing in sales of company from the month of March which shows increase in
sales from that month gradually. This shows that Thorne Estates Limited operation
efficiency is being increased in work and moving to earn more profits. While before
march there efficiency is quite low in operation as they are selling same unit are being
sold. Increase in efficiency will ultimately result in increase in profit and budgets of
activities which are needed by management to operate (Salehi, BehrouziYekta and
Ranjbar, 2020).
9. The Thorne Estates Limited strategies to increase their sales in market through giving
bonuses to all employees which are selling properties with more than 20 units and
provide with £140 pounds on every additional unit they sold. It was one of the reason that

company sales had increase gradually in month of Feb – April. This motivates
employees and management to increase the efficiency working to earn more profits and
earn high bonus from company apart from there salary. These strategies need to followed
in more effective manner that employees are getting benefits from every sale above
target. These strategies will increase the sales of company rapidly in market in less cost
incurred (Campbell and et.al., 2020).
10. The variable cost of company which is being set at 0.5% on every sale and paid monthly
wise by company. This will increase with the increase in every sale unit of property of
company. However, it will decease when employees are working effectively and save
cost which are incurred unnecessary. This variable cost can be reduced through
improving sale process by employees, improving customer centred area that help
company to increase the profit margin and reduce the variable cost on each sale.
11. The Thorne Estates Limited sell there extra vehicle at £20,000 which was written
£15,000 in book value. This shows the extra profit of £5000 on cash flow statement and
leads to increase in budget of company. It is a profit of company which is used by
company in other activities which help to operate effectively (Günay and Fatih, 2020).
12. The interest on loan which is taken by company of £200,000 with interest rate of 6% is
being paid by company in last December and next payment was made in April which
made cash statement high as interest is not being paid by company for 3 months.
CONCLUSION
It is being concluded that, profit and cash flow statement are different from each other as
profit are showed at last and cash flow statement shows the inflow of outflow of cash by
company by operating in market. Also, effect financial position of company can effect increasing
in company's expenditure and low profits margins. While company can improve cash flow
statement through maintain operation cost to increase the profit margin. On the other hand the
Thorne Estates Limited is being showed deficit in beginning but had gradually increased in from
the month of Feb to April. The bonus system motivate employees to increase their working
efficiency to earn more profits and hence reduce the operating cost of company.

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