The document covers the most vital parts of managing the finances of a business. What is profit and loss? What is working capital and how does it affect the business? Case study with examples is included. How is inventory managed? The essay also covers the purpose of budgeting and explains some bud...
Executive summary:
In task one of this report I have covered the definitions of some financial terms and how the
management of Bright Lawns LTD is affecting their financial results. I have also analysed
and recommended policies and steps that they should undertake to improve their working
capital management.
Profit and Cashflow
Profit is the revenue minus the expenses.
There is gross profit which is Revenue less cost of sales.
Operating profit is Revenue less cost of sales less operating expenses.
Profit before tax is the operating profit less finance expenses and the
Net profit is when we take away all the expenses from the revenue.
Cashflow is referring to the inflows and outflows of the cash in a business, it also focuses on
the liquidity of the business and how quick they can turn assets into cash.
The main difference between the profit and the cashflow is the time differences, which is a
result of the accrual method used when preparing Income Statement and Profit and Loss, as
the sales and the associated costs are recognised when they are realised, however the
associated inflows and outflows of cash will be recognised later. As making sales and
revenue doesn’t always mean that you are rising the cash immediately. Also the expenses in
the income statement are reducing the profit but they are not cash. (Sullivan 2019)
Working Capital, Receivables, Payables, Inventory
Working Capital is the capital that is used for everyday operations of the business. It can be
calculated by current asset minus current liabilities. When there is positive working capital,
the business will be able to meet their short- term liabilities. (Atrill 2014)
Trade Receivables are the money that customers need to pay to the business due to sold
goods or services on credit. Trade receivables are beneficial to the company as they will
increase the sales, however there is a risk that the customer may not pay, which will lead to
bad debt.(Sullivan 2019)
Trade Payables are the money that the company needs to pay to their suppliers for the
delivered goods or services, which the company has consumed. Companies need to be very
careful and punctual with their payables, as if they don’t pay back there is a risk of getting
bad reputation and other suppliers may refuse to work with the company. (Sullivan 2019)
Inventory is all the stock that a business holds in order to sell it can be already finished
product or the raw materials they will need in order to manufacture their products. (Sullivan
2019)
Changes in Working Capital and effect on Cashflow
If there are changes in the working capital of a business, there will be an effect shown on the
cash flow statement. When there is an increase in the assets (the company has purchased it),
there would be decrease in the working capital, as the portion of an asset would be reduced,
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