Finance Report: Profit, Cash Flow, and Working Capital

This report provides a detailed analysis of business finance, focusing on the concepts of profit, cash flow, and working capital. It differentiates between profit and cash flow, explaining their significance and the components of each. The report examines working capital, including receivables, inventory, and payables, and evaluates changes that can improve a firm's long-term performance. It applies these concepts to a company, assessing how management practices affect financial results and recommending steps to enhance cash flow through improved working capital management. The report includes a monthly cash budget for Thorne Estates, providing observations and recommendations for management based on the analysis.

Business
Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
I (a) Discussing the concepts of profit and cash flow and their difference in a detailed way.....3
(b) Identification of the concept of working capital and detailed examination of the different
concepts that are receivables, inventory, and payables...............................................................4
(c) Detailed evaluation of the changes in the working capital that can be done which can help
the firm in the long run................................................................................................................5
II Apply the concepts in (i) above to this company to show how the way the company is being
managed might affect its financial results...................................................................................5
III) Analyse and recommend what steps should now be taken to improve this company’s cash
flow through better Working Capital management.....................................................................6
TASK 2............................................................................................................................................6
1. Prepare a monthly cash budget for the four months from 1st Jan to 30 April 2021................6
2. Are there any observations or recommendations that you would make to the management of
Thorne Estates arising from your analysis...................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Business finance is one of the most important as well as crucial aspect in each of the
business firm that is operational in the current market scenario since it helps in helps in analysing
and evaluating the positioning of the firm so that appropriate and necessary rectification
measures can be taken and that too within a limited time frame (Anuar and Chin, 2016). In this
report there is a detailed explanation done of various topics such as cash flow, inventories,
working capital that has to be allocated in the company in a very detailed and precise manner so
that it can add value to the firm in the long term concept. Apart from that in this report there is an
elaborated evaluation and analysis done of the things that are related with the finances of the
company so that necessary adjustments can be made in the working capital and ratio in which it
is allocated so that all the resources that are available with the organisation can be used in an
effective and efficient manner so that wastage can be reduced which can help in increasing the
level of profitability of the company in the long term.
TASK 1
I (a) Discussing the concepts of profit and cash flow and their difference in a detailed way
The concepts that are profit and cash flow are somewhat similar bit are different too and
thus it is very important as well as crucial to analyse and evaluated both of them in an elaborated
manner and that is done below-
Profit- It is the amount that remains with the company after removing all the amount of
the expenditure that are incurred while producing goods and services so as to carter the needs,
requirements, and demands of the society as well as the citizens that are living there. It is mainly
divided into three major sub heads that are gross profit, net profit, and operating profit and the
second one that is the net profit carriers a lot of value with context to the company as it helps in
analysing the true and fair picture of the company’s positing in the market so that appropriate

measures can be taken by the higher authorities and that too within a short time frame so that it
can add value to the company in the long run scenario (Badarinza, Balasubramaniam and
Ramadorai, Bikker and Spierdijk, 2017).
Cash flow- It is mainly recognised as the inflow and outflow of the cash and its related
aspects while performing all the activities of the business in a daily basis. It is very crucial for
the firm to keep this aspect in positive since if the cash flow is negative it indicates that the
company is performing badly in the industry and the management needs to implemented
effective measures so that it can help in the improvement of the enterprise and its condition in
the industry. Apart from that analysis of inflow and outflow of cash can also be determined and
checked with the help of this which can prove beneficial from the company’s point of view in the
current market environment that is highly dynamic as well as competitive in nature. There are
mainly three parts of the cash flow statement that is formulated by the finance team of the firm
and they are operating, financing, and investing activities (Botrić and Božić, 2017).
The major difference of the above mentioned two aspects is that profit means the net
amount that is available with the company after deducting all the expenditure while the cash flow
is the net flow of cash that is done during a period of time. Also one of the differences that
possesses a lot of importance is that the profit is a narrow concept which does not include cash
inflow and outflow while cash flow is a broad and wider concept that includes profit in it.
(b) Identification of the concept of working capital and detailed examination of the different
concepts that are receivables, inventory, and payables
Working capital- It is the capital that is being currently used in the business and it is
generally calculated by subtracting current assets of the company with its current liabilities. It is
very important as it helps in determining the actual and factual position of the firm as compared
to other rivals that are operating in the similar market conditions so that appropriate and
necessary measures of rectification can be implemented in its working so that it can add market
value to the enterprise (Civera, Meoli and Vismara, 2017).
Receivables- It is the amount of the debtors that the company is having in the market
from where the amount will be received in the near future. They are mainly those that have been
given goods and services of the company on credit basis. If a company maintains a good amount
of receivables then it can be determined that the firm is very profitable in the industry in which it

