This essay involves report writing. It occurs in two parts whereby part one deals with analyzing the difference between the profit and cash flows, with specific interest on whether the two can change independently without affecting each other. It goes further to describe what working capital, receivables and payables are as well as how they affect cash flows. After the cash flows, analysis of UTL company takes place to show how the issues dealt with in the company relate to the changes in cash flows and working capital in the organization. Recommendations are given for the company to improve on its day to day doings. Part two, on the other hand, deals with the description of various financial ratios, calculating the specific ratios and explain what the ratios denote. The possible reasons for the high or low ratios get explained which give different gestures for the life of the company.
Part 1. Definition and relationships of terminologies and statements
In the corporate world, each organization works with the goal of realizing a gain at the end of the day. This gain is always either positive or negative depending on the effectiveness the management put in the trading affairs more so on the issue of cost. What constitutes profit is the positive form of the gain. Therefore, profit is the positive gain from operations of the said organization. It is the residual figure that results after subtracting the sum of all costs and all expenses from the revenue realized from the sales (Aktas, Croci and Petmezas, 2015).
With the profit as a tool, the management or any other stakeholder can determine the success or the failure of business though this is alongside consideration of other factors. For instance, if one needs to put a given institution's growth in comparison with another, it is of great import to use a ratio of profits to sales (profit margin). A firm that does well in terms of profitability acquire a good image in the corporate environment; for example, lenders will not shy away from extending loans to such firms. Again the public will find it an excellent place to invest (Aktas, Croci and Petmezas, 2015, P. 99).
Cash flow refers to the amount of money that comes in or leaves the organization during the trading. Thus cash flow can either be cash outflow or cash inflow. The cash flow can result from the sale or purchase of different items of the balance sheet as well as receipt and payment against items that are outside the balance sheet (Melville, 2017).
1.3 Differences between profit and cash flow
Someone may at times confuse the profit for cash flow and vice versa, but in the real sense, the two have a big difference. It should be in every manager’s mind that a firm must generate profits and at the same time realize a positive cash flow for it to thrive in the corporate world; This means the difference between the two is there, and a track of it is crucial for effective operations (Watson, and Head, 2016).
Profits come when the selling executes, but cash flows are recorded only when the money comes or leaves the company. For example, a businessperson may sell an asset at a very high profit that he purchased it but under an agreement that money will exchange hands in a future date; this means that the seller has received gain, but the cash inflow is still pending. The only thing that is logical here is that there has occurred an outflow and the business may struggle to exist (Watson, and Head, 2016, P.69).
A cash flow transaction does not necessarily mean that the firm is profitable. For instance, if company A borrows money to pay a debt, the cost of the debt may show a very high figure such that making the profit from this does not materialize. Hence cash flow and profit are two different things (Watson, and Head, 2016, P. 70).
1.4 Working capital
From the statistical point of view, working capital is the difference that exists between the current assets and current liabilities of a given institution. The main items used in calculating the working capital include the stock, trade payables and trade receivables. From the dynamic point of view, working capital is the equilibrium that occurs between the activities that generate income and activities that help in purchasing the resources in the business entity. Networking capital is an excellent tool to measure the liquidity of the firm (Aktas, Croci and Petmezas, 2015, P.106).
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