Report on Business Finance: Uber Tools and Madagascar Industries

This report provides a comprehensive analysis of working capital management and financial ratios. It begins by examining the concepts of profit versus cash flow, working capital components, and their impact on cash flow, using Uber Tools Ltd. as a case study. The report then delves into the financial performance of Madagascar Industries Ltd., evaluating key financial ratios to assess profitability, liquidity, and solvency. The analysis includes an examination of the company's financial statements, identifying trends in non-current assets, working capital elements, and debt capacity. Recommendations are provided based on the financial ratio analysis, offering insights into improving the financial performance of the company. The report covers key aspects of business finance, including cash flow management, working capital optimization, and financial statement analysis.

Running Head: BUSINESS FINANCE
Business Finance
Name of the Student
Name of the University
Author Note

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Executive Summary
Theaim of this report is the analysis of the management of working capital of Uber Tools Ltd.
and analysis of financial performance of Madagascar Industries Ltd. in terms of financial
ratios. The discussion of the Part 1 of the report will include the position of the cash flow of
Uber Tools Ltd in working capital management. The discussion of the Part 2 will includes the
measurement of the financial performance of the Madagascar Industries Ltd. with the help of
analysis of the financial ratios.Hence, the management of the working capital and financial
ratio is the important aspect for the management of the liquidity position of the company in
terms of cash and measuring the financial performance of the company in terms of
profitability, liquidity and solvency position of the company.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Part 1......................................................................................................................................3
Answer to the Question 1...................................................................................................3
Answer to the Question 2...................................................................................................6
Answer to the Question 3...................................................................................................7
Part 2..........................................................................................................................................7
Answer to the Question 1:......................................................................................................7
Answer to the Question 2:....................................................................................................12
Conclusion................................................................................................................................12
References................................................................................................................................13

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Introduction
The aim of this report is the analysis of management of cash and financial ratios.
Working capital is the important part of the company. The management of the working
capital is the process of the management of the assets and liabilities that is of short-term
nature. It reflects the liquidity position of the company. In addition, the information regarding
the financial ratios gives the scope for comparing different data such as assets of the company
and its liabilities.Hence,for this, discussion will be based on two parts; first part will discuss
the difference between cash flow and profit. It will include the identification and explanation
of the reasons of shortage of cashas well as its consequences. In addition, analysis of the
general causes of the cash flow problemswill be done by using the case study of the Uber
Tools Ltd. Lastly, the methods for dealing with the problems of cash flow and management
of the cash for the business will be discussed.
The discussion on the second part will be the case study of financial statement of
Madagascar Industries Ltd., which will include the identification and the explanation of the
each specified financial ratios and what they specify about the company. In addition, ratios
have been calculated and based on that analysis and recommendations have to be given to the
company.
Discussion
Part 1
UberTools Ltd. is the company, which produces power tools in the factory owned and
operated by them in New market of United Kingdom.
Answer to the Question 1
a. Explanation of the concept and difference between Profit and Cash Flow

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Profit for the business is defined as the reduction of the expenses from the sales or the
gross income.When the revenue generated by the business activity of the company exceeds
the total expenses then the profit is realized. Moreover, Cash flow is determined by the
money that flows from within and outside the business of the company. It is the total amount
of the net cash and equivalents cash, whichis being transferred into and outside the business.
The company needs to focus and keep track on regular basis of the two financial
parameters that is cash and profit. Cash is required to meet the day-to-day operations of the
business. The company can be bankrupt if it does not have sufficient cash flow. There can be
the situation when the business is earning profit but it lacks in the liquidity position that
means it may not have sufficient cash (Aktas, Croci and Petmezas 2015). The other situation
occurs if the sales of the company are growing with the increasing cash outflow, but still the
company fails in recognizing profit. The company cannot survive in the long-run if it does
not make profit. However, sometimes in case of cash flow, product’s success raises the
expenses. Hence, the crisis of the cash can be avoided by reducing the costs associate with
the production. The clear understanding of the cost-associated data is required in order to
make profit without running shortage of cash for the business.
b. Explanation of Working Capitaland the meanings of Receivables, Inventory and
Payables
Working Capital is that capital of the business thatis required for day-to-day operations. It
represents the availability of the operational liquidity in the business, which is obtained by
subtracting current liabilities from current assets. The elements of the current assets include
cash, inventories and trade receivables. In addition, elements of the current liabilities include
bank overdraft and trade payables.The availability of the working capital reflects the liquidity

