Business Finance: Analysis of UTL and Madagascar Industries Financials

This report provides a comprehensive analysis of business finance, focusing on cash flow, profit, and working capital management. It begins with an examination of the differences between profit and cash flow, the role of working capital, and its impact on cash flows, using Uber Tools Ltd (UTL) as a case study. The report then applies these concepts to UTL, analyzing its financial performance and offering recommendations to improve its financial position, particularly focusing on managing expenses and improving cash flow. Part 2 shifts focus to Madagascar Industries Ltd, exploring elements of financial performance like revenues, profits, and operational efficiency. The report calculates and interprets financial ratios for Madagascar Industries over three years to assess its financial health, offering insights into its performance and recommendations for improvement. The analysis highlights the importance of effective financial management, including managing working capital, controlling expenses, and optimizing cash flow to ensure long-term business success. This assignment is a valuable resource for students studying business finance, providing practical examples and analytical techniques.

Business Finance

Table of Contents
PART 1............................................................................................................................................1
1. a) Profit and Cash flow and their difference............................................................................1
b) Working Capital......................................................................................................................2
c) Effect of working capital over cash-flows...............................................................................3
2. Application of concepts...........................................................................................................3
3. Analysis and recommendation to Uber Tools Ltd (“UTL”)....................................................4
EXECUTIVE SUMMARY.............................................................................................................4
PART 2............................................................................................................................................5
1. a) Elements of financial performance......................................................................................5
b) Calculations of ratios of company...........................................................................................6
c) Application of ratios................................................................................................................7
2. Recommendation to board to assess financial performance of business.................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business finance refers to money and credit employed in business. Finance is termed as
basis of on which all the structure of business is designed. Finance in the business is required to
arrange various assets that will help in operating business activities. Availability of finance in
business makes it competitive to deal in various business situations and be more strong. In this
project Uber Tools Ltd (“UTL”) orgnisation is taken to elaborate the importance of business
finance (Burns and Dewhurst, 2016). This project includes various elements that generate
finance for business such as cash flow, profits and working capital requirements. Together with
this ratio analysis of Madagascar Industries Ltd is also provided in this report to understand the
concept of business finance.
EXECUTIVE SUMMARY
Business finance consists of multiple activities that help in managing and monitoring
various activities in business related to finance. Funds in the business acts as blood that helps and
necessary for its survival. Business finance provides information regarding financial position of
the company that helps in preparing in financial statements to give more accurate information of
financial condition of business organization. Information regarding finances of business
organization helps in grabbing opportunities and most favorable steps are taken. This projects
gives information regarding profits and cash flows of Uber Tools Ltd (“UTL”) that helpws in
managing working capital of company.
PART 1
1. a) Profit and Cash flow and their difference
Profits: It is termed as financial benefit that is generated in business organization by
conducting various operating activities. When cost of providing goods and services of Uber
Tools Ltd (“UTL”) organization is less then amount charged for the product then amount of
difference in cost and revenue generated is termed as profits. Profits in a year of business helps
in deciding amount of funds that will be inveted in business organization. In the present case
Uber Tools Ltd (“UTL”) is generating £36 million as operating profits (Casadesus-Masanell and
Tarzijan, 2012).
Cash Flow: It is the net amount that is available with business organistion at the end of year
as cash by receiving various funds and paying various liabilities. Effective cash flow in the
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organization is reflect that business is very efficient in generating revenue and funds are received
on time. This will help Uber Tools Ltd (“UTL”) in managing various financial operation in most
productive manner.
Profits Cash Flow
Profits in business are generate through
revenues when sales are made while
performing operating activity.
Cash flow in business is generated with inflow
of funds from various activity performed to
carry out business operations.
Profits in business are calculated by following
accrual basis of accounting.
Cash flow in business is recorded on the actual
basis of funds paid and received in a period.
Profits in business is generated when sales are
made beyond break-even-point.
