1 Introduction
The shareholders of Event Planners Ltd; a business specialised in planning events such as birthdays, weddings, etc., are disturbed regarding the unprofitable state of the business and the cash flow problem the business faces in recent times. This report discusses the importance of cash and profit for business survival, outlines how the problem of cash flow arises, effects of cash flow problems for the business, and identifies methods for dealing with cash flow problems. It gathered and applied information from several sources such as academic articles, reports, and documents, assumed to be credible enough for the discussions.
2 Importance of Cash and Profit
Both cash and profit are essential for business growth and survival.
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Therefore, the amount of profit obtained is somewhat arbitrary. However, cash flow is an objective measure of cash and it is not subjected to a personal criterion. Net cash flow is the difference between cash inflows and cash outflows; that is, the cash received into the business and cash paid out of the business (Fernández, 2006). Whereas, net profit is the figure obtained after expenses or cost of resources used by the business is deducted from revenues generated from the business operations activities. Nonetheless, the figure for revenue and cash are not entirely cash, some of the items may be sold on credit and some of the expenses are not paid up …show more content…
Therefore, the company looses cash, which could aid further business operations. Increase numbers of creditors - countless businesses acquire credit to operate, however, too much credit can become a problem for a business, especially, if it also offers credit to customers. This is because you’re ability to pay your credit is dependent on whether your debtors pay you in due time. Therefore, in case they don’t, the business will surface cash flow problems. Over-financing – excessive borrowing to finance your business can result in higher interest rates and tougher repayment schedules and this can lead to cash flow challenges. Over-trading – when a business sells over and above its capability on credit, it results to loans or overdrafts to finance the transactions. If the customers do not pay on time, cash flow problem occurs. Over-investment – often times, a company may be tempted to utilise available cash for investment; purchase vehicles, machinery, premises, and other assets. Too much investment in assets and failure to budget for the future can cause a business to run out of cash and consequently, fail to finance
In order to determine the value of operations, and using proforma income statement and balance sheet statement, Cash flow statement was formulated for the next 5 years. The Account Receivables plus the Inventory minus the Account Payable was determined as Net Operating Working Assets. An organization cost of 0,000 was amortized over the 5-year period.
The financial challenges facing the company in the working capital management simulation showed how companies are able to play a balancing act with incoming and outgoing cash flow floats. Companies can juggle cash flows by withholding payments to retain capital or negotiate with companies that withhold payments to receive an incoming cash flow. Either way, keeping as much cash to fund operations with out heavy financial leveraging was the greatest challenge. Another juggling act was to keep management and business partners happy. The decisions made were not always positive for everyone.
Measures of profitability enable a company to evaluate its profits with respect to a given level of sales, a certain level of assets, or the owners’ investment (Gitman et al., 2015). Essentially, a company can compare its expenses and other relevant costs incurred during a specific period of time. Companies use the net profit margin to measure the percentage of each sales dollar remaining after costs and expenses – the higher a company’s net profit margin, the better (Gitman et al., 2015). Figure 4a indicates that IPG’s net profit
However, notwithstanding the threats envisaged in the event management market in the UK, the opportunities presented is very appealing especially the growth potentials, which Carlton Company Ltd needs to, take advantage of to expand its
Furthermore, the cash-flow demonstrates the monetary receipts and monetary expenses in a certain time period. The cash-flow budget greatly centers on viability, which relates to the organization’s generating enough cash to meet both short-term and long-term financial obligations to maintain their existence (Finkler et al., 2013). In essence, an organization generating more cash than using in their operations produces a more
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
I like to begin with how simple mistakes in operations could lead to financial impacts within the businesses. From my perspective, there are several problems within the organization that are in need of restructuring. For example, departments not working as whole, which leads to discrepancies and repetitive work, resulting in loss of revenue. The following
When a firm grows, it needs capital, and that capital can come from debt or equity. Debt has two important advantages. First, interest paid on Debt is tax deductible to the corporation. This effectively reduces the debt’s effective cost. Second, debt holders get a fixed return so stockholders do not have to share their profits if the business is extremely successful. Debt has disadvantages as well, the higher the debt ratio, the riskier the company, hence higher the cost of debt as well as equity. If the company suffers financial hardships and the operating income is not sufficient to cover interest charges, its stockholders will have to make up for the shortfall and if they cannot, bankruptcy will result. Debt can be an obstacle that blocks a company from seeing better times even if they are a couple of quarters away.
If you receive cash you are likely to save it and put it in the bank. Thus, what a business sacrifices by having to wait for the cash inflows is the interest lost on the sum that would have been saved.
The appropriate amount of cash balance to be maintained should be determined on the basis of past experience and future expectations. In case the company maintains less cash balance, its liquidity position will be weak. On the other hand, if it maintains a higher cash balance then an opportunity to earn will be lost. Thus a company should maintain an optimum cash balance which is neither too small nor too large. To ensure this, the company should match the transaction costs and risk of too small a balance with the opportunity costs of too large a
What is more, the author wrote that in the companies with long operating cycles cash flow accounting would be a relatively poor measure of performance in contrast to accrual accounting (Dechow, 1994, p. 7). This research, combined with the statement about accrual method complexity, supports the claim of Professor Feleaga who said “cash accounting has overpassed the accrual accounting. Moreover, nowadays, small enterprises and most of the private businesses use, under different forms, the cash accounting” (as cited in Toma et al., 2015, p.
The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going.
The statement of profit or loss is also known as income statement and it’s equation is revenue minus expenses equals profit or loss. The statement of profit or loss summarize the revenues and expenses of a business and also shown the ability of a business to generated business. The total profit or loss that generated in an organization during an accounting period can be seen through the income statement. For example, if the expenses of the company are higher than revenues, the company will get a loss in the business. However, the company will generate a profit when the revenues are greater than the
What if your business does not grow as fast or as well as you expected? Debt is an expense and you have to pay expenses on a regular schedule. This could put a damper on your company's ability to grow.... ... middle of paper ... ...
Cash flow statements provide essential information to company owners, shareholders and investors and provide an overview of the status of cash flow at a given point in time. Cash flow management is an ongoing process that ties the forecasting of cash flow to strategic goals and objectives of an organization. The measurement of cash flow can be used for calculating other parameters that give information on a company 's value, liquidity or solvency, and situation. Without positive cash flow, a company cannot meet its financial obligations.