Evaluating Financial Performance of Organizations

This assignment provides an in-depth evaluation of the financial performance of an organization, specifically Madagascar Industry Ltd. The report is constructed using correct accounting concepts and analyzes various elements to understand profitable positions and working capital structure. Financial ratios are calculated to determine key factors affecting financial performance. Recommendations are provided based on the results, emphasizing effective working capital management and coordination of liquid transactions and plans.

Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1.) a) Meaning of cash flow and profit and their difference...................................................1
b) Meaning of Working capital, Receivable, Inventory and payables...................................1
c) Affect of working capital on Cash Flow............................................................................2
2) Accounting concept that affect the Financial position.......................................................2
3) Steps to improve cash flow through working capital management...................................3
PART 2............................................................................................................................................4
1 (a). Elements of financial performance...............................................................................4
(b). Calculation of ratios.........................................................................................................5
(c). Results to consider the changes in ratios.........................................................................6
2) Analysis and recommendation that helps to assess the financial performance..................7
CONCLUSION................................................................................................................................8
REFRENCES...................................................................................................................................9

INTRODUCTION
Finance is the most important part of any organisation. In business, finance is needed at
every part for acquisition of new assets an organisation needs finance, for its operations finance
is required (Bánciová and Raisová, 2012). Its is very important for managers to manage its
financing activities. This report contains the uses of finance and its importance in an
organisation, this report also talked about the Uber Tools LTD a UK based company which
manufactures power tools and the importance of finance. This reports also gives information and
difference between the Profit and cash flow and how does it helps management to take necessary
decisions which are effective for the firm. It also contains the changes of working capital and
how does it affected the cash flow of Uber Tools LTD.
PART 1
1.) a) Meaning of cash flow and profit and their difference
Cash Flow: Cash is a financial statement which is prepared by management to check the
inflow and outflow of cash and cash equivalents from company (Bertilorenzi, 2014). It shows
only cash transactions which took in a company in one financial year. It helps the organisation to
understand use of cash in a year by the company's various activities such as operating activities,
financing activities and investing activities.
Profit: Profit is the difference of revenue and all expense(Bruhn and Love, 2014). It
includes the total profit whether generated for its operations or other sources. Profit is a total gain
earned by the company during a financial year.
Difference between Cash Flow and Profit
Cash flow only shows uses of cash whereas Profit is the difference of income and
expenses. To calculate actual usage of cash all non cash and non operating expenses are added
back to profit. It helps the management to control its expenses which is related to cash and cash
equivalents whereas it is calculated after the deduction of all expenses related and not related to
operation.
b) Meaning of Working capital, Receivable, Inventory and payables
Working Capital: The difference between current assets and current liabilities is known
as working capital. Current assets include accounts receivable, cash, inventory and finished
goods, currents liabilities include all liabilities which a company can pay off within one year. It
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is used by managers to measure company's liquidity positing and it ability to work efficiently. It
is also used to check a firm's short term financial health.
Receivables: Receivables are debts which are owed to company for sale of its goods or
services by customers (Buckland and Davis, 2016). Usually these are converted back into cash
within one year, this is created by giving goods to customer on credit basis and extending a line
of credit as per the terms of the customers, these receivables are shown on the balance sheet on
assets side under the name of accounts receivables.
Inventory: Inventory refers to the stock which is with the company during an accounting
year. Stock includes all finished goods, raw material and goods which are still in work in
progress. It is shown on assets side of balance sheet under the heading of current assets. It is
termed as a finished goods and raw materials used to product finished which are in company's
store. It is considered as one of most important part of any business as it is considered as a
primary source of revenue generation.
