Business Finance Report: Comparing Profitability and Cash Flow for WFB

This report delves into the core concepts of business finance, focusing on the critical distinction between profitability and cash flow, using the case study of Wild Frontier Builders (WFB). The report meticulously examines profitability, its measurement through various methods like net profit margin and gross profit margin, and contrasts it with cash flow, detailing its components (operating, investing, and financing activities) and measurement methods. Furthermore, the report explores working capital management, its significance in ensuring continuous business operations, and the strategies and tools for effective management, including cash management, inventory management, and debtor management. The report also covers capital budgeting, outlining its process and methods such as the net present value method. The document serves as a valuable resource for students seeking to understand and apply financial principles to real-world business scenarios.

Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
i)..................................................................................................................................................1
ii).................................................................................................................................................2
Iii)................................................................................................................................................3
TASK 2............................................................................................................................................6
I)..................................................................................................................................................6
II).................................................................................................................................................8
iii)................................................................................................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Business finance is related with various activities which revolves around the monetary
aspects. The companies require to understand the areas where the investment of funds and
effective debt management can be done. In order to raise the company profits, it is crucial for the
manager to have good amount of understanding about the business finance. This will assist the
organization to identify the areas where funds can be invested and debt management can be
done. The present report is based on the case study of Wild Frontier Builders (WFB). The
organization deals in the maintenance of property where buying and selling is done. In addition
to this, the firm provide plumbing, roofing, electrical and other small building work. The cited
document is prepared with a purpose to compare the difference between profitability and cash
flow. In addition to this, the application of working capital is also going to be included in the
report. This provides an effective understanding to reader to have good knowledge about
business finance (Ahmed, 2010).
TASK 1
i)
Profitability can be defines as the profit earning capacity of the organization. Profit ca be
explained as the amount left after paying all the expenses. In addition to this, without
profitability none of the business can survive for the long period. This can be measured by
considering income and expense of the company. The profitability of the organization can be
measures with the help of income statement. In order to attain the profitability of the firm, there
are different methods are available for the business. Whereas, the profits can be calculated with
the help of four methods such as net profit margin, gross profit margin, comparative expense
analysis and profit by statements. In addition to this, net profit margin can be calculated with the
help of revenue less expenses. On other hand, gross profit margin can be calculated by deducting
sales revenue minus cost of goods sold. In addition to this, comparative expense analysis helps in
identifying the percentage of the data related with two years. All these methods helps an
organization to address the profits of the company (Budgeting, 2013).
In context to above, cash flow statement is a document which depicts the inflow and
outflow of the cash in an accounting year. It mainly consist of three activities like operating,
investing and financing activities. In operating activities there are different activities includes
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such as receipt form the sales of loan, payment to the supplier etc. It can be said that, operating
activities are the one which is based on transaction related to the operations of the business. It
also includes all the items which are related with gain or loss of the business. In context to this,
investing activities are those which are used for the investment purpose of the business. If any
investment is done in the business then it is included in investing activities. The examples of the
same are purchase and sales of assets (Broadbent and Cullen, 2012). In addition to this, payment
related to mergers and acquisition is also comes under this head. In context to this, financing
activities are the one in which the cash flow is done with the help of investors. The examples of
the same are purchase of shares and dividend paid. However, this can be concluded that, cash
flow and profitability are distinct with each other. In order to calculate the cash flow of the
company there are two methods. It consist of direct and indirect method are considered to
measure the amount of cash flow statement. The effect of profitability can be analysed with the
help of profit and loss account. The effect of cash flow statement is on the balance sheet
(Drechsler and Natter, 2012).
ii)
The motive of working capital management is to identify the continuous working of the
company operations. With the help of this concept a firm can evaluate its sufficiency to meet
both the short band long term expenses. However, the stated organization can measure its
working capital by deducting current liabilities from current assets. If the working capital of the
company is good then it sates that cash convertible efficiency of the company (Chazi, Terra and
Zanella, 2010). The positive working capital of the company defines the ability of continuous
operations. It can also be said that the time taken by the business to convert the assets into cash.
The shorter the cycle the better the position of the company and vice versa. In addition to this,
working capital financing can be done with the help of different methods such as lines of credit,
trade credit, factoring and short term loans. The working capital of the company can be positive
or negative where the firm needs to analyse the optimum level. As per the case study the working
capital of the company is not that good. This concept helps the company to identify its operating
efficiency. The working capital of the company can be managed with the help of certain
techniques and tools which are given below (Chazi, Terra and Zanella, 2010).
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Cash management: It is necessary for the organization to identify the cash availability of the
company. For the same, the management needs to take care of the cost and expenses. This should
not be increased on the daily basis.
Inventory management: This is the most important area where the firm is required to focus on
the management of the inventories. For the same, the organization needs to adopt the inventories
control methods such as just in time and economic order quantity. These methods will help the
management to make a proper data of the raw material used and remained (Drechsler and Natter,
2012).