Cash flow in business reflects strengths and
positive cash flow helps in increasing share
price in long run.
b) Working Capital
Working capital is a financial metric which represents operating liquidity available to a
business oragnisation. It is reflected with net amount of difference in current assets and current
liabilities. Major components of current assets are inventory, trade receivables and cash. On the
other hand current liabilities includes trade payables, bank overdraft (Cole, 2013).
Amount of working capital differs on the basis of size of business operating its
operations. Working capital in business is quite essential as day-to-day operations in business is
carried with the help of working capital. It is generated with the amount received from current
assets and all the operating expenses in short term are met with amount generated. Operating cost
of Uber Tools Ltd (“UTL”) is managed with working capital funds. There are certain relate terms
that are explained here as follows-
 Receivables: It refers to a company’s claims to the future collection of cash and other
assets or services. Receivables resulting from sale of goods or services on account. These
are considered as assets for Uber Tools Ltd (“UTL”) and associated with sales that are
made on credit.
 Inventory: It is the array of finished goods or goods used in production held by a
company. Inventory is classified as current assets on a company’s balance sheet. Amount
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of inventory consist of various cost associated with raw material that helps it bringing in
saleable position (Inventory, 2019).
 Payable: It is amount of money owned by business to its suppliers and shown as liability
on a company’s balance sheet. It is distinct from liabilities that are created with legal
instruments documents. Payables are liabilities that are shown in balance sheet as current
liabilities and repayments are made on regular basis.
c) Effect of working capital over cash-flows
Working capital in business reflects its strengths of generating more current assets in
business of Uber Tools Ltd (“UTL”). There are various factors in business that affects its
working capital. Working capital in business keeps on changing with business transactions. WC
in business is reflected with the amount of current assets net of current liabilities. It possess
impact on cash flows of business organization as amount of current assets received increases
working capital and cash flows in business. Vice versa amount paid for current liabilities reduces
working capital amount and cash flow. While preparing cash flow statement change in working
capital is noted in the statement (Finance, 2017). A increase in working capital reflects that
business is investing its productive resources in assets that brings returns in short run. Investing
in current assets by business will leads to outflow of cash and cash flow and working capital both
will be effected by this business transaction. Availability of working capital in business shows its
efficiency in operating various business transactions. Cash flow reflects availability of overall
cash amount in business for conducting business operations in most effective manner.
2. Application of concepts
The whole case scenario is mentioned and that reflects Uber Tools Ltd (“UTL”) is
efficient in meeting its expenses required in managing business operations. Uber Tools Ltd
(“UTL”) organisation has recorded an operating profit of £36 million which is quite good. When
a glance of companies liberalities is taken then it will be recorded an hike from past year. Rise in
debt gives managers of the organisation an opportunity to enhance their profitability. But there is
no effect on the profitability of the company and it is constant in this year. This reflects that
utilisation of funds is not done at efficient level (Jochimsen and Thomasius, 2014). Management
of Uber Tools Ltd (“UTL”) organisation needs to keep watch on expenses made in cash as miss-
utilisation of funds is going in the company. When financial results of the company is considered
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then it will reflect bad condition of the entity that has increased in its liabilities and no change is
recorded in profits.
Information that is provided to Uber Tools Ltd (“UTL”) from its financial statements will
help it in managing finances in in long run to sustain in competitive market. Profitability
statements and cash flow statement will provide a clear case scenario to the managers of the
organisation and they can take corrective action so that financial position of Uber Tools Ltd
(“UTL”) can be improved in long run and utilisation of funds is done in such manner that brings
most productive results and enhance financial position by reducing debts and increasing profits.
3. Analysis and recommendation to Uber Tools Ltd (“UTL”)
Business requires funds to perform its day to day activities and that is satisfied by
availability of working capital in the company. From financial statement of the company it is
seen that company is continuous loosing its financial viability as more and more debts are
increasing (McLean and Zhao, 2014). Working capital in business plays important role while
calculating cash flows in the business. It is managers who are responsible for managing finance
in Uber Tools Ltd (“UTL”) so that a positive cash flow with availability of working capital is
recorded in business. To enhance working capital of company cost that is incurred but do not
provide any productive results will be minimised. When outflow of cash will be less then it will
increase availability of working capital in Uber Tools Ltd (“UTL”). Inventory is one of the most
important part of working capital, holding high inventory leads to reduction in availability of
working capital. As more and more stock is acquired this leads to outflow of cash for payment
and no inflow is received in this regard as sales are not made yet. Managing inventory will help
in improving cash flow and working capital.
