Understanding Financial Information and Management of Cash

This document provides an in-depth understanding of financial information and management of cash. It covers topics such as financial ratio analysis, interpretation of ratios, meaning of working capital, receivables, inventory, and payables, and how changes in working capital affect cash flow.

FINANCE

TABLE OF CONTENTS
MAIN BODY...................................................................................................................................1
PART 1: FINANCIAL RATIO ANALYSIS...................................................................................1
Ratio Analysis..............................................................................................................................1
Interpretation and reasons for change..........................................................................................1
Why the calculation of the receivables collection period not relevant........................................3
PART 2: UNDERSTANDING FINANCIAL INFORMATION AND MANAGEMENT OF
CASH...............................................................................................................................................4
2.1 Meaning and difference between the profit and cash flow....................................................4
2.2 Meaning of working capital, receivables, inventory and payables........................................5
2.3 Presenting the changes in working capital affects the cash flow...........................................5
2.4 Analysis of the traditional and the alternative budgetary system and its appropriateness for
the business..................................................................................................................................6
REFERENCES................................................................................................................................8

MAIN BODY
PART 1: FINANCIAL RATIO ANALYSIS
Ratio Analysis
The ratio analysis for the period ended 31st December 2019 are as follows:-
2019
S.NO RATIOS FORMUALAS
CALCULATI
ON
1 Gross Profit Margin Gross profit / Revenues * 100 7.51%
Gross Profit 1540
Revenues 20510
2 Operating Profit Margin Operating profit / Revenues * 100 3.17%
Operating Profit 650
Revenues 20510
3 Current Ratio Current assets / Current liabilities 0.54
Current Assets 1570
Current Liabilities 2920
4 Quick Ratio
(Current assets – Inventory) /
Current Liabilities 0.25
Current Assets 1570
Inventory 850
Current Liabilities 2920
5 Inventory Holding Period Inventory / Cost of Sales * 365 16.35
Inventory 850
Cost of Sales 18970
6 Payables Payment Period Trade Payables / Cost of Sales * 365 40.41
Trade Payables 2100
Cost of Sales 18970
Interpretation and reasons for change
The interpretation of the above ratios pertaining to the financial year ended 31st
December 2019 and the reasons for change from 2018 to 2019:- Gross profit margin- The gross profit margin of the company shows the percentage of
the efficiency that the company has in managing its operations. It is calculated by
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dividing the gross profit with the revenues from operations. It depicts the amount of
profitability that is generated from the sales that are incurred by the company post
decreasing the costs of production. From the above table it can be inferred that earlier in
2018 Browns plc had gross profit margin of 5.6% which now in 2019 has increased to
7.51%. This shows that the operational efficiency of the company has boosted as
indicated by the increase in the gross profit margin of the company. This can be due to
the increase in the sales because of the increasing home delivery, increased customers for
clothing market, establishment of the new stores etc. which has led to increased sales
with the attainment of the economies of scale. Operating profit margin- The operating profit margin of the company shows the
performance of the business in terms of the operations that are conducted by showing the
profitability that is earned on the sales after the deduction of the operating expenses. It is
depicted in the percentage form wherein the profits are depicted per dollar of the sales
post deducting the variable expenses of the company. As per the above analysis it can be
evaluated that the operating profit margin for the year ending 2018 was 3% and it
increased to 3.17% in 2019. This shows that the operational performance of Browns plc
has boosted and the major reason regarding that is the strong marketing campaign that
took place during the year. The aggressive marketing techniques that are used by the
company shall be leading to the increment in the sales and profitability of the company. Current ratio- The current ratio indicates the availability of the current assets in the
company to meet the short term liabilities and obligations of the business. This shall be
showing the liquidity position of the entity proving its ability to finance the liabilities that
are to be arising within the time span of one year. The ratio analysis of Browns plc shows
that the liquidity position that has been deteriorated over time as the current ratio in the
year 2018 was 0.6 which has now decreased to 0.54 in the year 2019. This is the red
signal for the company and the emergency fund needs to be arranged as the funds
available are just half of the liabilities of the company (Popescu and Popescu, 2019). This
can spoil the credibility and the reputation of the company if they are unable to meet the
liabilities. The reason for the same can be decrease in the closing inventory balance that
is managed by the company.
