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

This report delves into key concepts in business finance, differentiating between profit and cash flow, and exploring the components of working capital, including receivables, inventory, and payables. It examines how changes in working capital affect cash flow and applies financial accounting concepts to improve company management, using Trend Ltd as a case study. The report also provides practical steps to enhance cash flow through working capital management, such as cash flow forecasting, electronic invoicing, and inventory management. Furthermore, it includes a cash budget analysis for Thorne Estates Limited over four consecutive months, highlighting the advantages of cash budgeting, such as controlling spending and fostering critical thinking within an organization. The analysis provides observations and recommendations for Thorne Estates Limited based on the cash budget data.

Business Finance

Table of Contents
TASK 1............................................................................................................................................3
Profit and Cash flow and their difference...................................................................................3
Working Capital, Receivables, Inventory and Payables.............................................................3
Effect on Cash Flow due to working capital changes.................................................................4
Application of financial accounting concepts which can improve the management of the
company:.....................................................................................................................................4
Steps that can be taken to improve the cash flow of the company through working capital
management:...............................................................................................................................5
TASK 2............................................................................................................................................6
Cash Budget of Thorne Estates Limited for four consecutive months.......................................6
Observation and recommendation to Thorne Estates Limited arising from this analysis.........11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

TASK 1
Profit and Cash flow and their difference
Cash flow and profit are important tools used in financial accounting of various
organisations and businesses. Cash flow and profit are two different concepts of financial
accounting and it is important for an individual to understand the difference between these
concepts.
Cash flow: There is a frequent flow of cash in any business or organisation. When a
company buys raw material for the production of its products the cash flows out of the business
to its suppliers. When the company sells its finished goods and additional services to its
customers (wholesalers, retailers, government etc.) then there is an inflow of cash in the
business. Other activities like paying of salaries, utility bills, maintenance bills, rent consists of
inflow and outflow of cash in the business. Cash flow refers to the net amount of cash inflow and
outflow of a business in a specific period or at a certain point of time (Jouirou and Lakhal, 2020).
Profit: Profit refers to the balance obtained by subtracting all the operating expenses
from the revenues of the business. It is the remaining amount that is left after subtracting
expenses from the proceeds of the business.
Working Capital, Receivables, Inventory and Payables
Working Capital: Working capital refers to the deviation between all the current assets
and current liabilities of the business. Current consists of ; inventories of raw material, cash,
debtors, inventories of work in progress and stock of finished goods etc. Current liabilities
consists of; short-term borrowings, account payables, creditors, bank overdraft etc. With the help
of working capital the management is able to calculate the liquidity of the business by using
current assets and current liabilities.
Receivables: Receivables refers to the personal accounts that are maintained by the
business in its financial accounts which displays the amount due from the people ( generally
customers) in favour of the business. Receivables or debtors are generally customers who have
paid for the products and services which he will receive from the business and availed the same
with the promise to pay such amount in the future (Ciola, Gaffeo and Gallegati, 2020).
Inventory: Inventory is the stock of goods which the business holds or manufactures and
sells the same with or without value addition. Inventory can be further classified into three basic

types; raw material, work in progress and finished goods. This is considered as current asset for
the organisation.
Payables: Payables refer to the personal accounts that are recorded by the organisation in
its financial statement which displays the balance remaining and due which the business has to
pay to the suppliers or a third party outside the business who provides the business with some
type of inventory. Payables or creditors are generally suppliers who have supplied the business
with some sought of inventory. The business promises to pay such amount to the creditors in the
future. It is recorded as current liability in the books of business.
Effect on Cash Flow due to working capital changes
In businesses there are frequent transactions in cash which implies inflow and outflow of
cash. Inflow and outflow of cash changes the working capital and as a result cash flow of
business is greatly affected as cash is of great significance in the calculation of working capital
and cash flow.
For example if the business advances a long term debt from a bank then there will be a
change in the working capital due to the inflow of cash in the business. As a result inflow of cash
will also increase resulting in a positive cash flow (Ujah, Tarkom and Okafor, 2020).
Another example can be considered in which the business buys a fixed asset, let's say a
machine or a building. There will be an outflow of cash which will result in decreased balance of
current assets which will further decrease the working capital of the business. Also as a result
outflow of cash will increase resulting in negative cash flow.
Application of financial accounting concepts which can improve the management of the
company:
Trend Ltd (TL) is manufacturer of gym clothing and footwear. The management have
basic knowledge about the above enlisted and briefed concepts of financial accounting but this
knowledge is nor applied and tasks are not executed with efficiency and effectiveness.
The company has a positive cash flow but most of the cash inflow is from the financing
activities of the business. Trend Ltd has borrowed £35 million more as long-term debt. Which
has certainly boosted up the cash inflow of the business.
TL ha made few investing decisions as well which has certainly increased the profit of
the company. With new facilities and new machines, the company will be able to produce more
of the specified products and increase the cash flow of the business.