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position of the company in terms of management of the inventory and debt, collections of
revenue and payments to the suppliers.
Account receivable is that money which is received from the sales of goods and services
by the company. Invoices are issued by the company claiming the customers to pay the due
amount at the specified time limit. The time limit is generally for short period that ranges
from few days to end of the year. It is considered as current assets for the company and
isshown in the balance sheet. It is important aspects of the business for measuring the
liquidity of the company or the ability for covering the short-term obligations.
Inventory is defined as that stock of goods and services which is used for future resale. It
forms the important part of the assets of the business of company as it is used for measuring
the turnover of the inventory that represents one of the key sources of the generation of
revenueand following the earning of the shareholders. It is also shown in the current assets of
the balance sheet.
Accounts Payables is defined as that amount which is owed by the company to their
suppliers. The money owed by the company is for the short-term which generally have to be
paid within the accounting year. It is the liability of the company that is shown in the current
liability on the balance sheet. Once the payment has been done to the suppliers and creditors,
the amount is then deducted from the accounts payable.
c. Explanation of how changes in Working Capital affect Cash flow
Any changes in the items of the working capital will affect the cash flow of the
company.Working capital depends on equilibrium between activities of income
generation and resource purchase, which in turn depends upon the cycle of cash
conversion. The length of the cycle of cash conversion depends on the trade payables
deferral period, the trade receivables collection period and the inventory conversion. If

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there is increase in the balance of the assets then there will be decrease in the cash flow
from operations and when there is decrease in the balance of the assets then there will be
increase in the cash flow from operations. The change of the working capital is shown in
the cash flow statement. Analysis of the cash flow and working capital is important as it
helps in determining the financial activity that is either short term or long term.
Answer to the Question 2
Under the scenario of the company Uber Tools Ltd, the company has earned the
operating profit of £36m but the debt of the company has increased from £350m to £250m.
The company has made investment and paid advance in the shares of the design company.
The amount of UTL is also invested in acquisition of the license for manufacturing of the
range of chainsaws. Due to the faulty workmanship of the contactor, the company has also
started to build up the large stocks of the materials and supplies at their production site.
Hence, maximum amount of cash flow is involved in operating, investing and financing
activities of the company. The company needs to focus on reducing the cost of the production
and encouraging the debtors to make the payment in order to increase the cash flow and
profit. The working capital position of the company £17m, receivable is due from the debtors,
Omar who manages the company has insisted to have that level of stock for when the dispute
is sorted out. The company is producing the large stock of materials and supplies at the
production site. The company does not have accounts payable as it has refused to pay the
contractor due to faulty workmanship. The assets of the company are increasing, which
reduces the working capital position of the company.Thus, the company is insisting the
debtors for the payment and in order to reduce the debt the company is concerned about more
investment by the other shareholders.
Answer to the Question 3
Analysis and Recommendation

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Working Capital Management is necessary for the efficient operations of the
organization. Hence, by analyzing the situation of the UTL, it can be said that the cash flow
position of the company is not at the level due to delay in the payment by the debtors, legal
battle with the contractors and increase in the debt position of the company. The company
needs to focus on recovering the payments from the creditors, which will increase the cash
position of the company (Atrill 2014). In addition, the company should also try to sort out the
disputeof their biggest client Brico France and the legal battle of their contractor as early as
possible to reduce the problem of working capital.
Part 2
Madagascar Industries Ltd. is the company based in Hastings, UK thatproduces
jewelry by using the gemstones imported from South Africa and Madagascar.
Answer to the Question 1:
a. Explanation of the element of financial performance for financial ratios
From the analysis of the financial statements of Madagascar Industries Ltd., certain
information can be ascertained which cannot be ascertained from calculation of the ratios. It
will be helpful in recognizing the important issues, which will be helpful in the calculation of
ratios (Beaver 1966). Following are the points, which are ascertained by the financial
statement of the company:
 Expansion of the non- current assets: The Non-current assets of the company have
increased from £454pound to £533 pound and £533pound to £713 pound, which
increase the percentage from 17% to 33% from the year 2009-2011. It is good sign to
the company, as it will increase the sales revenue of the company.
 Expansion of the elements of the working capital: The inventory position of the
company has decreased from 157% to 19% and trade receivables of the company

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have decreased from 19% to 16%. Hence, there is decrease in inventories as well as
receivables.
 Reduction in the cash balance: The balance of the cash has been increased from £14
to £35 and then it drastically reduced to zero position. Cash is the part of the current
assets, which is required for operating day-to-day business activities. Hence, company
is required to maintain its cash position for maintaining good working capital.
 Good Debt capacity: The long term liabilities of the company has increased from the
year 2009-2010 which results in increase in total debt position. The shareholders
equity of the company has also increased during the years. Therefore, the solvency
position of the company has drastically increased from 2009 to 2011, which means
that the company is highly geared, and works under risk. The trend from the year
2009- 2010 shows that the non-current assets of the company are sufficient for
offering the security for borrowings of the company. The non-current assets of the
company have increased from 17% to 33% and non-current liabilities of the company
has increased from 65% to 112.5%.
 Lower Operating capacity: The revenue or the sale of the company from the year
2009 to 2011 shows that it is increasing every year. The expenses of the company in
terms of cost of sales, operating expenses and depreciation have increased during the
years that reduce the operating profit of the company. The net profit of the company
has also reduced during the years due to increase in the finance expense of 7%.
Decrease in the operating profit and increase in the finance expenses from 2009 to
2011 has reduced the capacity of the company in the payment of the interest
obligations.
c. Reasons of changes in the financial ratios

