Financial Analysis and Management for Business Success

This assignment focuses on the importance of finance in business, highlighting its role in decision-making and driving success. It emphasizes the significance of working capital, cash flow, and ratio analysis in financial management, providing examples and references to support the discussion.

BUSINESS
FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
(a) Meaning of profit and cash flow and their difference.......................................................1
(b) Meaning of working capital, inventory, receivables and payables...................................2
(c) Changes in working capital affect cash flow....................................................................2
2. Apply the concepts to show the way of company to manage effect of financial result.....3
3. Analyse and recommendation to improve company's cash flow through better working
capital management................................................................................................................3
PART 2............................................................................................................................................4
(a) Elements of financial performance...................................................................................4
(b) Calculate the ratio for each year for this company...........................................................6
(c) Apply the result to consider the changes by using the information..................................6
2. Analyse and recommend to assess the financial performance of the business...................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business Finance refers to money and credit employed in business. It can include
acquisition and utilisation of funds so that business firms may be able to carry out their
operations in effective manner. There are including modernizing or diversifying operations and
expansion (Myran, 2013). The term of business finance includes the ways in which a company
accomplish and uses money according to business activities. In other way business finance is
about strategies for earnings, savings and investing revenue. Apart from it can contain financial
information and cover strategies for business in reference to leveraging future rather than to
present value. The present report covers various topics which are meaning of profit, cash flow,
working capital, receivables, inventories and payables. In hence changes in working capital
affect cash flow in the context of UberTools Ltd which owns and operates a factory in new
market to producing power. In addition, extract financial statement of Madagascar industries Ltd
which is in the business of producing jewellery.
PART 1
(a) Meaning of profit and cash flow and their difference
Profit – It is a financial benefit that is realized when amount of all costs are paid and
revenue remaining after all deduction that is profit. These costs include labour, materials, interest
on debt and taxes. To conduct business activity described profit to everyone with the help of
income statement.
Cash flow – It is the inflow and outflow of money in a business, institution or individual
account. In the financial terms, it is used to define the amount of cash that is operated in
particular time period. There are considering many activities which can use to running business
and show financial performance (Buckland and Davis, 2016) .
Difference between cash flow and profit
Cash Flow Profit
Cash flow represent money from several
sources
It is the money left over from sales revenue
once costs have been subtracted
To achieve net cash flow apply formula = cash
in flow – cash out flow
To gain net profit apply formula = Sales –
variable cost – fixed cost
1

It can affect to timing of payments into and out
of the firm.
It is calculated even before the money is
actually received.
Tax paid in instalments Tax based on profits
(b) Meaning of working capital, inventory, receivables and payables
Working Capital – It is basically an indicator of the short term financial position of an
organization and it will help to measure efficiency of overall company. Working capital
calculated when current assets less from current liabilities. The working capital of UberTools Ltd
in 2009 to 2011 respectively 36, 92 and (8). A positive working capital describe about a
company to able to pay off its short term liabilities almost immediately. Negative working
capital define a company is unable to do so (Yablonsky, 2014).
Inventory – It is the quantity of the goods available for sale and raw material used to
manufacturer good for sale. Inventory represents one of the most important assets of a business
because it is the primary resource of a company to generate earnings.
Accounts Receivable – It is the process of payment which the company will receive
from their customers who have purchased its goods & services on credit basis. Most of the
companies’ credit period set as short time such as 3 months, 6 months or in some cases may be a
year. When a company extend to credit time period so that time sale is completed when the
invoice is generated. As UberTools Ltd owned £12 million pounds for a series of large orders
placed by D&R last year.
Accounts Payable – It is a liability due to a particular creditor when it order goods or
services without paying in cash up front that means bought goods in credit. It is also known as
bills receivables. It is considered as a liability under the head of current liabilities. Accounts
payable is a short term debt payment which can paid by comp nay for neglect default.
(c) Changes in working capital affect cash flow
To survive the business in effective way there is needed to working capital perform on
daily basis of business activities. Working capital is the operating capital of a company which is
used in daily activities. The regular expenses of company affect the operating section of cash
flow and working capital invested affects investing section of cash flow statement (Khan, 2015).
Specifically, the operating cash flow section of the cash flow statement details change in its
shorter term working capital needs. For example, if a company received cash from short term
2

