Business Finance Report: Financial Ratio Analysis of Browns PLC

This report provides a comprehensive financial analysis of Browns PLC, focusing on key financial ratios and cash flow management. The analysis includes calculations and interpretations of the gross profit margin, operating profit margin, current ratio, quick ratio, inventory holding period, and payables payment period for the years 2018 and 2019. The report highlights the company's operational efficiency, liquidity position, and working capital cycle. Furthermore, it differentiates between profit and cash flow, explaining their roles and importance in assessing a company's financial health. The report also discusses the relevance of calculating certain financial metrics, such as the receivables collection period, in the context of Browns PLC's operations. Finally, the report addresses the understanding of financial information and the management of cash, including working capital, receivables, inventory, and payables, and their impact on cash flows.

BUSINESS FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
PART- 1: FINANCIAL RATIO ANALYSIS.................................................................................1
Ratio Analysis..............................................................................................................................1
Interpretation................................................................................................................................2
Irrelevance of calculating the receivables collection period in this scenario..............................4
PART- 2: UNDERSTANDING FINANCIAL INFORMATION AND MANAGEMENT OF
CASH...............................................................................................................................................5
2.1 Explaining profit & cash flow and their differentiation........................................................5
2.2 Explaining working capital, receivables, inventory and payables.........................................7
2.3 Reasons for changes in the working capital affecting the cash flows...................................7
2.4 Appropriateness of the traditional and the alternative budgetary system for the business....9
REFERENCES..............................................................................................................................11