Payables: Payables are also known as Accounts Payable (De Mooij, 2012). It is an entry
which shows that organisation has purchased its raw material on credit. Payables are shown on
liabilities side of balance sheet. It also includes the debt which company owes to its creditors and
pay off in a short term. When organisation takes goods on credit basis and pays it off in a short-
term then the payables are increased with the amount of goods taken on credit.
c) Affect of working capital on Cash Flow
Changes in working capital has a direct impact on inflow and out flow of cash in an
organisation. These financial statements are prepared to check and analyse growth of
organisation (Demerjian, Lev and McVay, 2012). Change in working capital can have positive
and negative affect on cash flow. If working capital increase it means cash inflow in an
organisation and if working capital is decreased it show cash outflow from organisation. If
current assets increase than cash flow will be decreased, if there is a decrease in current assets it
shows inflow of cash in an organisation. If current liabilities is increased it will show a increase
of cash from operating activities, and if the current liabilities are decreased than it will show a
decrease of cash from operating activities.
2) Accounting concept that affect the Financial position
Accounting Concept: Accounting concepts are a given set of rules which is to be
followed by every organisation for preparation of it all accounts including its financial
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statements. It is a given rule of accounting which is applicable to all organisation and working
across the globe. Uber Tools LTD is using the following concept for preparing their final
accounts:
Accrual Concept: This is one of the basic accounting concepts. This concept states that
events and transactions are recorded as and when it arise (Gavalas and Syriopoulos, 2015). The
transactions is recorded on a accrual basis as it when it was accrued instead of time when
payment is received. As per this concept losses and expenses which is to be presumed in the
future is recorded today only where the income or profit is only recorded when it actually occurs.
Uber Tools LTD uses this concept of accounting to record its future losses and make provisions
for them in advance. UTL has an outstanding dispute of 35 million which is not sure to be paid
or not as per concept of accrual basis UTL has showed this outstanding as a liabilities
Full discloser Concept: This concept is used by the company which states that a
company should disclose all information related to its business in annual report which is
published every year (Groebner, Shannon, Fry and Smith, 2013). As per this concept company
has to clearly mention its operations and all sources from where company is raising its funds and
profits for the year. Uber Tools LTD uses this concept and mentions its sources of fund in the
annual report and operations of company. It showed it operating profit at £ 36 million in the last
year by using this accounting concept. UTL also showed its net debts increased in one year at
350 millions.
Accounting concepts helps the organisation to mange it s resources according to the rules
and regulation which are accepted globally. Using these concepts gives a clear picture of
organisations financial health and financial position. Uber Tools LTD also uses these concept to
produce its financial statements and see their financial position.
3) Steps to improve cash flow through working capital management
Cash Flow can be improved if organisation control the uses of cash and cash equivalent.
If the cash is less used in an organisation then it will automatically improve the health of cash
flow (Halbert, Henneberry, and Mouzakis, 2014). Managers of Uber Tools LTD uses the method
of improving it working capital in order to improve its cash flow from company. It can be
improved by using the following methods:
Increase Price Policy: One of a most commonly used methods for improving its cash
flow is by increasing its price of product. If the company increases its cash flow by selling its
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products at a higher cost on cash basis will help in generation of cash and improving cash flow
statements. Uber tools can use this kind of policy to improve their cash flow position as this
policy says that company should sell their goods at a higher price and on cash basis. To maintain
its cash flow position uber tools Ltd has started to push their key customer for paying their
respective amount.
Conduct Credit Check on Customers: To improve the health of its cash flow company
has to conduct a credit check on its customers (Mazanai, and Fatoki, 2012). If the customers are
not willing to pay cash than it should issue a credit check on its customers and carefully read it
terms and conditions before singing the document. Uber tools Ltd should use this check to
improve its health of cash flow as debts recorded by UTL this year was stated at 350 million
where as in the previous year it totalled at 250 million, by using this credit check on its
customers company can raise funds and pay-off its debts.
Improve Inventory: The company should improve its inventory in order to improve its
cash flow position. Company should do a regular inventory check, if goods are not moving from
at same volume as it was moving in earlier times. The company should start selling its remaining
stock even at discount to clear its inventory. Uber tools Ltd should improve its inventory as it is
mentioned in above case that UTL has a large stock of materials and supplies after the dispute is
arised. Blocking up of inventory will stop circulation of cash in an organisation.
