Business Finance Module

This assignment explores the concepts of profit, cash flow, and working capital management, analyzing the financial performance of Uber Tools plc through various ratios and providing recommendations for improvement.

Business Finance
Module

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1. A) Explaining meaning of Profit and cash flow and their differences....................................1
1. B) Explaining meaning of working capital, receivables, inventory and payables..................2
1.C) Explaining the effect of working capital over cash flows...................................................2
2. Explaining the impact of financial results of the company over managerial activities..........3
3. Analysing and recommending steps to be taken to improve the cash flow through working
capital management.....................................................................................................................4
PART B............................................................................................................................................4
1. A) Explaining elements of the financial performance............................................................4
1. B) Calculating financial ratios of Uber tools plc....................................................................5
1.C) Analysing financial ratios of Uber tools plc.......................................................................6
2. Analysis and recommendation to assess the financial performance of business....................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business is an enterprise which engage in commercial business and professional business.
Business concerned with buying and selling of goods and services which helps to generating
profit. It includes production and exchanging the goods and services like transport business ,
insurance, banking etc. Business is important to create employment, provide innovative product
to customers which is use to expand market and improve standard of living by fulfil customers
needs and wants that helps to increase profitability and sustainable growth of the company.
Present report based on Uber tool ltd which is managed by Omar , the grandson of owner.
Uber tool operate a factory which producing power of tool . This report explain about the cash
flow and profit and its differentiation. It also defines receivable , inventory and payable of
working capital and changes in working capital affect to cash flow. Further , management of
working capital impact on financial result and its analysis and recommendation. this report
shows elements of financial performance and various ratio analysis and its recommendation to
assess the financial performance.
PART 1
1. A) Explaining meaning of Profit and cash flow and their differences.
Profit
Profit can be defined as the surplus amount remained with the company after adjustment
of all the costs and debts of the company from its total earnings during a specific time period. In
simple words, profit refers to the financial gain of the company after making deduction of all the
costs incurred by the business for doing its normal course of operations (Post and Byron, 2015).
Cash flow
The term cash flow refers to the cash or cash equivalent used or received by the business
while performing its business activities. The net amount of cash flow shows the liquidity of the
business organisation. Further, the cash flow of the company shows the amount and areas where
the company has spent or earned the cash or cash equivalent.
Difference between profit and cash flow
Basis Profit Cash flow
Meaning It refers to the net of total revenues
and total expenses.
On the other hand, the cash flow
refers to inflow and outflow of
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cash and cash equivalent in the
business.
Consideration While calculating the profit, each
operating income and expenses are
taken into consideration.
For the purpose of calculating
cash flows, only those transactions
are taken into account that
involves flow of cash or cash
equivalents (The Critical
Difference Between Profit and
Cash Flow. 2018).
1. B) Explaining meaning of working capital, receivables, inventory and payables.
Working capital:
The working capital of the Uber tools plc can be defined as the amount of capital that is
being used by the company in its normal course of business activities (Lewellen and Lewellen,
2016). In other words., the working capital shows the liquidity of the business organisation.
Receivables:
Receivables can be defined as the amount which is yet to be received by the business for
against which the company has performed its part of performance. Receivables are the part of
current assets of a business organisation.
Inventory
Inventories are the sum of stock held by the business that is going to be used by it for the
purpose of further sales or for using it in the production process. The inventory are also
considered as a part of current assets as these are not being held by the organisation for the long
time.
Payables
The term payables is the antonym of the receivables. It refers to the amount due to the
business against which the consideration has been taken by the business. On the other hands,
payables refers to the amount due to the company against which assets, furniture, plant or any
other thing has been obtained by the firm.
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1.C) Explaining the effect of working capital over cash flows
Working capital is taken into consideration as an operating activity in the cash flow
statement. Working capital shows net amount of current assets and current liabilities. If the
working capital of the company enhances, it would result in providing more positive cash flow of
the company. on this other hand, if the amount of current assets reduces over the cuurent
liabilities, it would result in reducing the Woking capital. it may lead in reduction in the
positivity of the cash flow. Even it can also result in gaining negative results from the cash flow
statement.
For example, in case, the company purchases any furniture for the company. It would
lead in reducing the working capital of the business due to decrease in cash. Further, it would
also result in effecting the cash flow statement of the business due to the outflow of cash.
In this regard, it can be analysed that the change in working capital directly effects the
cash flow of business.
2. Explaining the impact of financial results of the company over managerial activities
The main objective of the management of Uber tools Ltd. is to enhance the capability and
profitability of the business and help it to achieve its business objectives as well (Mathuva,
2015). The financial activity can be taken as the major basis of determining the efficiency of the
organisation, as the major objective any company is to achieve its major objectives i.e. profit
maximisation.
