Financial Management and Performance Analysis

The provided document is a report that delves into various terms related to business, such as cash flows, profits, inventory, working capital, and the effects of managing costs on financial outcomes. It also explores different ratios used to assess a company's financial performance and health. The report highlights the importance of effective cost management, optimum resource utilization, and maintaining reserves in achieving better financial results.

Business Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1 A) Meaning of cash flows and profit and difference between these two..................................1
1. B) Explaining meaning of working capital, receivables, payables and inventory...................2
1.C) Explaining how change in working capital affects the cash flow of business.....................3
2. Explaining impact of the way the Uber Tools is managed can affect its financial results......3
3. Analysing and recommending various steps that should be taken to improve cash flow of
company through an effective working capital management .....................................................4
PART 2............................................................................................................................................4
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Business finance can be defined as funds that is being employed by a company for the
purpose of purchasing and maintaining assets, liabilities, goods, and other major factors for
performing the business activities. A firm needs to maintain a proper arrangement and
management of its business finance for the so that each business activities could be performed
smoothly. Uber tools Ltd. Is a company that manufactures power tools and the other company
described in Madagascar Industrial Ltd. Is a company that produces jwellary using gemstones.
The present study shows a brief explanation about profit and cash flow of a company along with
difference between these two. It also shows description of working capital, receivables,
inventory and payable. Further, it also shows impact of company's management over its financial
results along with recommendations for better working capital management in company through
which it can improve its cash flow.
Further, the assignment also describes various elements of financial performance of the
company. It also provides information about the actual financial position of the company on the
basis of analysis of the financial ratios of company along with calculation of ratio analysis of the
company. In addition, it also provides recommendations for accessing the financial performance
of business.
PART 1
1 A) Meaning of cash flows and profit and difference between these two elements
Cash flow
Cash flow can be defined as movement of cash within and outside of the business for the
purpose of performing various business activities such as investing of excess of fund, purchase
of raw materials, assets, selling assets, goods and services, etc.
Profit
Profit can be defined as net income that remains with the company from the revenue
earned by from selling goods and services after making all the expenses for the business.
Difference between cash flow and profit
Basis Cash flow Profit
calculation Cash flow can be deriving
from netting total cash inflows
Profit is determined by
subtracting various costs
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and cash outflows of the
company (Chen, 2017).
incurred by business from the
sales revenue.
Effect of Purchase of assets At the time of purchasing any
non current asset, the cash
amount paid would be charged
at the time of purchasing the
asset.
The amount of depreciation on
the asset purchased would be
charged against profit over the
year.
Impact of credit sale Cash flow will be affected at
the time of cash amount paid
by the debtors against the
credit sales.
Profit will be affected at the
time of sales made by
company
1. B) Explaining meaning of working capital, receivables, payables and inventory
Working capital:
The term working capital refers to the amount or the capital that remains with the
company through which it performs its daily operations like production, purchasing and selling
of goods and services, etc.
Receivables
Receivables are the total amount that would be received by the business in the near future
(Hennessy, 2017). It is the amount against which goods or services has been provided by the
company earlier against which the fund has not yet been received. The company shows
receivables in the asset side under the head current assets.
Payable
Payable is a sum which is due to company or the amount that is needed to be paid by the
business. The amount of payable is shown in the liability side under the head current liabilities. It
can be further defined as an amount against which the goods or services has been enjoyed by the
business without paying consideration against it.
Inventories:
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Inventory refers to amount of raw materials or finished goods or services held by a
business for the purpose of further production of goods or selling them into the market. It is also
shown in the assets side under the head of current asset of the company.
1.C) Explaining how change in working capital affects the cash flow of business
Working capital management refers to an effective management of assets and liabilities
held by the business so that company's ability to repay all the debts could be maintained by it.
The change in the level of working capital held by a business directly affects the cash flow of it.
