MOD003319 Business Finance

Business Finance
MOD003319
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Contents
Part 1: Management of cash............................................................................................................3
Executive Summary.....................................................................................................................3
Section (i).........................................................................................................................................3
A: Meaning of Profit and Cash Flow and their Difference..........................................................3
B: Meaning of Working Capital and, Receivables, Inventory and Payables...............................3
C: Impact of Changes in Working Capital on the Cash flow.......................................................4
Section (ii).......................................................................................................................................4
Section (iii)......................................................................................................................................5
Part 2: Financial Ratio Analysis......................................................................................................7
Executive Summary.........................................................................................................................7
(i): Analysis and Calculation of Financial Ratios............................................................................7
(ii): Analysis and recommendation through which bank can assess the financial performance of
the business....................................................................................................................................11
References......................................................................................................................................12
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Part 1: Management of cash
Executive Summary
This report is developed for the shareholders of the MGD Company, involved in
production of luxury garden furniture for the clients that are larger retailers in the UK and EU. In
this context, this report aims to analyze and examine the working capital issue that is faced by
the company at present as depicted in the case study.
Section (i)
A: Meaning of Profit and Cash Flow and their Difference
Profit and cash flow are regarded to be very important parameters for running a business
and thus it is very essential for them to be regularly viewed and monitored. Cash flow can be
regarded as the money that flows in and out of the business resulting from its operational,
financial and investing activities. The businesses need to maintain an adequate flow of cash for
meeting its financial obligations that can become due within a short period of time. The profit of
a business refers to the difference present between the gross incomes by deduction of business
expenses for a specified period of time. Thus, there exists a significant difference between the
profits and cash flows as the concept of profit can be regarded as limited as it helps in
determination of any income and expenses realized by a business at a certain point of time. On
the other hand, cash flow concept is more dynamic as it is more helpful in depicting the business
reality. This is because a company can have positive cash flow despite having no profits if the
cash realized comes from other source of income. Similarly, it can negative cash flows despite
having larger profits if the cash is invested in other business activities such as meeting expenses.
The businesses in order to promote its growth over long-term aims to achieve sustained
profitability while the presence of sufficient cash balance is required for carrying out daily
operational activities of a firm (Watson (2), 2016).
B: Meaning of Working Capital and, Receivables, Inventory and Payables
Working capital is regarded as a major indicator of the overall liquidity, efficiency and
overall financial health of a company. This is because it reflects accurately the difference
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between the current assets such as cash, accounts receivables and inventories and the current
liabilities such as accounts payable of a company. As such, it can be regarded as a major
indicator of the operational efficiency and short-term financial health of a company. It is required
that businesses need to have an adequate working capital as low level can results in negatively
impacting the growth potential of the company. However, the overinvestment in working capital
can also result in destruction of value for shareholders as it required additional funds that can
lead to rise within the financing and opportunity costs. Accounts receivables can be regarded as
the amount to be collected by a company on the goods and services sold on credit to the
customer. On the other hand, accounts payable is the amount that is owned by a company on the
purchase of goods or services on credit from supplier. Inventory can be regarded as the term that
is used for the goods that are in various stages of production or are ready to be sold that includes
finished goods, work-in-progress and raw materials (Atrill (1), 2014).
C: Impact of Changes in Working Capital on the Cash flow
The impact of working capital changes are adequately reflected within the cash flow
statement of a firm. The positive working capital depicts the inflow of cash for a specific period
of time under the measurement. However, on the other hand, a negative working capital reflects
the outflow of cash which means that there are more outflows of cash in comparison to the cash
inflow that can occur due to purchase of products and services from the suppliers. The changes
occurring within the working capital are depicted within its cash flow statement. The cash
transaction that leads to an increase within the current assets and liabilities by the same amount
would result in having no change within the working capital. For example, if a firm realizes cash
from short-term debt that is to be repaid within a period of 60 days then it would result in
increasing the amount of cash inflows but will not have any impact on the working capital as it
will also have an increase in the current liability. However, if it acquires fixed assets such as
building then it would result in decreasing in the cash flow as well as working capital.
Section (ii)
After applying the concepts of working capital management in case of Modern Garden
Designs Ltd (“MGD”) it can be said that company has failed to manage its working capital
practices effectively. The two major issues that were noticed in case of MGD was poor inventory
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