debt which is to be paid in 45 days there will be increase in the cash flow statement. But working
capital does not affect to transaction because of loan would be cash and record in current assets.
If an organisation sales short term investments so cash flow of corporation can reduce.
Working capital of an organisation can not affect because of cash portion of current assets
increase and short investment reduce in current assets so there is no affect coming in current
liabilities. If UberTools Ltd issue of share so it will affect to working capital and cash flow
statement as increasing way.
2. Apply the concepts to show the way of company to manage effect of financial result
There are several concepts which can related to accounting reports and helps to prepare
financial statement. These are analysing of financial result, if the company Uber Tools Ltd
cannot follow the concept so it affects to financial result. Concepts are described as below -
Going Concern concept – The going concern concept assumption refers that business
should be treated as if they will continue to operate indefinitely or at least long enough to
achieve their objectives. Working capital, current assets and inventories related to this concept
because it will continue in future to survive business. The company has managed these items in
effective manner because these are important to growth for the business and help to achieve good
financial result.
Full Disclosure Concept – This concept requires a business to report all necessary
information about their financial statements and other relevant information to any person who
are accustomed to reading particular information. According to this concept all financial
information disclose in front of shareholders to show financial performance of company. It will
help in decision making process such as profit, payables and liquidity. These are affect to
financial performance of a company in effective manner.
3. Analyse and recommendation to improve company's cash flow through better working capital
management
Capital management is an accounting strategy that attempt to manage adequate and equal
levels of working capital like current assets and current liabilities. It can help to company for
achieve it expenses induce while also maintaining sufficient cash flow and is primarily related to
short term financial decisions. In the subject to UberTools Ltd apply the concept of capital
management. The company generate power tools in new market and wants to increase its
turnover (Cassar, Ittner and Cavalluzzo, 2015). The company mainly focus to increase their cash
3

flow with the help of working capital management through trace all transaction of company.
UTL can observe all statements like cash flow statement in particular time period. The analysis
of cash flow starting from starting balances and examine at the ending for observe all cash
receipts and expenses.
Steps to improve cash flow and their recommendation
 Improve Inventory – It is a primary source of any company which can help to generate
profit. In UTL managers need to focus to sale old products instead of buy new products
and apply FIFO method.
 Pay Supplier less – For achieving better deals from customer, company has to contact to
customer on time to time and maintain relation. They are providing good environment to
their creditors. In the context of UTL, they provide many offers to take amount early
from their suppliers like discount offer, vouchers etc.
 Lease, Don't buy – The process of leasing is very costly for the company So UTL is
need to pay small increments which can help to improve cash flow system. It is a
business expenses so it is written off from incomes (Ashamu, 2014).
 Use electronic payments – It is using by company as good option to pay their client in
electronic form. It can help to improve cash flow by buying of time. In UTL, managers
can provide benefits to their customer regarding to business credit policy which can
define as grace period as long as 21 periods.
 Use up to date financial information – It means manage financial statements and
current reports on regular basis to track performance of a company. With the help of
these company focus on issue of stock or purchase on debt when organisation wants to
run out of working capital. In the context of UTL time to time update their financial
information which can help to improve cash flow and identify higher profits.
PART 2
(a) Elements of financial performance
There are several elements that are related to financial performance of company where
are including assets, liabilities, equity, income and expenses. These elements are helping to
evaluate the financial wealth of organisation and scope of improvements in future (Donovan,
2015).
4

Revenues – It is the amount of money that was received by company when all expenses
deducted from incomes in particular time period. Madagascar Industries Ltd from financial
statements of past three years refers that sale are important requirement to expand business year
by year. It can reflects on all business activities to perform in business and provide positive
outcomes.
Profit – It is a part of revenue which can earn by company after reduce amount of cost
incurred from revenues. There is identified that in the first year profit increase by £20 million
and it is continued in second year but in third year it is shattered.
Operational Efficiency – It is one of the key element that is used to measure financial
performance of Madagascar Industries Ltd. This helps in analysing how well a business can
manage their resources in financial terms where includes amount invested in business. It is not
operating its resources to its maximum as cost in last it has increased and that leads in reduction
of profits. Capital efficiency and solvency – It is the efficiency of the business organisation
to achieve their long term responsibilities. The company has operated their business in quite
solvent manner as amount of assets in business is more than liabilities and it can reflect to
company to pay their long term debts (de Almeida and Eid Jr, 2014).
Liquidity – It is presenting the degree to which assets or securities can be quickly bought
and sold in market without affecting price of assets. Madagascar Ltd s highly liquid as
availability of current assets is more in business. In last three years graph of current assets is
highly flexible and fluctuated.
Capital – It is the financial need of business to produce the goods or services it offers to
its customers. Capital is important to maintain for business to conduct their operations. In the
context of company it can not change in three years.
Shareholder fund – It is referred as shareholders equity and organisation's owners'
residual claim after debts have been paid. Madagascar Ltd can identify their their funds which
can reflect to return on equity. The fund amount has been flexible due to retained earnings and it
is increase in second year as compare to first year.
Current Liabilities – It is part of working capital and shows liquidity of a company in
specific manner. The current liabilities of a company increase in second year by 19 as compare
to first year. After than in 2011 is is continuously increasing.
5