For example, if the company have a positive working capital. Further,. if current
liabilities are more than the current liabilities, the net cash flow will show the cash inflow for the
specific period (Aktas, Croci and Petmezas, 2015). On the other hand, in case, the company held
negative working capital in any of the period. It would reflect the cash outflow as the net amount
of cash flow statement for the specific period.
In this regard, a business needs to have an effective management of its working capital as
it would result in fluctuating the capability of the business in paying its debts and managing all
the commitment of the firm during the year.
2. Explaining impact of the way the Uber Tools is managed can affect its financial results
For the purpose of gaining success from the business activities, it is a major task for the
company to develop strong strategies and plans for the company. In order to improve the
financial position of the company, its managers need to have a proper analysis of business'
various business activities, as it would affect the performance of financial position of the
company.
In case, the managers of Uber Tools plc. Fails to maintain a proper management of
company's working capital, there might be either excessive amount of cash or cash equivalent
held by the company due to which company's profitability may reduce (Gill and et.al., 2019). In
addition, improper working capital management can also result in lack of funds available for the
firm for doing its business. It can result in suffering loss from the business even in enhancement
of customer dissatisfaction due to failure of meeting needs and demand of them. It can affect the
profitability and cash flow position of the business.
In this regard, it can be analysed that way of management of the overall business can
directly affect the financial results if Uber Tools Ltd.
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3. Analysing and recommending various steps that should be taken to improve cash flow of
company through an effective working capital management
In Uber Tools ltd., it can be analysed that the company's debts are increasing over the
year. Further, company has invested a sum through which it will gain interest income in the
future. Further, there are also some receivables that can become bad debts.
From the above analysis of the company, it can be recommended to its directors that they
should analyse the overall situation of the business completely and evaluate its actual position as
well (Five Tips for Effectively Managing Working Capital, 2019). From the above case study, it
can be analysed that company's cash requirement may increase in the future. Cash flow system of
the company is not good. It may provide negative cash flow to the company for a specific period.
In this regard, the boards should detect some sources of funds in advance through which the
company can generate funds whenever it is needed.
In this regard, it can be analysed that the working capital management of Uber Tools
Ltd,. Can be improved if its managers follow the following steps:
 A complete analysis of the actual position of company.
 Comparing the current results with past performance.
 Determine the inefficiencies in the overall business performance of UberTools Ltd.
 Forecast future debts of company.
 Analyse and forecast the needs of funds in business.
 Identify various sources through which it can generate funds for paying debts.
 Determine the need of cash flow in the business.
 Develop strategies and plans to maintain the sufficient flow.
 In case of any excessive amount is held by business, determine the best sources at which
funds can be invested and maximum profit can be generated by the company.
In this regard, if the managers of Uber Tools ltd. Follows the above steps, they would be
able to improve their working capital management for the company.
PART 2
Particulars 2009 2010 2011
Sales 360 396 459
Gross Profit 230 252 272
Operating Profit 108 101 49
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Total Debt 215 300 462
Shareholders fund 304 347 344
Finance expense 9 12 16
Current assets 65 114 94
Current liabilities 29 48 102
Net profit 79 72 26
Sales Growth
To find out the percentage sales growth from on financial period to another than it is
required to calculate the ratio equation so that company Will able to know which figures from
income statement to plug in the ratio. sales growth can be calculated from the income statement
of the company which are required the relevant net sales figures of different years for which the
ratio need to be calculated. while reviewing the income statement it is the common practice
followed by the companies to report the net sales as just “sales”.
The percentage calculation of the sales growth required the historical financial results,
comparative income statement which reports the net sale for the current periods as well as for the
recent past years which are required to consider (Laitinen, 2017). If the company is unable to
obtain the comparative statement than they not able to calculate the sales growth for the
company.
The sales growth of three years of Madagascar Industries Ltd.
