Financial Performance Analysis of UberTools Company

This assignment provides a comprehensive analysis of the financial performance of UberTools company. It includes an examination of the company's assets and liabilities, income statement, and ratio analysis to assess its liquidity, profitability, and efficiency. The report aims to identify areas for improvement and provide insights into the company's financial management.

Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................4
a. what is meant by profit and cash flow and how it is different................................................4
b. What is the meaning of working capital, receivables, inventory and payables......................4
c. Changes in working capital affect cash flow...........................................................................5
ii. Apply the concepts .................................................................................................................6
iii. Analyse and recommend what steps should now be taken to improve this company’s
cashflow through better Working Capital management..............................................................6
PART B............................................................................................................................................6
a. Elements of financial performance .........................................................................................6
b. Calculate ratios........................................................................................................................8
c. Ratios might have changed using the information in the scenario.........................................9
ii. Analyse and recommend how the board might assess the financial performance of the
business ......................................................................................................................................9
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Funds or money invested in business or business related activities are known as business
finance. Funds and monetary resources are required for business functions or activities and
sources of obtaining funds may be debt or equity. Finance is core need of a business organisation
in order to carry out its day to day activities such as purchase of raw material, payment of
salaries and bills, collection of cash from customers etc. Finance in business is key aspect which
ensures survival and growth of an business organisation. Finance sources and financing decisions
have direct or indirect impact on organisation's liquidity and profitability position. This report
describes explanations about Profit and Cash-flow and how they are different, meaning of
Working Capital, Receivables,
Inventory and Payables, how changes in Working Capital affect Cash-flow in the context
of UberTools Ltd which owns and operates a factory in Newmarket producing power
tools.
PART 1
a. What is meant by profit and cash flow and how it is different
Cash flow is the amount of cash or cash equivalent which corporation receives or given
out by the way of payment to creditors is known as cash flow. Profit is the surplus remaining
after total cost are deducted from total revenue, and the basis on which tax is computed &
dividend is paid. It is helpful to measure the success of an organisation. There are various
difference between cash flow & profits which are as describe below :
Cash Flow Profit
It represents money from different sources It is the money left over from sales revenue
once costs have been deducted.
Cash flow can be affected by the timing of
payments into & out of the business.
Profit is calculated before the money is
received.
It represents the corporation strength. Goal is
to ensure business solvency, generate positive
cash flow & maximizes share price
Sales made beyond a break even point (Nobes,
2014).

If management of UberTools Ltd is able to manage the cash flow in proper manner than it
does not face the problem of shortage of cash as a result business operations of organisation does
not get hamper. If company is earning sufficient profits than it can expand its business and
makes strategies for growth of corporation. The operating profit before interest and tax is £36
million.
b. What is the meaning of working capital, receivables, inventory and payables
Working capital : It is that capital which is required by the organisation to operates its
regular business operation so that its works does not get hamper. It is also known as net working
capital which shows the difference between current assets and current liabilities. Current assets
involves accounts receivables, cash, inventories etc. Current liabilities involves accounts
payable, short term borrowings, accrued liabilities etc (Perotti and Wagenhofer, 2014).
Accounts receivable : It is the payment which organisation will receive from its
consumers who have purchased the products & services on credit basis. Generally the credit
period is short which is from few days to months but in some cases it can be a for year. As
UberTools Ltd owned £12million pounds for a series of large orders placed by D&R last year.
Company should to try to minimize the credit period so that it can get the money in short period
of time and this money can be used by organisation to meet its regular operational work.
Inventory : It is also known as stock which involves goods and raw material which is
hold by the organisation for the main purpose of resale so that profits can be earn. In the
warehouse of corporation it is stored.
Trade payables : It is shows as current liability in which organisation records the
amounts it owes to suppliers for products & services that it received on credit. In the liability side
of balance sheet it is recorded under the heading current liabilities. Formula to calculate Trade
payables are as follows :
Trade payable = Creditors + Trade payable
c. Changes in working capital affect cash flow
To run the business successfully working capital is needed and to perform regular
business activities cash is need and if it is manage effectively than organisation does not face the
problem of shortage of funds (Han and et. al, 2014).
The fluctuation in working capital are reflected in a organisation cash flow statement. As
an example, if a corporation received cash from short-term debt which is to be paid in 60 days,