Debtors of the company also owes the company an amount of £10 million and £12.5
million, which reflects poor account receivables management system and long term account
receivable conversion period.
Steps that can be taken to improve the cash flow of the company through working capital
management:
Management of working capital assists the management in maintaining adequate balance
of cash with analysing and modulating cash flow of the business, this cash balance is further
used to comply with the short term financial obligations and short term monetary needs of the
business. Working capital management requires the organisation to effectively use current assets
so the business can be more profitable which and has enough cash flow to carry out its
operations. It prevents the business from using external borrowings which helps in decreasing the
financial obligations of the company. These funds can be used in the growth of the business
(Bamfo-Debrah, 2019).
Working capital is truly important for every business and organisation. Trend Ltd needs
to maintain enough cash so that it can cover expenses which will arise in the future. The
company must also use the available funds with efficiency so that these funds can be allotted for
the activities which are of a greater significance. All of this can be achieved by managing
receivables, payables, inventories and cash.
Working capital management is exercised by using certain tools and methods. These
methods are:
 Cash Flow Forecasting: This method identifies and predicts the cash inflow and
outflow of the business which can occur in the future. For example, by assessing
the past performance of the company it can be identified how much cash will be
received from debtors and how much cash will be used in order to settle account
payables.. By assessing this the company can plan and predict the cash that it will
need in the future and also determine the shortfall or excess of cash. The more
accurate the prediction, the better will be the company's working capital
decisions.
 Electronic Invoicing: Electronic invoicing is the process of furnishing an
electronic invoice for the customers. This type of activity can surely benefit Trend
Ltd as electronic invoicing process will reduce the risk of errors and

miscalculation. This will automate the invoice cycle and the customers will
receive invoices as soon as possible. This will further help the company to receive
the payments quickly and increase its cash flow (Göransson, Lundqvist and
Svensson, 2020). This method is more convenient than the traditional one as
Trend Ltd can easily record inventory purchased, finished goods produced, work
in progress and also finished goods sold. The system will generate invoices by
itself as per the sale data provided by the employee.
 Inventory Management: Inventory management is one of a major element of
working capital management which assists the organisation to carry out its
operations with high efficiency along with managing high working capital. This
method enables the company to maintain sufficient level of inventory available on
demand so that consumers' demand can be met and excess inventory stock can be
avoided as it blocks cash and makes working capital more rigid. Trend Ltd can
use inventory turnover ratio to monitor and maintain the stock of inventory. The
inventory turnover ratio is calculated by dividing revenues by inventory cost. This
ratio determines how quickly can inventory of the company be replenished and
sold. The ratio is further compared to other businesses in the same industry.
Comparatively high ratio indicate low or inadequate level of inventory and low
ratio indicates high level of inventory.
TASK 2
Cash Budget of Thorne Estates Limited for four consecutive months
Cash Budgets are made to predict the future cash position of the company. Cash budget
records expected cash inflow and outflow which occurs in a certain time duration. Cash inflow
and outflow may contain revenues collected, investments made, expenses paid and loans receipts
and payments.
Management uses cash budget in order to manage the cash inflow and outflow of the
organisation. Through cash budget, the management ensures that the organisation has adequate
cash balance which will aid the business in carrying out its operations and even pay bills when
they come due (Honková, 2019). For example utility bills are required to be paid every month

along with other monthly expenses. The management use cash budget to determine the shortfall
in the cash balance of the organisation so that the gap can be filled before payments are to be
made.
Cash Budget has following advantages:
 It restrict the spends of an organisation: Cash budget assist businesses and
companies to manage their cash balance which further limit their spendings so
that they have enough finances available which will prevent them from borrowing
funds from the market or any other lender. Cash budget is the estimation and
prediction of the future cash inflow and outflow of the upcoming period. With the
help of this prediction and forecast, the management will be able to determine
how much money the business has available with it. From this assessment
management can identify and allocate funds to different department and activities.
This restricts the business from spending cash on insignificant activities so that it
can be used on other items and processes which are of a greater importance.
 It empowers critical thinking within the organisation: Cash budget stimulate
the organisation and its employees to evaluate the financial statements and assess
the financial position of the organisation so that they can formulate strategies
which helps in improving the financial situation and position of the company.
Employees have limited finances available with them, in order to complete
various activities in the given budget they have to allocate funds carefully to
minimise unnecessary use of cash on insignificant activities. This will improve
their decision making skills and make them more effective and motivated to
accept such challenges.
Following are the cash budgets of Throne Estates Limited for the months of January, February,
March and April of the year 2021 (working notes are at the end of the budget):
Cash Budget of Thorne Estates Limited for the month of January 2021
Particulars January(£)
Cash Inflow:
Income via Fees charged 54000
Receipts via sale of vehicle -

________
Total Cash Inflow (A) 54000
Cash Outflow
Employee Salary 26250
Variable Expenses 9000
Fixed Overheads 4300
Interest on loan -
Outstanding Tax Liability -
Total Cash Outflow (B) 39550
Net Cash Flow ( A - B) 14450
Add: Bank balance at start of the month -40000
________
Bank balance at the end of the month −25550
Cash Budget of Thorne Estates Limited for the month of February 2021
Particulars February(£)
Cash Inflow:
Income via Fees charged 63000
Receipts via sale of vehicle -
________
Total Cash Inflow (A) 63000
Cash Outflow
Employee Salary 26250
Variable Expenses 13500
Fixed Overheads 4300