2009 2010 2011
Sales Growth=(Sales of
year 2- year 1)/ year 1 NIL 10% 15%
From the above ratio it can clearly identify that company having increasing trend of sales
growth as in the from the year 2009 to 2010 they have 10% growth while from 2010 to 2011
they have 15% of growth which is clearly indicating the upwards trend which helps the business
to take decision for continuing the operations and productions in the same and more optimum
way which ultimately helps them in increasing their sales growth year by year and leads to
achievement of the organisations goal
Profitability ratios:
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Gross Profit Margin
Gross Profit Margin is basically metric which is used to assess the company's financial
health and business model by revealing the amount of money which they left over from the sales
after deducting the cost of goods sold (Rahman, 2017). The gross profit margin is also expresses
as percentage of the sales and many be called as the gross profit margin ratio. It is basically the
difference between the revenue and the cost of the goods sold divided by the revenue. this can be
calculated as the selling price the item less the cost of the goods sold to arrive at the gross profit
of the company.
2009 2010 2011
Gross Profit
Margin=Gross profit/
sales (%) 63.89% 63.64% 59.26%
From the above Gross profit ratio, it can be ascertained that company have decreasing
percentage in their gross profit margin of the company over the years as from the year 2009 to
2011 company had continuously earning low gross profit margin compared to previous years
which is showing the decreasing end. From the income statement it can be interpreted that
company having increasing sales over the years and also the higher gross profit but the increased
sale is the result of less profit margin that is company sales goods by keeping the low profit
margin which enhance their sales but lowers their gross profit margin.
Operating Profit Margin
Operating Profit Margin is basically the profitability ratios which is used to calculate the
percentage of profit which company produces from their operations before subtracting their
interest and taxes. It can be calculated by dividing the operating profit by total revenue.
2009 2010 2011
Operating Profit
Margin=Operating
profit/Sales(%) 30.00% 25.51% 10.68%
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From the above table it can be interpreted that from the year 2009 to 2011 the company
showing continuously decreasing trend in the operating profit margin as their margin falls from
30% to 25.51% and then to 10.68% which very less compared to previous years. it is because of
the reason that company's sales is continuously increasing because of the low gross profit margin
as result of higher cost of production which tend so decreasing operating profit and which
ultimately leads the company to earn less operating profit margin over the years.
Liquidity Ratio
This ratio helps the company in determining the debtor's ability to pay off their current
liabilities bad debts by using their current assets and not raising any external borrowings
(Hermawan and et.al., 2016).
2009 2010 2011
Liquidity
Ratio=Current
Assets/Current
Liabilities 2.2 2.4 0.92
From the above table it can be interpreted that company's current or liquidity ratio
showing the increasing trend between the year 2009 and 2010 and decreasing trend from the year
2010 to 2011 which means lower the ratio depict that company has not enough resources and
current assets available to them to pay off their all current liabilities and obligations,
Return on Equity
it is the measure of the financial performance of company which ca be calculated by
dividing the net income by its shareholders equity as shareholder's equity is equals to the
company's asset minus its debts (Laitinen, 2017). It is basically the measure of the profitability of
the business in relation to its equity.
2009 2010 2011
Return on Equity=Net
profit/Shareholders
funds(%) 25.99% 20.75% 7.56%
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From the above ratio it can be interpreted that company has earning lower return on
equity over the years compared to the previous. This showing the decreasing trend that means its
shareholders fund is increasing year by year according to the financial statement but its operating
profit is continuously decreasing which results in lower returns on the equity of the company.
Return on Capital Employed
It is the financial ratio which measures the company's profitability and the efficiency after
taking amount of capital used into the consideration(Rahman, 2017). It shows how efficiently
company is generating profits from its capital employed by comparing the net operating profits
to capital employed.
2009 2010 2011
Return on Capital
Employed=Operating
profit/Total Debt+
Shareholder fund(%) 20.81% 15.61% 6.08%
From the above ratio it can clearly identify that company is showing the decreasing trend
over the years in their return on capital they employed in the business which is because of the
low operating profit and increased debt over the years results in lower return on amount of
capital employed
Efficiency ratios:
Gearing
Gearing refers to the ratio of a company's total debt to its equity. This ratios shows the
extent to which eh firm's operations are funded by the lenders verses shareholders (Kanapickienė
and Grundienė, 2015). In simple words it helps in determining the company's financial leverage.