Debtors management: This is the next tool which should be adopted by the company. Here the
firm needs to focus on the credit policy of the organization. The management needs to focus on
managing discounts and allowances. This will help the company to make an effective
management of the debtors (Annual Report and Accounts for 2015).
Short term financing: The company can adopt the short term financing process so that it will be
able to meet out its operational expenses on daily basis.
Iii)
1. Manage working capital actively throughout the organization – the company can
improve their working capital by way of proper management flow and right
strategy plan (Anderson and et. al., 2015). Thus, it is only possible by circulating
proper fund flow within the organization.
2. Considering the alternative funding – The alternative funding is the most
important factor which is helpful in worse situational (Bazerman and Moore,
2012.). This fund arranges by enterprise by using long term planning. It collected
with small portion an used when it is needed.
3. Pay supplier at appropriate time period – any of the organization supplier play a
important role because he provides good as organization nature (Broadbent and
Cullen, 2012), further, this person also provide credit to enterprise when they
needed, therefore, when enterprise pay to supplied at specific time period then its
make a good image of company in the mind of supplier (Kaplan and Atkinson,
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2015). Thus, they are also ready to supplier good even in enterprise face a worse
condition.
 Mange stock activity – Maintenance of stock activity is important because it is
indicated to undertaking for whole operation with proper manner (Moynihan and
Pandey, 2010). Therefore, the activity of stock at every level is important for
manage working capital. In addition, it is highlighted to on pinpoint area to
management for situation which may arise in future time period.
1. Manage payment process more effectively – in the modern time period, every
organization focus on online mode payment because it is more accurate, reliable
and recorded item (Siano, Kitchen and Giovanna Confetto, 2010). Every payment
should be cashless for proper management of fund. Even in organization payment
should be online by using system.
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2. Distributing of responsibilities – the responsibilities must be serve to different
person in organization further, particular person will be liable for specific work
only. It is liable to person completing work (Raising capital: Equity vs. Debt. 2009).
3. Internal audit – This is the universal concept for every organization for check their
books of account with proper manner. Further, this method, help to detect fraud
and error arise during transaction (Anderson and et. al., 2015). Therefore, when
every would be reliable and accurate then working capital will manage with proper
manner.
4. Enterprise resources planning – it is one of the software program application
which has used within the organization for manage whole undertaking operation
(Bazerman and Moore, 2012). This system has operated by every department for
every transaction. So that accuracy of transaction has been maintained. Therefore,
ultimately it helps to manage each transaction.
5. Six segama rules – it is scientifically proved rules which exhibit that organization
must considered on 0% defect (Broadbent and Cullen, 2012). Further, chances of
error must be null.
6. Access current position - The management should be considered the past data and
record for analysis of current position of enterprise (Kaplan and Atkinson, 2015).
It is because of it shows the actual position of organization with proper manner. So
that, on basis of past record management assumed some idea for strategy
(Moynihan and Pandey, 2010).
7. Track of performance – knowing of performance is necessary because when it is
known then it is easy to known that what action should be taken for manage
working capital (Siano, Kitchen and Giovanna Confetto, 2010).

TASK 2
I)
Capital budget process is important in every organization because it helps to
manage it with scientific manner (Raising capital: Equity vs. Debt. 2009). Therefore, for the
maintenance purpose, organization has various option to choose. There is mainly five
stage is under followed for managing capital budgeting.
1. Identify and evaluate potential opportunities – for the purpose of capital budgeting, it is
necessary to evaluate the initial opportunities for organization with proper manner
(Anderson and et. al., 2015). Therefore, enterprise should focus on various option and
find out the appropriate option as their business need and requirement (Bazerman and
Moore, 2012). Along with, it should link with future need as well for better capital
management.
2. Estimate operation and implementation cost – the higher authority should also be
considered for operation cost as well as implementation cost (Buhovac, 2014). It is
necessary for taking right decision with appropriate method and techniques. Therefore,
only focus on cost of assets is irreverent if operating and implementation cost is much
higher during operation (Epstein and Buhovac, 2014). Generally, finance management
check it by using comparing method.
3. Estimate cash flow benefits – Management should be focus on long term benefits on
capital assets. Therefore, they should also consider on benefits which arise in future time
period. The profitability must be divided in estimate year (Raising capital: Equity vs.
Debt. 2009). Along with, they should also evaluate cost recover time period. In last, brief
analysis of recovery of cost provide the mathematical review which gives appropriate
suggestion for long term benefits.
4. Assess risk – The risk factor in the organization is most considerable thing because of
earlier preparation is necessary for protecting from any tragedy (Siano, Kitchen, and
Giovanna Confetto, 2010). On the other hand, management should also prepare for
alternative in their strategy because of this protect from any of the risk to enterprise.
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5. Implementation – management should implement the plan by reviewing every
considerable thing. Along with, he should discuss with higher authority and related
department.
Method are as follows-
 Net present value method – this type of method has based on value analysis with
particular time period (Moynihan and Pandey, 2010). Therefore, total value of revenue
and cost has converted in to present value for particular time period. This method has
based on money value which has reduced particular time basis (Kaplan and Atkinson,
2015). Its main objective is to provided present value of capital investment for purpose of
showing net value.