there will be an increase in the cash flow statement. The working capital does not increase
because the proceeds from the loan would be a cash or current assets.
If an organisation buy a fixed assets such as plant & machinery the cash flow of
corporation can reduce. Working capital of an organisation would also reduce since the cash
portion of current assets would be minimize but there will be no change in the current liabilities
, the reason being it would be long term. If UberTools Ltd sells its fixed assets than working
capital & cash flow will be increase.
If a corporation buy stock in cash, in that situation working capital does not change
reason being cash & stock both are current assets. So cash flow can be minimize by the
purchasing of inventory. The debt of UberTools Ltd has increased to £350 million from £250
million the year before as a result it can influence the cash flow. So if working capital has
changed than it also affect the cash flow.
ii. Apply the concepts
There are various concepts which provide help to analysis of financial results and if they
are not followed than financial results of UberTools Ltd can affects. Concepts are described as
below :
Accrual concepts : The financial report of company are being prepared under accrual
concept of accounting which suggest that expenditures & income must recognised in accounting
periods to which they relate rather than on cash basis. According to this concept an income
should be recorded in that accounting period in which it is actually generated. The expenses are
recorded in that accounting period in which they are actually occurs. As an example, operating
profit which is earned by UberTools Ltd is £350 million which are recorded in the same year in
which it is earned (Friewald and Zechner, 2014).
Matching concept : As per this concept it is necessary that revenues & any related
expenditures can be recognised together in the same accounting period. The main aim of this
concept is to avoid misstating earnings during a particular period. If UberTools Ltd does not
recognise the income & expenses in same time duration than its financial results does not show
the true and fair information and data.

iii. Analyse and recommend what steps should now be taken to improve this company’s
cashflow through better Working Capital management
Capital management is an financial strategy that seeks to maintain equal level and sufficient level
of current assets, current liabilities and working capital. It helps to make sure that an organisation
always keeps enough cash flow to meet its short term debts and short term operating cost. In
order to understand the concept of capital management Uber Tools Ltd (UTL) has been taken. It
produce power tools in new market and wants to increase its turnover. This company focuses to
improve its cash flow through better working capital management by tracking accounts
receivable, clear and concise invoices and secure payment option. UTL analysis cash flow
through observation and examination of its cash inflows and outflows during a period. The
analysis starts with a beginning balance and generates an ending balance for all cash receipts and
expenses paid by the company.
Steps to improve cash flow and their recommendation
 Lease, Don't buy: Leasing process used to end up being more costly than buying. In
UTL there is need to pay small increments, which helps to improve cash flow. Lease
payments are the business expenses, so it can be written off.
 Improve inventory: This means to improve stock management system for getting good
result. In UTL managers need to sell all products instead of buying new products and
should also apply FIFO method to maintain inventory.
 Use electronic payments: It is a good option for any organisation that pay electronically.
A company can improve its cash flow by buying of time. In UTL, managers gives a
benefit to customers that they can use business credit card for grace period as long as 21
days.
 Pay supplier less: This means to maintain regular communication with suppliers,
friendly environment that helps to give a good chance at landing better deals with
customers. Such as , UTL offer creditors early payments if they are willing to give a
discount in return.
 Use up to date financial information: This means maintains financial statements and
current reports on a periodic basis. Many companies focuses to issue stock or purchase on
debt when organisation wants to run out of working capital. In UTL, managers prepare
financial and current reports on periodic basis to improve cash flow. They also identify

other ways to improve working capital such as earning higher profits, issuing company
stock and selling assets for cash.
PART B
a. Elements of financial performance
There are various elements of financial performance which are helpful for the UberTools
Ltd. It involves : assets, liabilities, equity, revenue, expenditures , gains, losses, etc. These
different elements are helpful to analyse the financial wealth of organisation and scope of
improvements in future.
Assets : It is the property of a business entity and organisation has legal rights & owned
to analyse the actual value of the assets. It is helpful to generates the revenue. The assets of
UberTools Ltd is increasing and in the year 2009 it is £518000. It reflects that financial
performance of company is good (Dunning, 2014).
Liabilities : It is the obligation of organisation to pay its debts and it is burden for the
company. Long term liabilities of UberTools Ltd is increasing year by year and in the year 2011
it is £360000 which is not good for the corporation and its profits can be decline because it have
to set off the liabilities as a result its financial performance can be hamper.
Equity : It represents the ownership interest in a firm in the form of stock and it is the
combination of owner's equity and liabilities. It is increasing which is good for UberTools Ltd
and it shows that financial performance of organisation is effective which is helpful to expand
the business.
Expenses : These are the gross outflows incurred by the business organisation for
generating revenue. It is charged to P&L account. The expenses of UberTools Ltd is increasing
form the year 2009 to 2011 which is not good for the organisation because it can minimize the
profits of corporation. As a result its financial performance can be affected.