Their is rise in funds as liabilities is noticed that means company is not efficient to
receive funds from debtors on time and payments to creditors are made frequently. To improve
cash flow management delay payments of debtors will be improved. Together with this credit
period offered to consumers will be reduced to bring cash flow on time. As debtors and creditors
form part of working capital of the company and needs to manage to bring effective cash flow in
Uber Tools Ltd (“UTL”).
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EXECUTIVE SUMMARY
In this part of the report Madagascar Industries Ltd organisation is taken which is
operating in jewellery business. Financial information of the business is provided and on the
basis of which financial position needs to be analysed. Various elements of financial
performance is described and how they reflect financial condition is mentioned. Ratios of
business is identified on the basis of which interpretation of financial position of jewellery
business in previous three years will be done.
PART 2
1. a) Elements of financial performance
Financial performance refers to the act of performing financial activity. It includes degree
to which financial objectives of business is being or has been achieved. Financial performance of
various elements in business must be present for its long term success. Elements that are
indicators for financial performance in Madagascar Industries Ltd. Are as follows-
Revenues: It is the main source of generating cash by performing various business
activities. Madagascar Industries Ltd from financial statements of past three years stated that
sales that are main source of revenue in business is increasing year by year (Tutunea and Rus,
2012). When sales in the business is increasing this reflects that all the activities that are
performed in business is providing positive results. Increasing revenue on continuous basis
demonstrate that business is operating successfully of Madagascar Industries Ltd.
Profits: Profits are that part of revenue in business that is actually earned by reducing
amount of cost incurred from revenues. All business organisations are operated with the motive
to earn more and more profits. Business in long run can not survive when amount of profits is
not enough to cover all cost. There is increase in profits from first year to next but in third year
profits gets shattered. This is because high amount of operating expenses and depreciation for
Madagascar Industries Ltd.
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
organisation is using its resources employed in business. Resources in financial terms includes
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amount invested in business. Madagascar Industries Ltd is not operating its resources to its
maximum as cost in last is has increased and that leads in reduction of profits (Yunus, 2017).
Capital Efficiency and solvency: Solvency is the ability of business organisation to meet
its long-term financial obligations. Solvency is essential to staying in business as it demonstrate
Madagascar Industries Ltd ability to continue operate into future. Madagascar Industries Ltd is
operating its business in quite solvent manner as amount of assets in business is more then
liabilities. This reflects that company is able to pay its long term debts.
Liquidity: It describes the degree to which assets or securities can be quickly bought and
sold in market without affecting price of assets. Madagascar Industries Ltd is highly liquid as
availability of currents assets is more in business. In last three years graph of current assets is
highly flexible and its keeps on fluctuating. In last year liquidity position of company has
decreased because of fall in current assets (Zubair, 2014).
b) Calculations of ratios of company
PARTICULARS 2009 2010 2011
Sales 360 396 459
1 Sales growth Sales Y2 - sales Y1)/sales Y1 - 10.00% 15.91%
Gross Profit 230 252 272
2 Gross Profit Margin Gross Profit/Sales (%) 63.89% 63.64% 59.26%
Operating Profit 108 101 49
3
Operating Profit Margin Operating Profit/Sales
(%) 30.00% 25.51% 10.68%
Total Debt 215 300 462
Shareholders fund 304 347 344
4
Gearing {Total Debt/Total Debt + Shareholder}
Funds (%) 41.43% 46.37% 57.32%
Finance Expenses 9 12 16
5
Interest Cover Operating Profit/Finance Expense
(x) 12
8.4166666
667 3.0625
Current Assets 65 114 94
Current Liabilities 29 48 102
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Liquidity Ratio Current Assets/Current
Liabilities
2.2413793
103 2.375
0.92156
86275
Net Profit 79 72 26
7
Return on Equity [Net Profit/Shareholders
Funds (%)] 25.99% 20.75% 7.56%
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Return on Capital Employed [Operating
Profit/Total Debt + S’holder Funds (%)] 20.81% 15.61% 6.08%
c) Application of ratios
Sales growth: Results of Madagascar Industries Ltd. Sales growth reflects increment
year by year. As in the year 2010 a 10% increased is recorded and in the year 2011 15.91%
increment is recorded. This reflects that company is continuously growing positively.
