Business Finance Report: Financial Analysis for Root and Cook Ltd

This report provides a comprehensive analysis of business finance, focusing on the financial performance of Root and Cook Ltd. It begins by defining key financial terms like profit, cash flow, and working capital, highlighting their differences and impacts. The report then delves into the financial position of the company by examining its cash flow statement, income statement, and balance sheet from 2016 to 2020. Based on the financial outcomes, the report recommends steps to control cash flow through effective working capital management, including improvements in debtor collection, creditor payments, supplier negotiations, expense reduction, and tax opportunity review. Furthermore, the report evaluates capital budgeting processes and investment appraisal methods, discussing their advantages and disadvantages to aid in strategic financial decision-making. The analysis provides recommendations for professionals involved in project evaluation and expansion.

Business Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................3
1. Explaining various terms.........................................................................................................3
2. Determining the financial position of the business as per the outcomes of various financial
results..........................................................................................................................................4
3. Recommending the steps to control the cash flow through working capital management.....8
PART 2............................................................................................................................................8
1. Evaluating the terms................................................................................................................8
2. Illustrating the various terms of investment operations........................................................11
3. Recommending the professionals to pursue the project........................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
To make the strategic decisions in terms with designing the operational activities of the
business there is need to have better financial management. It determines the financial statements
of the business which will be helpful for execution of operations and profits. In the present report
there will be study over the various financial terms such as profit, cash flow and working
statement on which Root and Cook Ltd. The report is also consists of outcomes of the investment
appraisals which are helping in having the appropriate information regarding the profitability of
the proposed project. Therefore, in relation with such measurements the professionals will have
sufficient details regarding the expansion of business operations.
PART 1
1. Explaining various terms
a. Analysing the profit and cash flow and determining the differences among them
The terms profit and cash flow are different from each other in accordance with analysing
the financial health of the business. However, in accordance with the business requirements there
is need to manage the cash flows and various transactions of the business which in turn will be
helpful to the entity to have profitable growth.
Profit: It is a surplus amount which will be helpful to the business in terms of analysing
the expenses and gains over the operational made by them. Thus, with the help of such amount
the business will become able to perform the operational activities (Campbell, 2017). Purchase
raw material, pay salaries to the employees, dividend payments to the shareholders as well as it
can plan for the expansion of the business criteria.
Cash flow: The inflows and outflows of the cash balance in the business which will be
helpful in analysing the liquidity. However, the level of cash balance determine the ability of the
entity in meeting the expenses as well as making the adequate payments to the operations
(Kumar, Sivashanmugam and Vennela, 2018). It ascertains the requirement of the cash has been
met and analysed by the business professionals.
Determining the difference between profit and cash flow:
Profit Cash flow

 This is the method of analysing the
surplus amount over all the income and
expenditures made by the business in a
financial year. These are the amount on
which the firm will make payments to
the shareholder's dividends, operational
investment as well as make payments
of the taxes.
 The determination of the daily tasks and
operations of the business which in turn
helps in analysing the inflows and
outflows of the total cash (Young and
Pagliari, 2017). However, it helps in
managing the daily financial activities
such as taxation, purchase of
inventories, employee salaries as well
as paying off the costs incurred in
various operations.
b. Ascertaining the concept of working capital:
This is the technique which helps in determining the efficiency of the business in day to
day operations. This ascertains the ability of the firm in meeting the short terms requirements
such as analysing the current liabilities and current assets of the firm (Block and et.al., 2018). It
facilitates the information to the professionals that the firm is having enough short term assets
which will be helpful in meeting to pay off the short term debts.
c. Analysing the impacts of working capital over cash flow
2. Determining the financial position of the business as per the outcomes of various financial
results
To ascertains the appropriate financial health of the entity there are analysis of the 5 years
financials which will be helpful in suggesting the adequate changes in the operations of Root and
Cook Ltd. Thus, there are analysis of cash flow statement, income statement and balance sheet of
the entity which will indicate the operational transactions held during the period and which will
be beneficial in ascertaining the liquidity and efficiency of the business.
Cash Flow statement:
Cash flow statement of Root and Cook Ltd.
Particulars
Initial
investment 2016 2017 2018 2019 2020