(b) Calculate the ratio for each year for this company
Particulars 2009 2010 2011
Sales 360 396 459
Sales growth:
Sales Y2 - sales Y1)/sales Y1
- (396-
360/360)*100
10.00%
(459-
396/396)*100
15.91%
Gross Profit Margin:
Gross Profit/Sales (%)
230/360*100
63.89%
252/396*100
63.64%
272/459*100
59.26%
Operating Profit Margin:
Operating Profit/Sales (%)
108/360*100
30.00%
101/396*100
25.51%
49/459*100
10.68%
Gearing:
{Total Debt/Total Debt + Shareholder}
Funds (%)
215/
(215+304)*100
41.43%
300/
(300+347)*100
46.37%
462/
(462+344)*100
57.32%
Interest Cover:
Operating Profit/Finance Expense (x)
108/9
12
101/12
8.4167
49/16
3.0625
Liquidity Ratio:
Current Assets/Current Liabilities
65/29
2.2413793103
114/48
2.375
94/102
0.9215686275
Return on Equity:
[Net Profit/Shareholders Funds (%)]
79/304*100
25.99%
72/347*100
20.75%
26/344*100
7.56%
Return on Capital Employed:
[Operating Profit/Total Debt + S’holder
Funds (%)]
108/
(215+304)*100
20.81%
101/
(300+347)*100
15.61%
49/
(462+344)*100
6.08%
(c) Apply the result to consider the changes by using the information
Sales Growth Ratio – There are information related to sales which are available in
income statement and from there it can be seen that sales growth ratio increase by 6% in the year
2010 when compared with last year (Dixon, 2012).
6

Gross Profit Margin Ratio – Amount of profit which is gain after deduction all
operating expenses. Gross profit of Ubertools Ltd has declined in the year 2011 because of rise
amount cost of sales.
Operating Profit Margin – Operating profit is the price that is earned by UberTools Ltd
through business activities. There are analysing that operating profits is falling in 2011 due to
raise amount of operating profit and charged depreciation year on year.
Gearing Ratio – The particular ratio indicate that outside liability borrowed in
comparison to shareholder fund. According to the company UberTools Ltd can reduce their
interest expenses in order to cover efficiency in particular time period with the help of earnings.
Interest coverage ratio – It is the amount of which can earn by company in comparison
of the interest expenses in the same accounting period. There are earnings of UberTools 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
UberTools Ltd. Liquid ratio of the company is declining and become 0.92 only due to company
has unable to pay current debts by selling of current assets (Lagoarde-Segot, 2015).
Return on Equity – There are amount earning by shareholder by investing activities in
UberTools 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 – The particular amount related to gross profit which can
earn by UberTools Ltd by employing funds as capital in business activities. There are reducing
ration for as 28.8 to 101.95 due to decrease working capital as effect market activities.
2. Analyse and recommend to assess the financial performance of the business
From the above table, it has been determined that UberTools Ltd face the financial
problems in an organisation in order to know performance in the year 2009 to 2011. Liquidity
ratio firstly increase 2.24 to 2.37 in the year 2009 to 2010 and then decrease 2.37 to 0.92 in the
year 2010-2011. It is happening due to increase in the current liability of UberTools company.
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.
Recommendation
7

 To determine the performance of a company, prepare balance sheet in accurate and true
position which can presents total assets and total liabilities of a company. There are
recommended to the manager up to date information in financial statements to know
actual performance of a business through assets and liabilities (Appleyard, 2013).
 The income statement of a company to help to know net profit and operating profit which
can help to expand business in effective manner. It can help to manager where is need to
manage all expenses and control extra activities.
 The ratio analysis important part to analysis financial performance of UberTools Ltd.
With the help of this analysis comparing performance from last year and know efficiency,
liquidity and profitability.
CONCLUSION
From the above discussion it has been concluded that finance is essential part of any
business which can help to decision making process and provide success for long time. The
working capital important for business and changes in affect to cash flow in direct and indirect
manner. With the help of ratio analysis know efficiency, liquidity and profitability of a company.
8

REFERENCES
Books and Journals
Myran, G., 2013. The new community college business and finance model. New Directions for
Community Colleges. 2013(162). pp.93-104.
Buckland, R. and Davis, E. W., 2016. Finance for growing enterprises. Routledge.
Yablonsky, S. A., 2014. E-finance innovation services in Russia. International Journal of
Business Innovation and Research. 8(5). pp.523-551.
Khan, S., 2015. Impact of sources of finance on the growth of SMEs: evidence from
Pakistan. Decision. 42(1). pp.3-10.
Cassar, G., Ittner, C. D. and Cavalluzzo, K. S., 2015. Alternative information sources and
information asymmetry reduction: Evidence from small business debt. Journal of
Accounting and Economics. 59(2-3). pp.242-263.
Ashamu, S. O., 2014. The impact of micro-finance on small scale business in Nigeria. Journal of
Policy and development studies. 289(1849). pp.1-15.
Donovan, C. W., 2015. Renewable energy finance: powering the future. World Scientific
Publishing Co. Pte. Ltd..
Dixon, A. D., 2012. Function before form: macro-institutional comparison and the geography of
finance. Journal of Economic Geography, 12(3), pp.579-600.
Lagoarde-Segot, T., 2015. Diversifying finance research: From financialization to
sustainability. International Review of Financial Analysis. 39. pp.1-6.
Appleyard, L., 2013. The geographies of access to enterprise finance: the case of the West
Midlands, UK. Regional Studies. 47(6). pp.868-879.
de Almeida, J. R. and Eid Jr, W., 2014. Access to finance, working capital management and
company value: Evidences from Brazilian companies listed on
BM&FBOVESPA. Journal of Business Research. 67(5). pp.924-934.
Online
Accrual Concept. 2017. [Online]. Available through:
<https://accounting-simplified.com/financial-accounting/accounting-concepts-and-
principles/accrual-concept.html>
9