is working and also that the enterprise is working on high capital as it is able to give debtors the
products that it renders in the market on credit basis.
Inventory- It refers to the quantity of the stock that the firm is having at present and it is
very crucial and critical to evaluate the exact quantity so that unnecessary wastage of resources
can be reduced that can help the firm to grow and prosper in the industry in which it is
operational. Also it helps in ordering the right quantity that is required for the smooth
functioning of the enterprise so that the business environment cannot hamper its working at all
(Singh and Wasdani, 2016)(Vij and Bedi, 2016).
Payables- They are basically the creditors of the company who has to be paid within a
stipulated time since they are the ones that gives raw material on credit basis to the firm in the
market. It is very important for a company to have low amounts due since creditors have the
right on the assets of the company and if in case it is not able to pay then they can sell the assets
so as to clear their due well within a limited time period (Hofmann and Johnson, 2016).
(c) Detailed evaluation of the changes in the working capital that can be done which can help the
firm in the long run
The necessary changes that can be done in the existing working capital of the firm is that a
company can increase its volume of current assets and decrease the volume of current liabilities
so that working capital can remain positive for a good time period that can help in improving the
image and the market value of the company in the long run so that it can prove useful and
beneficial at the same time for the enterprise. Also if assets are sold it can increase the cash flow
as well as the working capital that can help the organisation to perform in a better way in the
industry for a long time period (Hu and Zheng, 2016).
II Apply the concepts in (i) above to this company to show how the way the company is being
managed might affect its financial results
If a company manages its cash flow, working capital, profit, inventories, receivables, and
payables in an appropriate manner then it can stand well ahead of all its competitors that are
prevailing in the current market scenario and can also help the firm to reduce its losses if any and
become profitable in the market (Shinkafi, Yahaya and Sani, 2019). Since the company has the
turnover of £300 million and its profit which is of operating in nature increased with a good
amount and reached to £95 million which is one of the signs that there is less debt in the
organisation which is one of the reasons for its massive success in the market for so long. Apart

from all that the investment level of the company is also too high as it has invested £20 million
and also acquired shared with that investment amount (Lyngstadaas and Berg, 2016). All the
things that are discussed above shows that the enterprise is performing exceptionally well in the
current market and thus it has a good scope of improving its performance level in the near future
if it keeps its consistent form like that only. Also the company has a high rate of profitability
from the past many years and it shows that it is performing in a better manner as compared to
other competitors of it that are also working in the similar industry.
III) Analyse and recommend what steps should now be taken to improve this company’s cash
flow through better Working Capital management
The steps that the company can take so as to improve its cash flow by better management
of working capital is that it can try to minimise the gap between accounts payables and
receivable so that a balance between the two can be maintained which can help in sustainable
growth in the future scenario. Also there must be proper analysis and evaluation has to be done
on each and every aspect so that it can help in better management which can further help the
enterprise to grow in the industry. Working capital must also be analysed in depth on a regular
basis so that it can help the company to find the loop holes that are prevailing in the business
firm and thus rectification measures can be taken and implemented in the firm without wasting
any precious time which can help in the better management of the organisation as a whole
(Manwari, Ngare and Kipsang, 2017).
TASK 2
1. Prepare a monthly cash budget for the four months from 1st Jan to 30 April 2021
Particulars January February March April
Receipts:
Cash fees 18000 27000 45000 54000
Credit fees 36000 36000 54000 90000
Sale of asset 20000
Total receipt 54000 63000 99000 164000

Payment:
Salary 26250 26250 26250 26250
Bonus 6300 12600
Expenses 9000 13500 22500 27000
Fixed overhead 4300 4300 4300 4300
Taxation - - - 95800
Interest - 3000
Total payments 39550 44050 62350 165950
Net cash flow 14450 18950 36650 -1950
Opening balance -40000 -25550 -6600 -30050
Closing balance -25550 -6600 -30050 -28100
Working notes:
Month December January February March April
Units sold 10 10 15 25 30
Sales value 1800 1800 2700 4500 5400
Cash fee at 1% 18000 18000 27000 45000 54000
Cash fee at 2% 36000 36000 54000 90000 108000
Variable cost
at 0.5%
9000 13500 22500 27000
Monthly salary cost= (35000*9)/12=26250
Bonus for March= (25*20)*140*9=6300
Bonus for April= (30*20)*140*9=12600

