Business Finance Report: Analyzing Financial Performance and Cash Flow

This report provides an in-depth analysis of business finance, focusing on the concepts of profit, cash flow, and working capital. It explores the differences between profit and cash flow, the components of working capital (receivables, inventory, and payables), and how changes in working capital impact cash flow. The report uses Uber Tools (UTL) as a case study, examining how accounting concepts like accrual and full disclosure affect financial results. It further discusses strategies to improve cash flow through effective working capital management, including pricing strategies, leasing options, supplier relationships, credit checks, invoice management, electronic payment systems, and inventory optimization. The second part of the report delves into financial performance, defining key elements such as assets, liabilities, equity, expenses, and revenues. It also includes the calculation and interpretation of financial ratios like sales growth, gross profit margin, and operating income, offering recommendations for assessing the financial performance of a business. The report concludes by summarizing the key findings and recommendations for financial management.

Business
Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
a. Meaning of profit and cash flow .............................................................................................1
b. Meaning of working capital, receivable, inventory and payables...........................................1
c. Changes in working capital that affect cash flow....................................................................2
2. Company may affect financial results .....................................................................................2
3. Improvement in cash flow through management of working capital......................................3
PART 2............................................................................................................................................4
1. (a) Elements of financial performance ....................................................................................4
b. Calculation of ratio for each year ............................................................................................5
c. Result to consider why ratio may change information ...........................................................6
2. Analyse and recommendation that helps to assess the financial performance of business.....7
CONCLUSION................................................................................................................................7
REFERENCE...................................................................................................................................9

INTRODUCTION
Finance is first need of every organisation that helps to run a business effectively and
maintain profit margin. Business finance contains acquisition and utilization of funds so business
enterprise carry out their operation function efficiently. A businessman need to raise funds in
order to run growth of business (Belás and et.al., 2015). The main purpose of this report is to
understand the importance of business finance and how to increase it. To understand the concept
of business finance Uber tools has been taken that is UK based company and manufacture power
tools. This report will focus on different topics such as difference between profit and cash flow,
working capital, meaning of receivable, inventory and payables that will helps to show
profitability situation of UTL. Moreover, this report will define how working capital affect cash
flow if any changes arises, various ratio like sales growth, liquidity, gross profit, gearing, interest
coverage and return on equity that helps to describe financial performance of companies.
PART 1
1. (a) Meaning of profit and cash flow
Profit means net income that is calculate after ducting all expenses and taxes. Cash flow
means net amount that includes cash and cash equivalents amount which is transferred in to and
out of a business. In additional, cash flow is the gettable amount in a business at a certain period
of time as a result outflow and inflow of money that can be control by investing.
Profit contains net income after deducting interest and tax amount where as cash flow is
the collection of operating, investing and financing activity. In any organisation availability of
funds may make or break an enterprise and cash flow determines the viability.
(b). Meaning of working capital, receivable, inventory and payables
Working capital is required amount in any industry that is the difference between
company's current assets and current liabilities. Current assets means assets that can be converted
in cash within a year easily such as cash, debtor, bank, account receivable etc. and current
liabilities means need to pay within a year like as creditors or payables (Buckland and Davis,
2016).
Receivable is also known as account receivable, is balance of pending amount to a firm
or company for delivering goods and services but not receive payment through customers. Said
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other way, account receivable are sum of money owned by consumer to another entity for selling
goods and services on credit.
Inventory is an accounting term that means goods or stock are being get ready for selling
on an enterprise such as finished goods. It involves raw material ( used to manufacture goods),
work in progress (process being made) and finished good ( ready for sale).
Payables refers money owned to employees, creditors, government or lenders represent
as a liability in financial statement. If these liability are pending within twelve months, it will be
shown as short term liability.
(c). Changes in working capital that affect cash flow
Every organisation prepare financial statement and cash flow statement which shows
company's financial position by including inflow and outflow. Any business is depend on its
working capital that is variation between current assets and current liabilities which impact on
cash flow statement. Changes in working capital affect cash flow such as if firm increase amount
of current assets, cash flow from operation activity will decrease. If assets amount decrease or
reduce, cash flow from operating activity will decrease. For instance, if UTL purchase fixed
assets then current assets will increase and cash flow will also impact. If currents assets sold by
manager then currents assets will decrease but cash will increase and cash flow will be of same
amount (Cassar, Ittner and Cavalluzzo, 2015).