Gross profit margin: From ratios of Madagascar Industries Ltd. It is analysed that there
is continuous fall in gross profits and that is because of increase in cost of production and that
will hinder companies performance in long run.
Operating profit margin: Madagascar Industries Ltd. Has noticed that operating profits
are falling very rapidly that is not a good condition in financial statement. This is because
operating expenses has gone up in the current year.
Gearing: This ratio reflects that debts in the organisation is increasing rapidly and that
makes financial performance of business weak.
Interest coverage: This reflects ability of profits of company to cover its interest cost.
Madagascar Industries Ltd. Financial statements shows that this ratio is continuously decreasing
that reflects that profits are reducing or amount of debt is increasing.
Liquidity ratio: This ratio reflects ability of Madagascar Industries Ltd. to pay its current
liabilities by selling its current assets. This ratio is less then 1 that shows that company is not
able to pay its short term creditors in short run (Covas and Den Haan, 2012).
Return on equity: Amount earned by employing shareholders is keeps on decreasing in
all the three years. This shows that company is no more attractive for investment.
Return on capital employed: Overall profitability of Madagascar Industries Ltd.
Organisation has decreased over the period and shows that operations are no more productive in
the company.
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2. Recommendation to board to assess financial performance of business
Financial performance of business is assessed through assessing liquidity of the company
and Madagascar Industries Ltd. Is not liquid and board must take action to reduce its operating
expenses. A fair method of charging depreciation must be used to enhance liquidity. In short run
current liabilities must be reduced by management. A reason for sudden rise in short term debt
must be checked so that required actions can be taken to reduce liability or resources in short
term can be generated to termed as assets.
CONCLUSION
From the above project report it has been concluded that financial position is the indicator
that reflects how efficiently business is operating its functions. Profits is the ultimate goal in
business and that is achieved by managing effective cash flow strategy. Working capital
availability helps in operating business operations in most effective manner. Business
organisation need to take all possible step to improve cash flow and better working capital
management. Ratios are the key elements that reflects financial performance of business and by
critically analysing them corrective actions can be taken.
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REFERENCES
Books and Journals
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Casadesus-Masanell, R. and Tarzijan, J., 2012. When one business model isn't enough.
Cole, R. A., 2013. What do we know about the capital structure of privately held US firms?
Evidence from the surveys of small business finance. Financial Management. 42(4).
pp.777-813.
Covas, F. and Den Haan, W. J., 2012. The role of debt and equity finance over the business
cycle. The Economic Journal. 122(565). pp.1262-1286.
Finance, C., 2017. Empirical Corporate Finance. A Cap, 1.
Jochimsen, B. and Thomasius, S., 2014. The perfect finance minister: Whom to appoint as
finance minister to balance the budget. European Journal of Political Economy. 34.
pp.390-408.
McLean, R. D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external
finance. The Journal of Finance. 69(3). pp.1377-1409.
Tutunea, M. F. and Rus, R. V., 2012. Business intelligence solutions for SME's. Procedia
Economics and Finance. 3. pp.865-870.
Yunus, M., 2017. Social business entrepreneurs are the solution. In The Future Makers (pp. 219-
225). Routledge.
Zubair, H., 2014. Islamic banking and finance: an integrative approach. Oxford.. www.
investopedia. Com.
Online
Inventory. 2019. [Online]. Available through:
<https://www.shopify.in/encyclopedia/inventory>
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