Net income
1200000
0
2250000
0
2900000
0 35000000
4200000
0
Add: Depreciation
1000000
0
1100000
0
1450000
00
25000000
0
2900000
00
Add: decrease in debtors 1500000
1550000
0
1600000
0 16500000
1700000
0
Add: Decrease in inventories
2500000
0
2650000
00
2700000
0 27500000
2800000
0
Add: increase in creditors
3700000
0
3750000
00
4000000
0 42000000
4800000
0
Cash provided in operating
activities
8550000
0
6890000
00
2570000
00
37100000
0
4250000
00
Less: Capital expenses
(advance fee) 8000000
1400000
0
1580000
0 16000000
1620000
0
Add: Sale of property
1800000
0
2500000
0
3400000
0 38000000
4500000
0
Cash provided by investing
activities
9550000
0
7000000
00
2752000
00
39300000
0
4538000
00
Add: Borrowing of long term
debts
6800000
00
6250000
00
7200000
00
74000000
0
7650000
00
Less: Cash dividends
1400000
0
1800000
0
2200000
0 25000000
3200000
0
Cash from financing
activities
7615000
00
1307000
000
9732000
00
11080000
00
1186800
000
Net increment in cash 7615000 1307000 9732000 11080000 1186800

00 000 00 00 000
Cash at the beginning
2200000
00
5415000
00
7655000
00
20770000
0
9003000
00
Cash at the end of period 220000000
5415000
00
7655000
00
2077000
00
90030000
0
2865000
00
Income statement:
Income statement for Root and Cook Ltd.
Particulars 2016 2017 2018 2019 2020
Sale revenue 12000000 22500000 29000000 35000000 42000000
Less: COGS 7500000 7800000 8200000 8600000 9200000
Gross profit 4500000 14700000 20800000 26400000 32800000
Operating Expenses
Advertisement expenses 1500000 1500000 1500000 1500000 1500000
Depreciation on machinery 10000000 11000000
14500000
0
25000000
0
29000000
0
Telephone bill 1280000 1280000 1280000 1280000 1280000
Electricity bill 13000000 13000000 13000000 13000000 13000000
outstanding disputes 20000000 0 0 0 0
Salaries to employees 20000000 20000000 20000000 20000000 20000000
prepaid expenses
29800000
0
31000000
0
37800000
0
42000000
0
67000000
0
Total operating expenses
36378000
0
35678000
0
55878000
0
70578000
0
99578000
0
Operating income 18000000
Operating profit
-
34128000
0
35678000
0
55878000
0
70578000
0
99578000
0
Less: tax (30%) -
23889600
24974600
0
39114600
0
49404600
0
69704600
0

0
Less: Dividends 14000000 18000000 22000000 25000000 32000000
Net income
-
11638400
0 89034000
14563400
0
18673400
0
26673400
0
Balance sheet:
Balance-sheet of Root and Cook Ltd.
Particulars 2016 2017 2018 2019 2020
Current assets
Cash in hand
5415000
00 765500000
20770000
0 900300000 286500000
Bank
4800000
00 6834530000
75765700
00 666000000 1146980000
Debtors 1200000 1250000 250000 3200000 16500000
Prepaid expenses
2980000
00 310000000
37800000
0 420000000 670000000
Out standing disputes
2000000
0 0 0 0
Total current assets
1340700
000 7911280000
81625200
00
198950000
0 2119980000
Non- current assets
Machinery
2600000
00 498000000
52300000
0 565000000 612000000
less: depreciation
1000000
0 11000000
14500000
0 250000000 290000000
Equipments
1420000
00 285000000
92600000
0 938000000 946000000
Office building
2200000
00 410000000
43200000
0
455000000
0 512000000

Furniture and Fixtures
1200000
0 126500000 13260000 14560000 19800000
Inventories
7600000
0 150000000
16000000
0 170000000 180000000
Total assets
2040700
000 9369780000
10071780
000
797706000
0 4099780000
Liabilities
Current liabilities
Salaries
2000000
0 20000000 20000000 20000000 20000000
creditors
2800000
00 280000000
35900000
00
485228000
0 569000000
income tax
-
2388960
00 249746000
39114600
0 494046000 697046000
Total current- liabilities
6110400
0 549746000
40011460
00
536632600
0 1286046000
Long terms liabilities
6800000
00 786000000
83500000
0 950000000 990000000
Total liabilities
7411040
00 1335746000
48361460
00
631632600
0 2276046000
Owner's equity
Equity Capital
8200000
00 7580000000
82500000
0 985000000 995000000
Net profit
-
1163840
00 89034000
14563400
0 186734000 266734000
Retained earning
5959800
00 365000000
42650000
00 489000000 562000000
Total liabilities and
shareholder's equity
2040700
000 9369780000
10071780
000
797706000
0 4099780000