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Sales Growthratio is calculated in percentage that shows the increase and decrease in the
sales of the company. It identifies the prevailing trends in the business of the organization.It
is important to calculate because the stakeholders would like to know the current and future
demand of the company’s product in the market. The sales growth percentage of the company
from 2009-2010 is 10% and from 2010-2011 is 15.91%. It shows that the company’s sales
growth is good and increasing.
Sales Growth 2009 2010 2011
Sales 360.00£ 396.00£ 459.00£
Result 10.00% 15.91%
Gross Profit Margin is the percentage, which is calculated by deducting cost of goods
sold from revenue and dividing it by revenue. It is used for measuring the financial health of
the company. The trend from the year 2009-2011 shows that, the gross profit margin during
the year 2009 and 2010 is same that is 64% whereas in the year 2011, it has decreased to
59%. Although the profit margin is above the parameter of good profit margin but still the
company needs to increase it as compare to previous years.
Gross Profit Margin 2009 2010 2011
Gross Profit 230.00£ 252.00£ 272.00£
Sales 360.00£ 396.00£ 459.00£
Result 64% 64% 59%
Operating Profit Margin is the percentage thatis used to measure the performance of
the company by calculating the percentage of the profit that is obtained from the operations
of the business operations before calculating interest and taxes (Melville 2017). It is
calculated by dividing operating profit by sales revenue.The operating ratio of the company
in the year 2009 and 2010 is 30% and 26%, which is considered good whereas in the year
2011, it is 11% that is average. Hence, the cost of goods sold and expenses of the company
needs to be reduced.

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Operating Profit Margin 2009 2010 2011
Operating Profit 108.00£ 101.00£ 49.00£
Sales 360.00£ 396.00£ 459.00£
Result 30% 26% 11%
Gearing ratio measures the degree to which the company uses its equity over the total
debt. The gearing ratio of the year 2009 and 2010 is 41% and 46% that shows that the
company has average geared. Whereas the gearing ratio of the year 2011 is 57%, which
shows that the company is highly geared, and work under highly risk which means that
company is using more debt over equity.
Gearing 2009 2010 2011
Total Debt 215.00£ 300.00£ 462.00£
Shareholders' Funds 304.00£ 347.00£ 344.00£
Result 41% 46% 57%
Interest Coverage ratio measures the ability of the company in the payment of the
interest and taxes on outstanding debt. The interest cover ratio of the year 2009, 2010 and
2011 is 12%, 8.42% and 3.06%, which shows that the company’s ability for the payment of
interest expenses on their debt payment is decreasing over years that are not good for
company’s financial health.
Interest Cover 2009 2010 2011
Operating Profit 108.00£ 101.00£ 49.00£
Finance Expense 9.00£ 12.00£ 16.00£
Result 12.00£ 8.42£ 3.06£
Liquidity Ratio measures whether the company has the ability to make the payment of
the short-term liabilities or not. The Liquidity ratio of the year 2009 and 2010 is 2.24 and
2.38, which means that the company was having good liquidity position but in the year 2011,
the liquidity position of the company has reduced.

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Liquidity Ratio 2009 2010 2011
Current Assets 65.00£ 114.00£ 94.00£
Current Liabilities 29.00£ 48.00£ 102.00£
Result 2.24£ 2.38£ 0.92£
Return on Equityis the ratio, whichmeasure the company’s profitability in relation
with the shareholders’ fund. The return on equity in the year 2009 and 2010 is 26% and 21%,
whichis considered as good whereas in the year 2011 is 8%, which is not good that means
that the company is not able to generate much profit from the investment by the shareholders.
Return on Equity 2009 2010 2011
Net Profit 79.00£ 72.00£ 26.00£
Sharesholders Fund 304.00£ 347.00£ 344.00£
Result 26% 21% 8%
Return on Capital Employed is calculated to measure the profitability of the company
and the efficiency in terms of using the capital of the company, which results in the business
performance.The ROCE of the year 2009 and 2010 is 21% and 16%, which is good for the
company but for the year 2011 is 6%, which is not good because the company is not able to
utilize the capital efficiently in generating profitability.
Return on Capital Employed 2009 2010 2011
Operating Profit 108.00£ 101.00£ 49.00£
Total Debt 215.00£ 300.00£ 462.00£
Shareholders Fund 304.00£ 347.00£ 344.00£
Result 21% 16% 6%
Answer to the Question 2:
Analysis and Recommendation
The financial analysis of Madagascar Industries Ltd. illustrates that the financial
performance of the company in the year 2009 and 2010 is good but the financial performance
of the company in the year 2011 is not good. The position of the company in terms of