The financial results include the net profit, cash flow, efficiency variance, etc. All these
elements reflect the financial performance of the business organisation. Further, the these results
impacts the managerial functions like strategy development, decision making, etc. In order to
develop the most effective strategy, the company needs analyse the all the financial results as all
the decisions of the managers depends upon the actual performance of the Uber Tools ltd.
For example, In case the cash flow of the Uber Tools ltd. Reduced as compare to the
past year, the managers needs to develop their strategies as to enhance the liquidity in the
business so that the sufficiency of the cash and cash equivalent could be maintained by the
business.
In this regard it can be analysed that the financial results of the Uber tools ltd. Effects the
managerial functions as they need to develop their strategies for the purpose of enhancing the
financial performance and capability of the business.
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3. Analysing and recommending steps to be taken to improve the cash flow through working
capital management
Working capital management can be defined as a function of management through in
which the company analyses the liquidity of the business and prepares the strategies and plan as
to enhance the working capital condition of the business.
The cash flow statement highly depends upon the working capital of the company. Due to
inclusion of cash and cash equivalents in the calculation of working capital, the change in
working capital can directly change the condition of the cash flow (What changes in working
capital impact cash flow?, 2019). In this regard, the Uber tools Ltd. can improve the cash flow of
the business by improving its working capital management as under:
Recommendation
Managers of Uber tools Ltd. can develop effective strategies for buying or selling the
assets, stock and other operating items in such a way so that its cash and cash equivalents do not
get much effected by the purchase or sale. Further, with the help of developing policies and
procedure as to enhance the cost control system within the company, they can improve the cash
flow of firm,
Further, managers can develop the plan to invest its working capital in the most profut
generating investment. It would result gaining the fix sum in specific time which would help the
Uber tools ltd. in improving the cash flow. Moreover, for the purpose of determining the
stakeholders value of the Uber tools Ltd., the return on equity can be calculated by the business
by determining its profit and shareholders fund from the balance sheet of the company.
In this regard, it can be recommended to the Uber tools Ltd, financial ratios are the key
elements of determining the financial performance of the business. if the company wants to
improve its cash flow it can improve the policies and procedures of the working capital
management.
PART B
1. A) Explaining elements of the financial performance
Financial ratios like current ratio, operating ratio, sales growth, gearing ratios are the
major elements of determining the financial performance of the company. Information about
these elements can be gathered from various financial reports like, Income statement, balance
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sheet, cash flow statements, etc. that can help in the analyse of the financial performance of the
company.
For example, by analysing the amount of current assets and current liability from the
balance sheet, the current ratio can be determined. It can help in determining the liquidity of the
business. In addition, by taking information about the sales from the income statement, the
company can determine the sales growth of the business.
Further, by taking information about the operating profit of the business and its sales, the
operating profit margin of the business can be determined. It can help in determining the
efficiency of firm in performing the operating activities.
In this regard, it cam be analysed that the elements with the help of which the company
can analyse the financial performance of the business.
1. B) Calculating financial ratios of Uber tools plc
Required informations
Particulars 20x9 20x0 20x1
Sales 360 396 459
Gross profit 230 252 272
profit from operations 108 101 49
Total debts (short term + total
trade payables + total interest
payables) 21 26 73
Shareholders funds 304 347 344
Financial expenses 9 12 16
Current assets 65 114 94
Current liability 29 48 102
Net profit 79 72 26
Calculation of financial ratios
Particulars Formulae 20x9 20x0 20x1
Sales growth Sales of y2 – sales of y1/ - 395 458
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sales of y1
Gross profit margin
ratio Gross profit/sales *100 63.88% 63.63% 59.25%
Operating profit margin
ratio
Operating profit/ sales *
100 30.00% 25.50% 10.67%
Gearing ratio
Total debt/total debts +
shareholders funds *
100 6.90% 7.49% 21.22%
Interest cover ratio
Operating profit/
financial expenses 12 21 17
Liquidity ratio
Current assets/ current
liabilities 2.24 2.375 0.92
Return on equity
Net profit/ shareholders
funds 307.76 349.76 344.35
Return on capital
employed
Operating profit/ total
debts + shareholders
funds 309.14 350.88 347.72
1.C) Analysing financial ratios of Uber tools plc
Sales growth- From the above calculation Uber's sales growth have increasing trend
because sales are grown year by year. Company consider first year as a base for further
calculation of sales growth so In 2017 growth of sales was 395.company provide quality goods
and services so in 2018 the sales growth increased that was 458.
Gross profit margin - uber sales growth increased but gross profit margin has
decreasing trend. In 2016 the gross profit margin ratio was 63.88% but company not able to
manage cost of good sold and direct cost that impact on this ratio . In 2018 gross margin ratio
was 59.25% that impact on net profit and financial position of the company.