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 Quick ratio- The quick ratio of the company represents the highly liquid assets that are
available with the business in order to meet the current liabilities or the short term
obligations of the business. This also depicts the liquidity position of the company
showing the potential availability of the funds with the business. The financial data of the
company shows that in the year 2018 Browns plc had the quick ratio of 0.23 which has
now shifted to 0.25 which is the betterment in the position to some extent. This is because
the major shortcoming in the liquidity position was due to the closing balance of the
inventory which is excluded from the calculations of the quick ratio not being the highly
liquid asset that can be easily converted to cash. Inventory holding period- The inventory holding period depicts the number of days
averagely the inventory is hold by the business. This should be decently maintained by
the company so that the funds do not unnecessarily get blocked and are left idle without
much use. This is mainly determined by the type of the business that the Browns plc is
undertaking like for its supermarkets the inventory holding period shall be shorter as the
foods segment the expiry is of major significance which is of lesser period. Earlier for the
company the inventory holding period was 22 days in 2018 which changed to 16 days in
2019. It can be assessed that this is due to the faster rate of the inventory turnover in the
company that is because of the increased demand of the online food delivery and also the
aggressive promotional techniques that are managed in the company.
 Payables payment period- The payables payment period shall be showing the average
time taken by the company to meet its liabilities towards the creditors. This period should
be in sync with the receivables period so that the working capital cycle of the company
shall be moving smoothly for the company (Block and et.al., 2018). For the Browns plc
in the year 2018 such period was 49 days which later on shifted to 40 days which is the
positive indicator of the credibility and the reliability of the company. This is because the
working capital for the company is smoothly working and that is the reason that the funds
are sufficiently available for it being employed to pay off the creditors.
Why the calculation of the receivables collection period not relevant
The calculation of the receivables collection period is not relevant for the Browns plc as
it has the complete proportion of the cash sales which are in the form of online food purchased
by the customers that are home delivered and the payment regarding the same has to be instantly
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made to the company. Majorly the super market business is on 100% cash basis and since there
are retail purchases so it involves purely the cash transactions and this is the reason that there are
no receivables.
PART 2: UNDERSTANDING FINANCIAL INFORMATION AND
MANAGEMENT OF CASH
2.1 Meaning and difference between the profit and cash flow
The profits and the cash flows both are the financial metrics of the company which are
used for the purpose of decision-making in the company but are the different terms and cannot be
used interchangeably in the firm. The profits of the company are after decreasing the operating
expenses from the revenues that are incurred during the period. They depict the operational
efficiency of the company with which its performing the routine operations of the business. This
profit can be further either distributed in the form of the dividends or it can be retained in the
business for the financing the future operations of the business. This shall be reflecting the
profitability position of the company (Ortiz and Muniesa, 2018). The profits of the company can
be divided in three categories that is the gross profit, operating profit and the net profit of the
company.
Apart from that the cash flows of the company shows the movement of cash in and out of
the company for the various routine transactions of the company. The shall be determining the
liquidity position of the company and the availability of the funds with the company to meet the
obligations of the company. This shows the net cash flows that are either generated or that are
paid by the company during the financial year. The cash flow statements are prepared at the year
end for notifying the flows of the cash balance in respect of the three types of activities which
can either be operating, investing and financing.
Both the terms are different in its perspectives for the business as the profits is the
amount that is remaining with the business after the deduction of all the expenses of the
company. It is possible for the entity that it is profitable though has the negative cash flows and
because of this reason neither can it meet the expenses nor it can finance the expansions or the
growth for the company (Sassen, 2017). On the contrary it is even possible for the business to
have the positive cash flows but it is not profitable. In this case if it makes the higher level of the
sales still it will not be able to maximize its profitability if the operational efficiency is poor.
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Both the figures can be used as the financial metric in the company and accordingly the
financial health of the business shall be reviewed by the company. But this shall be dependent on
the needs and the requirements of the stakeholders and this is the reason a single metric cannot
be approved.
2.2 Meaning of working capital, receivables, inventory and payables
The working capital of the company is the difference between the current assets and the
current liabilities of the company. This shall be showing the short term financial health of the
company with the liquidity position, operational efficiency etc. This is very necessary for the
business for the smooth working of the routine operations of the business. The negative working
capital is the red signal for the company depicting that the company will not be able to meet the
short term liabilities and obligations (Tenca, Croce and Ughetto, 2018). The positive working
capital of the company shows that company is financially healthy and if the same is to excessive
then in that case the company shall mean that there are the idle funds in the company.
The receivables are the asset of the company representing the amount that is owed by the
customers of the company to it for the purchases that are made but for the same the amount is not
yet paid to the company. These are in the form of the credit that is extended by the business to its
customers. These are the legally enforceable claims with the company for the goods and services
that are supplied by the company. This shall be represented as the current assets of the company
and shown on the asset side of the balance sheet.
Payables on the other hand is the liability of the company in the form of the amount that
is owed by the business to its suppliers from whom they have purchased the goods on credit.