2. Company may affect financial results
Accounting concept are the important rules and regulation to that deals with monetary
value's items that can be attributed. In Uber tools manager follows accrual and full discloser,
matching and accrual concept that helps to run a business such as :
Accrual concept: This concept states expenses and revenues, that is not recorded yet in
company's balance sheet. According to accrual concept an enterprise should record all expenses
and incomes at the time of incurred which is not mentioned in financial statement. Manager of
UTL company prepare financial statement and shows revenues and expenses, based on accrual
accounting such as interest expenses, payables and account receivables.
Full discloser concept: This means a firm should disclose all information that relates to
business. UTL use this concept and prepare financial statements by disclosing all financial
information that helps to increase profits. Such as the operating profit of UTL was £ 36 million
in last year before interest and tax by using accounting concepts.
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Matching concept: This is a core concept of accounting that means expenses of any
enterprises should be matched with its income or revenue which incurred from expenses.
Moreover, it states debit and credit side of accounts should be equal while maintaining accounts.
UTL apply this concept and record all transaction such as income and expenses of enterprise
(Cole and Sokolyk, 2016).
Accounting concepts are the essential part of any firm that helps to improve financial
results by maintaining proper records of accounts and transaction. Manager of UTL shows bad
debt that was increased £ 350 million from £ 250 million that year before that affect company's
financial results and position by using concepts.
3. Improvement in cash flow through management of working capital
The management of working capital assures that an organisation is able to make and
continue its operation function and it has ability to give satisfaction to both short term debt and
further incurring operational expenses. It considers managing stock, cash, account receivable and
payable. In UTL manager focuses on management of working capital that helps to increase in
cash flow by recording all current assets and liabilities.
Steps to improve cash flow and their recommendation
Increase price policy: Every enterprises can increase cash flow by selling number of
products at increasing price. Increasing prices will impact on UTL's profits and and financial
position because if price will be high then inflow will be generate (Cumming, Hou and Lee,
2016).
Lease, no need to buy: Since leasing is more costly than buying and there is need to pay
attention to bottom line that expenses are paid off or not, by maintaining incomes and expenses.
But by leasing there is a benefit that can pay in small instalment which helps to improve cash
flow. Manager of UTL also can use to establish new market of power tools at new place that will
help to increase the cash flow by investing in small increments.
From a buying cooperative: This means a company should use proper mind that will
help to increase cash flow such as need to purchase at low price with suppliers and maintain
relationship in order to getting discount (Moisseron, Moschetto and Teulon, 2015).
Conduct credit check on customers: This means an organisation should issue credit
check instead of cash payment if customer wants. For example, if customer has not sufficient
amount to pay then supplier should issue credit check that will help to receive payment on time
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and increase customer loyalty. Manager of UTL can issue credit check as demand of customer
that will helps to increase inflow.
Send invoices out immediately: This means a supplier should send invoices at the time
of purchasing product and services that will helps to see receivables as soon as possible.
Follow electronic payment system: At present technologies are changing rapidly that
help to make profitable and product able organisation. By using new technique Manager of UTL
can increase cash flow through electronic payment system such as business credit card that give
a grace period as long as 21 day to pay.
Improve inventory: Every organisation should check stock time to time and should
focus what need to sell first instead of buying more material. For improving the inventory should
sell old stock which is in godown either discount or cost price. UTL should used FIFO method in
order to improve inventory that will be beneficial to improve cash flow (Djennas, 2016).
It has been recommended that if UTL adopt above mentioned all steps then can get
improvement in cash flow. It need to manage working capital in efficient manner and need to
keep records of all transaction such as increase and decrease in current assets or liabilities and
will helps to understand finance requirement and maintain cash flow.
PART 2
1. (a) Elements of financial performance
Financial performance is the ending result of any organisation that helps to measure how
well an enterprise could use assets in order to increase profits of company. Every firm prepares
financial statements end of the year with the help of financial information such as investors,
creditors that helps to analyse and evaluate financial performance (Gilje, 2017).In any
organisation manager make financial statement that shows financial position and future
expectation of company. It involves various elements to describe the financial performance like
as-
Assets: This involves wealth or legal right owned by business concern person at
monetary value to run a business. In another said, it is an item that is purchased by paying money
and expected to give benefits in future. It can be divide in to tangible, intangible, fixed and
current assets.
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Liabilities: It is a obligation on any enterprise originated from past events that needs to
be pay as result outflow increases. Additional, liabilities are the amount paid by the businessman
to the creditors or outsiders. It can be classified in to current and non current liabilities.