Operating profit margin- In 2016 the operating profit margin ratio was 30% but it was
decreased because manager not manage all operating and non operating expenses. In 2018 the
ratio was decreased that was 10.67% but company can improve ratio by reducing operating cost.
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Gearing ratio - This ratio have increasing trend that represent that reprent the high risk
of the company. In 2016 the gearing ratio was 6.90% then company's borrowing fund increased
that was 7.49% in 2017 and 21.22% in 2018 that give negative impact on shareholders because
high ratio shows high portion of debt to equity.
Interest cover - Uber's interest coverage ratio have fluctuation trend in 2016 the ratio
was 12 % but in 2017 the interest coverage ratio was 21% that represent that high debt burden on
the company that shows bad impression to public but after 2017 they reduce the borrowing
amount so 17% in 2018.
Liquidity ratio - this ratio have decreasing trend that shows negative liquidity position .
In 2016 the liquidity ratio was 2.4 that depict good situation because company manage all current
assets. In 2018 liquidity ratio was decreased by 0.92 On that time company didn't take sufficient
liquidity to pay short term obligation of the company.
Return on equity- Uber tool ltd company provide attractive return on equity return on
equity have increasing trend. In 2016 the ratio was 307 after that it was increased year by year. in
2018 ratio enhancing by 344.35 because company provide quality services to customers that
would helps to increase image and share price.
Return of capital employed- High return on capital employed shows high efficiency
and manage operation. Uber's return on capital employed have increasing trend . In 2016 the
return was 309.14% but it would increase in 2018 that was 347.72 % that represent the positive
impact on business activity.
2. Analysis and recommendation to assess the financial performance of business
Analysis
From the above analysis the sales growth of the company increased over the year because
Uber provide quality services to customer. Company's increasing return on equity and return on
capital employed helps to build image and increase shareholders value of the
company .Company doesn't manage their leverages and expenses that impact on profitability
ratios and gearing ratios (Friederich and Payne, 2015).
Recommendation-
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 Manager of the Uber company must prepare effective strategies which use to provide
quality goods and services that helps to increase profitability by increase sales of the
company.
 Uber company should manage sufficient liquidity that helps to meet out the obligation of
the company which helps to reduce debt and build image in the market (Sari and et. al.,
2018).
 They should formulate policies which used to build reputation which is required to
increase return on equity ratio that helps to increase shareholders value.
 Finance manager of the Uber should formulate effective strategies for reducing the
operating cost and non operating cost which helps to providing goods and services to
customer at the lower cost which leads to increase profitability and assess financial
performance.
CONCLUSION
From the analysis of above study, it can be concluded that with the help of maintaining
effective management of the financial activities the Uber tools Ltd. can achieve its business
objectives. Both profit and cash flow differs from each other. Working capital, trade receivables,
inventories, etc. are some major elements of the financial system of the company. The study has
also concluded that the Uber tools Ltd. can improve its cash flow with the help of improving its
working capital management. further, financial ratios helps the managers in determining the
financial performance of the company on the basis of which they can develop their effective
strategies and plans for the business. Further, the effective management of overall business
activities is important to enhance the profitability, capability and marketability of the company.
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REFERENCES
Books and Journals
Friederich, S. and Payne, R., 2015. Order-to-trade ratios and market liquidity. Journal of
Banking & Finance. 50. pp.214-223.
Goldmann, K., 2017. Financial liquidity and profitability management in practice of polish
business. In Financial Environment and Business Development (pp. 103-112). Springer,
Cham.
Lewellen, J. and Lewellen, K., 2016. Investment and cash flow: New evidence. Journal of
Financial and Quantitative Analysis. 51(4). pp.1135-1164.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Post, C. and Byron, K., 2015. Women on boards and firm financial performance: A meta-
analysis. Academy of Management Journal. 58(5). pp.1546-1571.
Pražák, T. and Stavárek, D., 2018. Importance of financial ratios for predicting stock price
trends: evidence from the Visegrad Group. International Journal of Trade and Global
Markets. 11(4). pp.293-305.
Sari, R.K. and et. al., 2018, August. The Effect of Liquidity Ratio, Profitability Ratio, Company
Size, and Leverage on Bond Rating in Construction and Real Estate Company.
In PROCEEDING ICTESS (Internasional Conference on Technology, Education and
Social Sciences).
Online
What changes in working capital impact cash flow?. 2019. [Online]. Available through
<https://www.investopedia.com/ask/answers/071114/how-do-changes-working-capital-
affect-companys-cash-flow.asp>.
The Critical Difference Between Profit and Cash Flow. 2018. [Online]. Available through
<https://quickbooks.intuit.com/r/cash-flow/critical-difference-profit-cash-flow/>.
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