Uses of Electronic Payments: In order to improve cash inflow in an organisation
company should use electronic payment methods so that the amount should not get stuck
(Ramiah, Xu, and Moosa, 2015). Using the electronic payment method will directly credit the
amount in bank account of the company. If Uber tools Ltd start using electronic payment
methods for their customers, it will help UTL to realise its sales without being giving goods on
credit basis.
PART 2
1 (a). Elements of financial performance
Financial performance: It is a measure which helps in describing the effective manners
in which an organisation uses its assets for increasing its profitability. This term is used for
determining the overall financial health position of any company. It is mandatory for all entities
to prepare the financial statements with the help of relevant financial information. Such
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statements are helpful in analysing, evaluating and monitoring the financial position. The
accountants of any business prepares financial statements to show the financial position along
with the future expectations. Various elements which helps in describing the financial
performance are the followings:
Assets: These are the legal rights in which the owner acquires them at monetary values. It
is a resource that provides economic benefits in the future time period. These may be classified
as tangible assets, intangible assets, fixed assets and current assets.
Liabilities: These are the obligations arising from the past events but are settled in future.
It increases the outflow. Th other words, it is the monetary amount to be paid by any person for
settling the past events. These are termed into current liabilities and non current liabilities.
Equity: It is the ownership amount paid by the owners to acquire the stocks. It is the
amount adjusted between assets and liabilities. It indicated the interests of owners in the
organisation.
Expenses: These are the outflows of the entity for achieving profitability (Volcker,
2012). It leads to decreasing the value of assets for generating more revenues. All the expenses
are shown in profit and loss account.
Revenue: It indicates the increase in assets along with decrease in liabilities. It reflects
the gross inflow of assets to increase the equity by maintaining profitability. It acts as the income
generated from the business operations.
Income: It is the money received after performing some activities on regular basis. It is
earned by selling the organisational products or services in the market place. It is used for
funding the day to day transactions or performing the day to day activities.
Investment by owners: These are the monetary investments done by the owners of the
business for achieving better results. It helps in increasing the owners equity. It leads to
transferring the resources in the owners interest. These includes the contributions done by the
owners for the business ined and applied on that particular company (Uber Ltd)firm.
(b). Calculation of ratios
Ratios are efficiency indicators which helps the management to analyse its efficiency
managers uses this tool to find out growth of company and its actual position. The following
table shows calculation of ratio for the company:
Ratio Formula 2009 2010 2011
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Sales growth ratio Current year sale - last
year sale/last year
sale*100
- 10.00% 15.90%
Gross profit
margin ratio
Gross profit/total sales
revenue*100
63.88 63.63 59.25
Operating profit
ratio
Operating income ÷
Total revenue
30.00% 25.5 10.67
Gearing ratio (Long-term debt +
Short-term debt + Bank
overdrafts) ÷
Shareholders' equity
61.18 72.62 115.4
Interest coverage
ratio
EBIT/interest exp 12 8.41 3.06
Liquidity ratio Current assets/current
liabilities
2.24 2.37 0.92
Return on equity
ratio
Net
income/shareholders
Equity
25.98 20.74 7.55
Return on capital
employed ratio
net operating profit/total
asset – current liabilities
28.8 47.86 101.95
(c). Results to consider the changes in ratios
Financial ratios: These are the indicators which reflects the financial situations along
with performance. Such ratios are helpful in analysing trends to compare the financial statements
of any firm with other business firms. All the ratios are calculated with the helps of information
analyses from financial statements. It shows the profitability as well as liquidity position of any
enterprise to maintain its activities. The impact of various ratios on business organisations as
follows:
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Sales growth: It is a tool which helps in increasing the sales of an organisation in fixed
period of time for maximising the profits. It helps in measuring the ability of the sales team for
maximising the revenue for a particular time period. The above calculation showed an increase
in the sale by 5.90 % than last year.