b. Calculate ratios
Ratio Formula 2009 2010 2011
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/sharehold
ers Equity
25.98 20.74 7.55
Return on capital
employed ratio
net operating
profit/total asset –
28.8 47.86 101.95

current liabilities
c. Ratios might have changed using the information in the scenario
Sales Growth Ratio: Information in relation to sales are available in income statement
and from there it can be seen that sales are increasing year-by-year. Increase in sales growth ratio
is approx 6 percent in the year 2010 when compared with last year (Brown and Tarca, 2014).
Gross Profit Margin Ratio: Amount of profit from which operating expenses are not
deducted is termed as gross profit amount. Gross profit of Uber Tools LTD has declined in the
year 2011 and reason behind this is rise in the amount of cost of sales.
Operating Profit Margin: Operating profit is the amount that is earned by Uber Tools
LTD through its business operations. There is a tremendous fall can be seen in operating profits
of the year 2011 because rise in operating expenses and amount of depreciation charged in the
year.
Gearing Ratio: This ratio reflects amount of outside liability borrowed in comparison to
shareholders fund. For Uber Tools LTD it is continuously rising that reflects poor performance
of businesses as borrowing are increasing rapidly.
Interest Coverage Ratio: It is the amount earned by company in comparison to the
amount of interest expense of the same period. Earnings of Uber Tools LTD is declining and it is
reducing companies efficiency to cover interest expenses for the period through earnings.
Liquidity Ratio: It reflects the amount of current assets to cover current liability of Uber
Tools LTD. Liquid ratio of the company is declining and become 0.92 only. That reflects that
company will be unable to pay its current debts by selling of current assets.
Return on Equity: Amount of funds that is earned by shareholders by investing in Uber
Tools LTD as equity. Return on equity in the year has dropped to 7.55 from 25.98 in the year
2011. this shows that companies operations are no more effective to earn efficiently.
Return on Capital Employed: It is the amount of operating profits earned by Uber
Tools LTD by employing funds as capital in business operations. There is fall in this ratio from
(28.8) to (101.95). This is because of more borrowings from the market and amount of working
capital is reducing (Bischof and Sextroh, 2014).

ii. Analyse and recommend how the board might assess the financial performance of the business
From the above table, it has been analysed that UberTools Ltd face the financial issues in
the company because most of the ratios decreased in the year 2009 to 2011. Operating profit
ratio is decreased from 30% to 25.5% in the year 2009-10 and 25.5% to 10.67% in the year 2010
to 2011 due to increase in total revenue of the UberTools Ltd. Liquidity ratio firstly increase 2.24
to 2.37 in the year 2009 to 2010 and than decrease 2.37 to 0.92 in the year 2010-2011. This one
is the drastic fall in the liquidity ratio. It is happen due to increase in the current liability of
UberTools company (Dunning, 2014).
Recommendation
 UberTools can asses their financial performance through balance sheet which provide the
accurate and true position of the business. So it is recommended to the manager to
analyse company's performance by comparing their assets and liabilities of the company.
 Company also check their performance of business with the help of income statement
which shows the revenue and expenditure of the business. It helps them to identify the
area where manager is able to control the expenses.
 Ratio analysis also one of the criteria of assess financial performance of UberTools
company. Because it provides the proper comparison on ratios according to different time
period. It is help them to identify liquidity or profitability of the company (Barnes,
2016).

CONCLUSION
As from the above report, it has been analysed that it is essential for the business to
manage the finance so that it can take important decisions for the growth of organisation. To
manage the working capital and cash flow is necessary for the company as a result it does not
face the shortage of funds. With the help of ratio analysis efficiency, liquidity, profitability can
be analysed of a corporation.

REFERENCES
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Online
Accrual concepts. 2018. [Online]. Available through:
<https://accounting-simplified.com/financial-accounting/accounting-concepts-and-
principles/accrual-concept.html>