Equity: This represent interest of owners in an organisation in form of stock or shares.
Basically equity is the differencing amount of value of assets and cost of liabilities. It is owned
by owner of the firm that helps to show the profit margin (Hanssens, Deloof and Vanacker,
2016).
Expenses: This is gross outflow which is arises by business corporation for generating
incomes and revenues. It shows in profit and loss account.
Revenues: It is gross inflow of assets that helps to increase owner's equity and maintain
profitability. For example, exchange of goods and services for money consideration that
maintains revenues.
Distribution to owners: This states decrease in equity that results from transfer to
business concern person. It defines the withdrawal amount through owners and reduce the
ownership interest. Such as cash dividend paid by a company to its shareholders (Julien, 2018).
Investments by owners: This means owner of any enterprise invest money in business in
order to get better returns. Moreover, it is contribution amount by owner to make profits and
growth of industry. For instance, issue of ownership shares of stock by a corporation for cash
amount.
b. Calculation of ratio for each year
Ratio is the relation between two numbers or groups that helps to describe how much
bigger first is comparison to other number (Vismara and Benaroio, 2017). In additional, it is the
comparison between two numbers that shows liquidity, profitability, solvency and operational
efficiency ratio.
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
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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/shareholders
Equity
25.98 20.74 7.55
Return on capital
employed ratio
net operating profit/total
asset – current liabilities
28.8 47.86 101.95
c. Result to consider why ratio may change information
Financial ratio is a relative property of two selected numerical values that is arises from
enterprise's financial statements. In additional, it shows the profitability and liquidity situation of
enterprises that helps to maintain business activities (Longin, 2016). It impacts on business
organisation such as-
Sales growth: This means increasing in sales over a fixed period of time that helps to
increase in profits. For instance, supplier who invest money to manufacture product and services
in order to know the demand for a company's product and services for future sale. In above
example sale growth present increased 5.90 percent than past year.
Gross profit: It shows relationship between net sale revenue and gross profit that helps
to evaluate the operational performance of business enterprise. In above example gross profit
was decreasing by 4.63 percent in 2011 because expenses are more than incomes.
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Operating profit margin: This is used to calculate a profit percent that is manufactured
by a company from its operations after deducting interest and tax charges. In above example
operating profit decreasing 4.38 percent from 2010 to 2011.
Gearing: It defines relative proportion of equity and debt that helps to support company's
operations. Such as in above calculation gearing ration increased 42.78 present from 2010 to
2011, and 10 present increased from 2009 to 2010.
Interest cover: This is also known as debt ratio that define paying interest amount on its
outstanding amount. In above example Interest cover ratio increase 5.35 present in 2011 than
2010.
Liquidity ratio: It shows corporation's current assets would be sufficient to meet with
organisation's obligation when they become due. In above example liquidity ratio decreased 1.45
percent in 2011 that shows company's pay ability.
Return on equity: It is measurement of profitability of business that relates to equity. It
helps to show return on investment by an investors and profitability situation. In previous
example ROE ratio decreased by 13.19 present that means less profit margin than past years.
Return on capital employed: This helps to measure how efficiently a enterprise used its
capital in order to increase profitability. In previous example ROCE increased continuously such
as in 2010 ROCE increased 19.06 present than 2009 and in 2011 it increased 54.09 present that
helps to increase profitability.
2. Analyse and recommendation that helps to assess the financial performance of business
Financial performance of any organisation is depend on financial statement and business
performance. It can be improve by maintaining day to day transactions and records. For making
profitability corporation it need to compare with past performance that helps to give ideas and
suggestion where investments needed (Tuyon and Ahmad, 2016). Each company should prepare
financial statements such as trading account, profit and loss account, cash flow and balance sheet
with the help of financial data and recording transaction. By preparing cash flow statements an
organisation can get ideas about company's profitability position and can take further steps to
improve this in order to make profits.
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CONCLUSION
Finance is the lifeblood of any organisation and business that helps to run a business at
market place by controlling cost and expenses. Moreover, Finance is the core of any business
and organisation that is used to grow a business activities by purchasing and selling product and
services. It make easy to understand need of business and take further steps to run an industry. It
is mandatory for each organisation to adopt accounting concept and principles that helps to take
effective business decision. This report covered various ratios that shows company's profitability
situation that helps to show financial performance.
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REFERENCE
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