2. Are there any observations or recommendations that you would make to the management of
Thorne Estates arising from your analysis
There are a number of observations from the above done calculations of Thorn Company
and the major one from all of the above is that the company has a fixed volume of sales in the
given period and it was maximum in the summer while it was at its minimum in the winters. So
it can be analysed and evaluated that the business is profitable mainly in the summer season so
the firm must try to sell as many products it can in that period of time so that the organisation can
run on a profitable margin in winters too which is very important for the above mentioned firm.
It can be seen from the above calculations too since the units sold were minimum in the months
of December and January while it was maximum in the month of April and thus the pattern of
sales can be evaluated from that only (Melvin and Norrbin, 2017). Apart from that the receipts
and payments for the month of January were lowest while it was maximum for the month of
April for the above mentioned company. The flow of cash that is forecasted in the month of
January was positive while it was negative for the rest of the subsequent months. The major
drawback for the company is that it has invested at various places but no one of them can
generate higher rate of return within a limited time period and thus it binds the hands of the
higher authorities of the company and also hampers the level of performance of the firm in the
long term. The capital loss that the firm is generating due to its poor sales can be cope up if it
implements innovative and new techniques of producing its gods and services so as to cut the
cost that are incurring while producing the product so that the benefit can directly be passed on
to the consumers which can help the company also as it can increase its sales and that too within
a short time period (Muller and Muller, 2018).
CONCLUSION
It can be concluded from the above that business finance is a very broad concept that has to
be studied in detail so that all the aspects that are included in it can be examined, analysed, and
evaluated in a detailed manner so that it can help in improving the positioning and condition of
the firm so that it can grow and prosper in the present market conditions that are highly
competitive and pervasive in nature. Apart from that it can be concluded that there are different
aspects that are working capital, profit, cash flow, inventories, accounts receivable and payables,
etc. and all carriers a lot of value in the current market scenario and thus it is very important as
well as crucial for the company’s higher management and authorities to examine all the factors

in a detailed way so that it can help the firm to improve its performance level. Further it can be
concluded that the firm that is mentioned above which is Thorn Company is performing well in
the market but still there are some loop holes in its operations that needs an immediate attention
so that it cannot become a reason for the huge losses that the organisation can incur in the near
future if it ignores all the related factors that possess a lot of value in the current market
conditions.

REFERENCES
Books and journals
Anuar, H. and Chin, O., 2016. The development of debt to equity ratio in capital structure model:
A case of micro franchising. Procedia Economics and Finance, 35, pp.274-280.
Badarinza, C., Balasubramaniam, V. and Ramadorai, T., 2019. The household finance landscape
in emerging economies. Annual Review of Financial Economics.
Bikker, J.A. and Spierdijk, L. eds., 2017. Handbook of competition in banking and finance.
Edward Elgar Publishing.
Botrić, V. and Božić, L., 2017. Access to finance: innovative firms´ perceptions in post-
transition EU members.
Civera, A., Meoli, M. and Vismara, S., 2017. Policies for the provision of finance to science-
based entrepreneurship. Annals of Science and Technology Policy, 1(4), pp.317-469.
Hofmann, E. and Johnson, M., 2016. Supply Chain Finance–some conceptual thoughts reloaded.
International Journal of Physical Distribution & Logistics Management, 46(4), pp.1-8.
Hu, B. and Zheng, L., 2016. Digital finance: Definition, models, risk, and regulation. In
Development of China's Financial Supervision and Regulation (pp. 31-58). Palgrave
Macmillan, New York.
Lyngstadaas, H. and Berg, T., 2016. Working capital management: evidence from Norway.
International Journal of Managerial Finance.
Manwari, L., Ngare, P. and Kipsang, R., 2017. Access to finance for women entrepreneurs in
Kenya: challenges and opportunities.
Melvin, M. and Norrbin, S., 2017. International money and finance. Academic Press.
Muller, J. and Muller, J.Z., 2018. The tyranny of metrics. Princeton University Press.
Shinkafi, A.A., Yahaya, S. and Sani, T.A., 2019. Realising financial inclusion in Islamic finance.
Journal of Islamic Marketing.
Singh, C. and Wasdani, P., 2016. Finance for micro, small, and medium-sized enterprises in
India: Sources and challenges.
Vij, S. and Bedi, H.S., 2016. Are subjective business performance measures justified?.
International Journal of Productivity and Performance Management.