These are also legally enforceable against which the company has to issue the valid instrument
showing its liability towards the suppliers of the business. The payables arise when the delivery
of the goods have been made to the company but the payment against it has not yet been made to
the company (Mian and Sufi, 2018). The credit period has been received by the company but it
should be in sync with the receivables so that the working capital cycle is not disturbed.
Inventory is the stock that is hold by the business either for the further production or it
can be for the resale by the company. This exists in three forms one is the raw material, the other
is work in progress and the last one is finished product. The ordering point must be decided such
that the cost of the business are minimized.
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2.3 Presenting the changes in working capital affects the cash flow
The changes in the working capital of the company shall be affecting the cash flows of
the business in case the transactions involves the element of cash in it. The changes in the
working capital is also one of the major elements in the representations as to the net cash flows
in the company. The increase in the working capital can be assessed as the investments that are
made in the cash flows of the company. This means that the resources of cash are being drained
from the business and are being used in the other activities like the operating, investing and the
financing activities (Kennickell, Kwast and Pogach, 2017). On the other hand if the working
capital of the business have been negatively impacted in that case the company shall have
obtained the cash flows either in the form of the short term borrowings to finance the routine
operations of the business. These are also used as the financial metric for the purpose of
valuations of the business and accordingly making the verdict for the business's financial health.
Both the working capital and the cash flows of the company are important elements to
processing of the future operations of the business (How changes in working capital affect your
net cash flow in business valuation, 2021). Apart from that it shall assesses that the cycle of
operations shall start with the cash and again end with cash resources so that all the functions are
smoothly carried out in the business.
2.4 Analysis of the traditional and the alternative budgetary system and its appropriateness for
the business
The traditional budgetary system was the incremental budgeting methods that were used
in the company. In this method the data pertaining to the past are taken and are accordingly
adjusted for the future changes in the demand and supply forces, inflation etc. and are
represented as the current budget that needs to be followed by the employees so that the
organizational objectives are fulfilled (Klopotan, Zoroja and Meško, 2018). Since only the some
changes are made in the past data as per the future predictions of the changes so it can be
assessed that this method is not very appropriate for the business.
But on the contrary the modern budgeting techniques can be used by the companies for
the accuracy in the budgeting works that are to be conducted by the company for the estimations
that are to be made in respect of future business operations. Zero based budgeting is the modern
budgeting technique wherein the past data shall not be used and on the contrary the estimates
shall be made based on the current trends. In this the budget shall be formed from the zero level
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wherein all the expenses shall be justified (Hertati and et.al., 2020). This shall help in the optimal
allocation of the resources and also the optimum utilization of such resources. All the expenses
that are involved in the budget shall be justified and accordingly there are chances of no
deviations and that the operations take place as per the business objectives of the company. The
appropriateness and the accuracy shall be defined of the company using the modern budgeting
techniques in the company.
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REFERENCES
Books and Journals
Hertati, L. and et.al., 2020. The Effects of Economic Crisis on Business Finance. International
Journal of Economics and Financial Issues. 10(3). pp.236-244.
Klopotan, I., Zoroja, J. and Meško, M., 2018. Early warning system in business, finance, and
economics: Bibliometric and topic analysis. International Journal of Engineering Business
Management. 10. p.1847979018797013.
Kennickell, A. B., Kwast, M. L. and Pogach, J., 2017. 7. Small Businesses and Small Business
Finance during the Financial Crisis and the Great Recession (pp. 291-350). University of
Chicago Press.
Mian, A. and Sufi, A., 2018. Finance and business cycles: the credit-driven household demand
channel. Journal of Economic Perspectives. 32(3). pp.31-58.
Tenca, F., Croce, A. and Ughetto, E., 2018. Business angels research in entrepreneurial finance:
A literature review and a research agenda. Journal of Economic Surveys. 32(5). pp.1384-
1413.
Sassen, S., 2017. Finance and business services in New York City: international linkages and
domestic effects (pp. 132-290). Routledge.
Block, J. H. and et.al., 2018. New players in entrepreneurial finance and why they are
there. Small Business Economics. 50(2). pp.239-250.
Popescu, C. R. G. and Popescu, G. N., 2019. An exploratory study based on a questionnaire
concerning green and sustainable finance, corporate social responsibility, and
performance: Evidence from the Romanian business environment. Journal of Risk and
Financial Management. 12(4). p.162.
Ortiz, H. and Muniesa, F., 2018. Business schools, the anxiety of finance, and the order of the
‘middle tier’. Journal of Cultural Economy. 11(1). pp.1-19.
Online
How changes in working capital affect your net cash flow in business valuation. 2021. [Online]
Available through: <https://www.valuadder.com/blog/2012/03/28/how-changes-in-
working-capital-affect-your-net-cash-flow-in-business-valuation/>
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