2009 2010 2011
Gearing=Total
Debt/Total Debt+
Shareholder's funds(%) 41.43% 46.37% 57.32%
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From the above ratio it can clearly identify that the Madagascar Industries Ltd. Has
increasing trend in their gearing ratio which shows the ratio of their debt to equity that is they
increase their borrowings from the outsiders that is they are more weighted towards the debt
funding comparatively to equity funding.
Interest Cover
Interest Coverage ratio is used to measure and determine that how the company can pay
their interest expenses on outstanding debt. This ratio can be calculated by dividing the
company's earnings before interest and taxes by the company's interest expenses for the same
period.
2009 2010 2011
Interest Cover=
Operating
Profit/Finance
expenses(X) 12 8.42 3.1
The above ratio and table depicts that company's interest coverage ratio is falling
continuously that is it showing the decreasing trend over the years. This interpreting that
company having higher debt burden and there is the grater possibility of default in the year 2011
whereas in 2009 company having higher ratio of 12 which showing that company have enough
earning to pay off their all interest expenses.
Recommendations
Madagascar Industries Ltd. Needs to focus on the corrective measures which helps them
to resolve their issues of lower returns and lower profit margin. This can be done by following
these major factors:
 Managing the costs- By managing the cost company cam able to increase their profit
margin which result in higher earning of profit and this can be down by effectively and
efficiently utilizing all of their resources.
 Implementing and monitoring the budget ( Kanapickienė and Grundienė, 2015)
 Bench marking revenue and overhead percentages to leader
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 concentrating on decreasing costs
 Optimum utilization of resources
 effective strategies
 maintenance of more reservesAll these factors help the business in increasing their profit
and lowering their cost and interest expenses.
CONCLUSION
From the above report it can be concluded that there are many terms which used in the
business which includes the meaning and importance of cash flows, profits, inventory, working
capital and the impact of the ways of managing the Uber tools on financial results of the
company. It can also be concluded that there are different ratios which helps in ascertaining the
financial performance and health of the business son that corrective measures ca e taken to
resolve the issues or resources can be sued optimally.
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REFERENCES
Books and Journals
Aktas, N., Croci, E. and Petmezas, D., 2015. Is working capital management value-enhancing?
Evidence from firm performance and investments. Journal of Corporate Finance. 30.
pp.98-113.
Chen, H., 2017. Do cash flows of growth stocks really grow faster?. The Journal of
Finance. 72(5). pp.2279-2330.
Gill, A. and et.al., 2019. The impact of working capital management on the decision of Indian
production firms about the amount of dividends. International Journal of Business and
Globalisation. 22(3). pp.372-388.
Hennessy, R., 2017. Profit and pleasure: Sexual identities in late capitalism. Routledge.
Hermawan, U and et.al., 2016. THE IMPACT OF LIQUIDITY, SOLVENCY, AND
PROFITABILITY RATIOS TO COMPANY PROFITS (STUDY ON PT. SSB TAHUN
2013-2016). Journal of Management. 3(3).
Kanapickienė, R. and Grundienė, Ž., 2015. The model of fraud detection in financial statements
by means of financial ratios. Procedia-Social and Behavioral Sciences. 213. pp.321-327.
Laitinen, E. K., 2017. Profitability ratios in the early stages of a startup. The Journal of
Entrepreneurial Finance. 19(2). pp.1-28.
Rahman, A. A. A. A., 2017. The Relationship between Solvency Ratios and Profitability Ratios:
Analytical Study in Food Industrial Companies listed in Amman Bursa. International
Journal of Economics and Financial Issues. 7(2). pp.86-93.
Online
Five Tips for Effectively Managing Working Capital. 2019. [Online] Available through:
<https://softco.com/blog/managing-working-capital/>
Sales Growth %. 2019 [Online] Available through: <https://www.stockopedia.com/ratios/sales-
growth-838/>.
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