Growth profit margin: It helps in calculating the profitability ratio by assessing the
financial health along with business model. It describes the relationship between net sales
revenue and gross profit for the purpose of evaluating the performance of business operations.
As per the above given scenario gross profit for the company showed a decreasing effect by
4.63% in the year 2011.
Operating profit margin: It helps in measuring the amount of money left after settling
the sales and other variable costs of the business model. The main aim of such margin is to
calculate the profits. The operating profit for the year 2011 was decreased by 4.38% as compared
to the last year.
Gearing: It is defined as the proportion of debt and equity to support the business
operations. It indicates the debt level in relation to the equity capital. The above calculation
shows the increase in gearing ratio by 42.78 %.
Interest cover: It determines the capacity of the company to settle its interest expenses
for outstanding debts. It is named as debt ratio which defines the capability to pay interest
amounts for outstanding amounts. In the above scenario interest coverage ratio showed an
increase of 5.35 % in year 2011
Liquidity ratio: It is used to determine the sufficiency of current assets to pay current
debt obligations as well as safety margins. In the year 2011 the liquidity is reported to e
decreased by 1.45 %
Return on equity: It is a tool for measuring the firm profitability by considering its
equity. It helps in defining the ways in which any company uses investments for composing
earning growths. The above table showed the Return on Equity at a decreasing rate marked at
13.19 % which shows that ROE is reduced in the year 2011.
Return on capital employed: It is an accounting ratio which measures the efficiency of
capital used for generating profitability of any company. The above calculation showed that
return on capital employed is at 54.09 % in the year 2011
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2) Analysis and recommendation that helps to assess the financial performance
Financial performance of any organisation depended on its efficiency to work and
convert its weaknesses in to profits. These financial performance can be improved if the
company's financial statement are improved. Financial statement helps mangers to find out
financial performance. Using right and correct accounting concept will automatically improve its
financial performance.
CONCLUSION
The above report construct the framework of business finance. It is analysed that different
elements are essential to evaluate the financial performance of organization. General context of
profit and loss and cash flow statement helps in understanding profitable position and working
capital structure of organization. it is concluded that ratios helps in determining the key factors
affect the financial performance of organization. The report also conclude that effective working
capital management helps in coordinating the liquid transactions and plans. Financial statement
of Madagascar industry Ltd evaluated by calculating financial ratios. On the basis of results
recommendations are given properly.
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REFRENCES
Books and journals
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Bertilorenzi, M., 2014. Business, finance, and politics: the rise and fall of international
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Bruhn, M. and Love, I., 2014. The real impact of improved access to finance: Evidence from
Mexico. The Journal of Finance. 69(3). pp.1347-1376.
Buckland, R. and Davis, E. W., 2016. Finance for growing enterprises. Routledge.
De Mooij, R. A., 2012. Tax biases to debt finance: Assessing the problem, finding
solutions. Fiscal Studies. 33(4). pp.489-512.
Demerjian, P., Lev, B. and McVay, S., 2012. Quantifying managerial ability: A new measure
and validity tests. Management science. 58(7). pp.1229-1248.
Gavalas, D. and Syriopoulos, T., 2015. An integrated credit rating and loan quality model:
application to bank shipping finance. Maritime Policy & Management. 42(6). pp.533-
554.
Groebner, D. F., Shannon, P. W., Fry, P. C. and Smith, K. D., 2013. Business statistics. Pearson
Education UK.
Halbert, L., Henneberry, J. and Mouzakis, F., 2014. Finance, business property and urban and
regional development. Regional Studies. 48(3). pp.421-424.
Mazanai, M. and Fatoki, O., 2012. Access to finance in the SME sector: A South African
perspective. Asian Journal of Business Management. 4(1). pp.58-67.
Ramiah, V., Xu, X. and Moosa, I. A., 2015. Neoclassical finance, behavioral finance and noise
traders: A review and assessment of the literature. International Review of Financial
Analysis. 41. pp.89-100.
Volcker, P., 2012. Unfinished business in financial reform. International Finance. 15(1). pp.125-
135.
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