3. Recommending the steps to control the cash flow through working capital management
On the basis of above determination and the findings in the financial statements of the
business it can be said that there is need to improve the funding process for the business which
will be helpful in managing the operational activities. Ion the year 2016 there has large amount
of debts which are need to be pay off as per having the appropriate investments in the company.
Thus, the professionals at Root and Cook Ltd will be suggested to have the adequate
improvement in the probability and balancing the working capital in appropriate way by
implicating several techniques such as:
 There is need to have appropriate improvement in the debtor collection.
 It is essential to have the satisfactory control over the creditor payments of the business.
 To have the better negotiation and adequate prices with suppliers and distributors.
 There should be appropriate reduction in the expenses of business (Castellucci and et.al.,
2017).
 There is need to have adequate review over the tax opportunities.
PART 2
1. Evaluating the terms
Capital Budgeting process and steps
To have the satisfactory control over the financial transactions in the business there is
need to have proper capital budgeting (Alkhamis and et.al., 2017). It will be beneficial in terms
of having the effective financial management of the expensive assets as well as executing the
long term operations. However, the process of preparing the fruitful capital budgeting will be
analysed as follows:
 Proposing the idea: The decision must be made and proposed by the professionals which
is need to be in good quality and must be accurate as to attain the fruitful growth.
However, the ideas will be generated through senior mangers, employees, departmental
heads etc.

 Determining the proposed idea: After having the ideas there is need to have research
over it as well as need to generate the appropriate information. This will be helpful in
ascertaining the profitability of such plan and the professionals will analyse the returns
they will have from such investments (Adiwibowo, Lestari and Manalu, 2018).
 Developing the capital budget: To proceed the plan after analysing the collected
information there is need to draw a capital budget on which the expected investment will
be mentioned. There will be presence of various financial statements such as forecasted
cash flows, income statements and balance sheet. It helps the professionals in strategic
planning and decision making.
 Post audit and execution: After preparing such budgets, it is essentially required to
make the adequate analysis over the operations as well as actual results of such activities.
There will be comparison of such budgeted plan and actual result and the variance result
will help the professionals to plan for further changes (Malek and et.al., 2017). It
promotes the better internal control as the costs incurred in each activities will be
managed and have the adequate control over it.
Advantages and disadvantages of the investment appraisal methods
Payback period: This is the time on which the initially invested cash amount will be
recovered in the upcoming time. To identify when the company will recover such invested
capital there are several operations and analysis will be made which in turn helps in determining
the profitability of the projects (Campbell, 2017). However, there will be various advantages and
disadvantages of this technique such as:
Advantages:
 This is the easiest and convenient way of determining the outcomes.
 It will be beneficial in identifying the risks involved in such projects and determines the
profitably of the cash inflows.
 It helps the organisation which are facing the liquidity problems with providing the
information about early return of the money (Block and et.al., 2018).
Disadvantages

 It does not consider the time value of money as it did not consider the discounting factors
which examining the data set.
 It did not consider the amount of cash flows which incurred after the measurements of the
payback period (Payback Period, 2013).
Net present value: This ascertains the present value of the future cash flows which helps
the managers in analysing the profitability of such projects. It facilitates the accurate information
regarding the profitability of the projects and help the business to have modification in the plan
(Castellucci and et.al., 2017). It is the accurate way of determining the fruitfulness of the projects
in the development and growth of the entities.
Advantages
 It is the easiest way of identifying the profitability over such projects and investments
planned by the professionals.
 It considers the time value of money as there has been influence of the discounting factor
which will be fruitful in determining the accurate outcomes (Alkhamis and et.al., 2017).
 It provokes the investors by the outcomes to make the investment decisions in the
business.
Disadvantages
 It considers the guesswork in measuring the cash flows for the planned period which in
turn does not bring the surety of having the accurate results.
 The results brought from two or more projects does not bring the adequate information
about the investments to be made or not as all the invested plan belongs to the different
time scale and it will be inaccurate in analysing the profitability ion the basis of same
discounting factors (Adiwibowo, Lestari and Manalu, 2018).
Internal rate of return: To ascertain the returns a firm will acquire through its invested
projects on the basis of the proposed period this technique is most required. It identifies the rate
on which the firm will have the profitable returns over the period. Therefore, there are several
advantages and disadvantages of this method plan which are as follows:
Advantages

 The estimation of the projected cash flows will be based on considering the time value of
money.
 There will be no influence of any hurdle rate to identify the rate of return.
Disadvantages
 It considers only the cash flows as it ignore the other factors such as economies of scale.
 The analysis is based on several assumptions and estimations which does not bring the
reliability over the outcomes (Malek and et.al., 2017).
2. Illustrating the various terms of investment operations
NET PRESENT VALUE:
Project 1: Reading Venture
Year Cash flow
Discounting factor
@10% Present value
0 20000000
1 7500000 0.909 6818181.818
2 7800000 0.826 6446280.992
3 8000000 0.751 6010518.407
4 8100000 0.683 5532408.988
5 8700000 0.621 5402015.511
6 8800000 0.564 4967370.584
7 9200000 0.513 4721054.688
8 9500000 0.467 4431820.112
9 9900000 0.424 4198566.422
10 11000000 0.386 4240976.184
Total Present value
52769193.706002
3
Initial investment 20000000
Net present value 32769193.706
Project 2: Bristol Venture