 Internal rate of return – it shows investment efficiency with scientifically method
(Buhovac, 2014). Further, cost of capital investment in company works out to be more
than the Internal rate of return value, the whole project would be rejected. On the other
side, vice versa situation emerged.
 Profitability Index – This method is based on calculation of value per unit of capital
investment (Moynihan and Pandey, 2010). On the other hand, it is also identified by ratio
between investment and profit investment ratio. Thus, it is simply a compared ratio with
invested amount and profit amount.
 Pay back period – this method is mostly based on net present value method, further, it
shows recovery investment in particular time period (Siano, Kitchen, and Giovanna
Confetto, 2010). Investment funds amount for future time is analysis by the analyzer with
focusing various factor. Apart from this, it is totally based on standard assumption which
may probably to not correct 100% (Epstein, and Buhovac, 2014.). but it may provide
appropriate information to take decision.
 Real Option Analysis – this method provide the data which is based on real data
(Bazerman and Moore, 2012). Further, this shows option for investment and shows every
cost and factor link with investment. Therefore, management choose real option as their
company situation.
II)
As per the given case scenario, EyeWatering Inc should focus on following of factor is as
under:
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 Investment – management of EyeWatering Inc should check on cost of both the
investment. Further, there call of the Assassins Part XXIII is required more investment
than Coalmining & Oil Extraction. In addition, different of 4 billion pound investment.
 Recovery time period – both of the investment gives different time where both has
recovers. Where Call of the Assassins Part XXIII takes a 2-4 year for recovery whole
amount. On the other hand, Coalmining & Oil Extraction, takes 4-5 year for recovery
(Anderson and et. al., 2015). But different may be vary on the basis of amount of
Investment.
 Useful life - Management should be considered useful life of capital assets because it
shows the long term benefits. Further, if it is good then management opt as accordingly
(Broadbent and Cullen, 2012.). On the other hand, long term benefits should be
considerable for choosing any of the assets. Thus, assets provide short term benefits is not
considerable for investment.
 Index value – for propose of find out the present value of assets, index value must be
considered (Kaplan, and Atkinson, 2015). Management required the estimate index value
on which 'present value can be evaluate with proper manner.
 Graphical representation – For the purpose of easy undertaking , graphical representation
is necessary because of it shows the real situation which management should be
considerable. It is generally used in real option method for purpose of comparing of two
assets.
 Depreciation – it is the most important thing which management have to considered
while analysis of both assets (Siano, Kitchen and Giovanna Confetto, 2010). Therefore,
every value for different year are calculated after deducting depreciation value.
 Revenue – Management must be focusing on this factor for taking decision making.
Every organization is based on profit. Therefore, manager choose capital assets on the
basis of revenue earned.
iii)
It can be assessed that implementing both real option method and present value method is
suitable for firm to examine the effectiveness so that success can be attained. Through using such
method it assists in making effective decisions and thus analyse that EyeWatering Inc helps in
making effective decisions regarding investment within different proposal and selecting the most
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suitable so that good amount of return can be gained (Broadbent and Cullen, 2012). From the
given case it can be identified that cited business plans to invest within two different projects i.e.
Call of the Assassins Part xxiii and Coalmining & Oil Extraction in regard to select the most
suitable option for EyeWatering Inc and thus which among them could give high return in small
time period.
Business aims to invest at least $ 10 million in Call of Assassins Part xxiii and thus
expects that return will be obtained in next 2-3 years and machine will remain in well condition
for 2-4 years after launching the product. While, business aims to make investment of $ 6 million
in Coalmining & Oil Extraction and aim to gain fairly return in next 1-2 years which is very
short time duration (Anderson and et. al., 2015). Thus, it would benefit firm in increasing the
profitability of firm in market. However, the machine will run for around 4-5 years which is also
high as compared to Call of the Assassins Part xxiii. Thus, it could be assessed that through
carrying put comparison between two different machines, EyeWatering would like to invest in
Coalmining & Oil Extraction business as it is requiring low investment and giving high return
over a small time period. Further, machine will also run for long time period and will get
obsolete in future. Therefore, it is essential for business to make effective decision and thus
implement real option method and present value method so that its life can be identified as well
as decision could be made in regard to implement the results that selecting Coalmining & Oil
Extraction business for investment is crucial as it assists in gaining high return over a small time
period.
CONCLUSION
It can be concluded from the study that business finance needs to be assessed effectively
in regard to carry out wide range of activities and thus helps in solving the problems faced within
firm. The main purpose behind preparing business finance report is that it assists in assessing the
main different between financial statements and thus evaluate the business performance in
market. Further, it identifies that EyeWatering Inc aims to take decision in regard to invest
within Coalmining & Oil Extraction because here investment of $ 6 million is required that will
be gained in 1-2 years and also the machine will run for around 4-5 years in future.
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REFERENCES
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