Interest on loan -
Outstanding Tax Liability -
Total Cash Outflow (B) 44050
Net Cash Flow ( A - B) 18950
Add: Bank balance at start of the month −25550
________
Bank balance at the end of the month −6600
Cash Budget of Thorne Estates Limited for the month of March 2021
Particulars March(£)
Cash Inflow:
Income via Fees charged 99000
Receipts via sale of vehicle -
________
Total Cash Inflow (A) 99000
Cash Outflow
Employee Salary 32550
Variable Expenses 22500
Fixed Overheads 4300
Interest on loan 3000
Outstanding Tax Liability -
Total Cash Outflow (B) 62350
Net Cash Flow ( A - B) 36650
Add: Bank balance at start of the month −6600
________

Bank balance at the end of the month 30050
Cash Budget of Thorne Estates Limited for the month of April 2021
Particulars April(£)
Cash Inflow:
Income via Fees charged 144000
Receipts via sale of vehicle 20000
________
Total Cash Inflow (A) 164000
Cash Outflow
Employee Salary 38850
Variable Expenses 27000
Fixed Overheads 4300
Interest on loan -
Outstanding Tax Liability 95800
Total Cash Outflow (B) 165950
Net Cash Flow ( A - B) −1950
Add: Bank balance at start of the month 30050
________
Bank balance at the end of the month 28100
Working Notes:
1. Calculation of Income via Fees charged:
1. For the month of January = (2% of 180000*10) + ( 1% of 180000*10)
= £54000
2. For the month of February= (2% of 180000*10) + ( 1% of 180000*15)

= £63000
3. For the month of March = (2% of 180000*15) + ( 1% of 180000*25)
= £99000
4. For the month of April = (2% of 180000*25) + ( 1% of 180000*30)
= £144000
2. Calculation of Employee Salary:
1. For the month of January = 35000 / 12 * 9
= £26250
2. For the month of February= 35000 / 12 * 9
= £26250
3. For the month of March = (35000 / 12 * 9) + (140*5)
= £32550
4. For the month of April = (35000 / 12 * 9) + (140*5)
= £38850
3. Calculation of Variable Expenses:
1. For the month of January = 0.5% of 180000*10
= £9000
2. For the month of February= 0.5% of 180000*15
= £13500
3. For the month of March = 0.5% of 180000*25
= £22500
4. For the month of April = 0.5% of 180000*30
= £27000
4. Calculation of Interest on loan to be paid in March:
Interest on loan to be paid in march
= 6% of 200000/4
= £3000
Observation and recommendation to Thorne Estates Limited arising from this analysis
Thorne Estates limited have started a new business of advertising and selling residential
property on behalf of its customers. The company is on the right track making profits and
covering losses even in the starting days of the business. Making and considering Cash Budget

was a really good decision as it will help the business in managing inflow and outflow of the
cash.
As per the analysis and observation of the author it is clear that there are some changes
which can be made in the approach and management of the company to be more profitable ,
generate more revenue and increase cash inflow. The company can increase its commission from
3% to 4-5%. A nominal change like this can have a huge impact over the cash inflow and
profitability of the business. It can further make a new policy of receiving the entire commission
in the month of sale, so that it can have more funds to spare and carry out all the necessary
business operations.
CONCLUSION
The above report concludes and describes the importance of analysing cash flow and
profit for any business organisation. Multiple tools and methods are used by various
organisations which helps them in stabilising the business and increasing profitability and cash
flow. Working capital management is on of the above said tools which helps in managing the
working capital of the business. Cash Budget play a significant role in the management of cash
in the organisation. It helps predict all the necessary areas where cash will be needed and by
what source will the business receive cash.

REFERENCES
Books and Journals
Bamfo-Debrah, Y., 2019. Quadratic Relationship between Working Capital Management and
the Profitability of Listed Manufacturing Companies in Ghana (Doctoral dissertation,
University of Ghana).
Ciola, E., Gaffeo, E. and Gallegati, M., 2020. Search for Profits and Business Fluctuations: How
Banks' Behaviour Explain Cycles?. Available at SSRN 3656325.
Göransson, T., Lundqvist, V. and Svensson, M., 2020. The impact of Working Capital
Management on Firm Performance in different phases of a business cycle: Evidence
from Sweden.
Honková, I., 2019. Working capital and its impact on business performance. Scientific papers of
the University of Pardubice. Series D, Faculty of Economics and Administration.
46/2019.
Jouirou, M. and Lakhal, F., 2020. VOLUNTARY DISCLOSURE AND FREE CASH FLOW IN
FAMILY FRENCH FIRMS.
Ujah, N. U., Tarkom, A. and Okafor, C. E., 2020. Working capital management and managerial
talent. International Journal of Managerial Finance.