PART- 1: FINANCIAL RATIO ANALYSIS
Ratio Analysis
2019 2018
S.NO RATIOS FORMUALAS
CALCUL
ATION
CALCUL
ATION
1 Gross Profit Margin Gross profit / Revenues * 100 7.51% 5.60%
Gross Profit 1540 1000
Revenues 20510 17835
2 Operating Profit Margin
Operating profit / Revenues *
100 3.17% 2.97%
Operating Profit 650 530
Revenues 20510 17835
3 Current Ratio
Current assets / Current
liabilities 0.54 0.6
Current Assets 1570 1610
Current Liabilities 2920 2650
4 Quick Ratio
(Current assets – Inventory) /
Current Liabilities 0.25 0.23
Current Assets 1570 1610
Inventory 850 1000
Current Liabilities 2920 2650
5 Inventory Holding Period Inventory / Cost of Sales * 365 16.35 22
Inventory 850 1000
Cost of Sales 18970 16835
6 Payables Payment Period Trade Payables / Cost of Sales * 40.41 49
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365
Trade Payables 2100 2280
Cost of Sales 18970 16835
Interpretation
Gross profit margin- The gross profit margin of the company shall be representing the
operational efficiency through conducting the routine business transactions in the company.
It is depicted in the percentage form wherein the gross profits that are earned are divided by
the revenues that are generated over the period for the organization. The higher is such ratio
the better it is for the profitability position of the business showing the lesser costs of
production. From the above table it can be represented that for Browns plc the gross profit
margin has increased from 5.60% in the previous 2018 to 7.51% in the current year 2019
(Agustina and Suprayitno, 2020). This reflects the significant increase which can be due to
the increased operational efficiency pertaining to the increased sales of the online food
delivery and the clothing business. The reason behind interpreting the gross profit’s ratio
increase is due to inclination of online food home delivery that has increased present year
GP than previous
 Operating profit margin- The operating profit margin of the company shall be showing
the performance that is generated through the routine operations that are undertaken by
the business. It is calculated by dividing the operating income to the sales of the company
and the operating income is identified post the deduction of all the operating expenses
that are incurred. As inferred by the above tabular representations the operating profit
margin of the Browns plc has also improved as compared with the previous year when it
was 2.97% and in the current year 2019 it has increased to 3.17%. The major reason for
this can be the strong and the aggressive marketing campaign that is being undertaken to
attract the larger portions of the market to the products and the services that are offered. Current ratio- The current ratio of the company shows the availability of the liquid assets
to meet the short term liabilities and obligations of the business. This shall be reflecting
the liquidity position and the maintenance of the credibility in the organization and
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simultaneously fulfilling the company objectives. Apart from that it shows the
availability of the funds for the payment of the liabilities that arise within the period of
one year that are categorized as the short term liabilities. The ratio analysis that is being
conducted above from the financials available of the Browns plc shows that the current
ratio of the company decreases as compared to the past year and this shows the
deterioration in the liquidity position of the company. In the year 2018 the ratio was 0.6
which has now decreased to 0.54 in the year 2019 which is the red signal for the company
as they have the insufficient balances to meet the liabilities. The major reason for the
change occurred in current year performance regarding this particular matrix is that
number of store has grow that has reduced available liquidity as part of fund has been
invested for this purpose, Quick ratio- The quick ratio of the company shows the availability of the highly liquid
assets in the company to fulfil the short term debt obligations of the company. The highly
liquid assets are the ones that can be easily converted to cash and equivalents. This does
not include the inventory and the prepaid expenses of the company as they are readily
available as cash (Easton and et.al., 2018). The above table that is formed for the Browns
plc shows that the quick ratio of the company has increased as compared from the
financial statements. As it can be evidently be noticed that in the year 2018 the ratio was
0.23 which increased to 0.25 in the year 2019 which is the positive signal for the
company and its liquidity position. This is because the calculations of the quick ratio are
not impacted by the closing balance of the inventory and that is the reason the increasing
trend is visible. The reason behind alternation in present outcome is change in customer
buying behaviour which has increased for 20% as compared to previous that has resulted
into little change of capacity to meet with short term obligation.
 Inventory holding period- The inventory holding period of the company highlights the
average number of days the inventory is hold by the business organization. This is found
out by dividing the average inventory by cost of sales and then multiplying it by 365
days, the result must not be too high showing that the funds are unnecessarily blocked
and the loss of the opportunity costs is taking place in the year. It can be analysed that in
comparison with the previous year the inventory holding period this year has reduced
significantly and the major reason for this is that the turnover of the company has
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increased in terms of online food delivery and the sale of the clothing and apart the
aggressive marketing has also contributed to the maximization of the revenues. The other
fact is that since Browns plc has the supermarket business and the food products have
closer expiry that is the reason that the inventory holding period shall be shorter. The
reason can be considered that online delivery ahs increased which has impacted in same
manner. Payables payment period- The payables payment period reflects the average number of
days it takes the company to make the payments that are due to its suppliers and the
creditors. For the smooth conduction of the working capital cycle by the company it can
be assessed that the payables ratio must be in sync with the receivables ratio so that the
liquidity flow can be maintained (Heriyanto and et.al., 2021). It can be assessed that
earlier in the year 2018 it took averagely 49 days to pay the due amounts but now in the
year 2019 it approximately takes 40 days to do the same. This means that with the ratio
the credibility of the company has improved. Since the long term borrowings have been
taken so it can be identified that the company has the sufficient availability of the funds.
Major reason behind is that new strengthened Grocery Supplier Code of Practice came
into force to improve grocery retailers’ treatment of suppliers in terms of fairer prices. It
has helped to pay debts in lesser time.
Irrelevance of calculating the receivables collection period in this scenario
It can be assessed that the calculation of the receivables collection period is not relevant
for the company Browns plc as 100% of its operations are in cash and so the matter of the
collection of the credit does arise for the company (Basuki, Hidayat and Budiwitjaksono, 2020).
Apart from that it can also be analysed that since major proportion of the sales are being
conducted online for the company that is the reason either the payments are made through online
modes of payment or it can be through the physical payments on delivery. So in this case the
scope for the credit transactions decrease. Further the retail business of the supermarkets are also
undertaking the operations in the full cash system.
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PART- 2: UNDERSTANDING FINANCIAL INFORMATION AND
MANAGEMENT OF CASH
2.1 Explaining profit & cash flow and their differentiation
Profit refers to gain company is earning from executing business transaction through
deducting expenses from revenue generated. It is one of the crucial objective of organization for
which is incurred to earn gain in terms of money. Achieving financial benefits are as well
referred as having profitability in company that tends to meet business goals. This is considered
to be one of the crucial aspects of measurement regarding company’s financial health (Laguecir,
Chapman and Kern, 2019). The margin taken into consideration for evaluating organization’s
success differs from industry to sector. Higher profit indicates good liquidity position and lower
signs poor position in industry. Several types of stakeholders highly give emphasis on
profitability for decision making. There are various situations in firm which indicates profitable
but posses lower cash balances as they include accrual principle while estimating the same. Non
monetary transaction such as depreciation, amortization, etc are taken into action while deterring
profits which creates differentiation in actual & estimated.
Cash Flow (CF) is real movement of money in and out of organization which is obtained
from three categories. It comprises operating, investing and financing which play important role
in deciding stability of organization. Operating cash flow includes money generated from main
business practices, financing are concerned with activities regarding capital assets & investment
and equivalents gained from debt, equity, etc. These are the forms which are utilized by
organization to have smooth functioning through maintaining liquidity. If the money is coming
due to implementation of entity activities it’s known as cash inflow. The cash and equivalent
incurred for practices are considered as outflow. Positive CF indicates firm is having stable and
sustainable liquidity position and recovering obligations via optimum utilization of resources.
Differentiation between profit and cash flow
Purpose
 Profitability helps in identifying that organization is going in right direction or not. For
example- it helps in identifying profitability through including sales credit as well to get
appropriate knowledge
 This provides guidance in evaluating capability in terms of monetary resources for reaching
the desirable position by evaluating the impact of depreciation, etc
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Basis of Outcome
 It can be estimated in terms of value creation. This provides helps in measuring firm’s
financial health and sustainability. It basically highlights gain remaining after all cash and
non monetary activity
 CF can be thought about in form of time like month, week or yearly operation depending
upon enterprise requirement. CFS is prepared for each period to get appropriate knowledge
of specific duration avail resources through removing irrelevant manipulation of non
monetary transaction
Procedure
 It is procedure of formulating cash for smooth functioning of organization (Profit vs. Cash
flow: What is difference? 2021). Various practices like selling on credit, holding inventory ,
etc to generate revenue to gain financial benefit.
 CF is crucial source material for generating profitability. It helps in having enough capacity
for reach position of higher liquidity through gaining financial advantages through.
Life span
 Company can survive in industry for particular span of time in absence of profitability
 It becomes difficult to have processing in company in non presence of cash flow. It leads to
closing of business operational practices.
Consideration
 This aids in making assessment regarding business activities for knowing longer run cash
flows in business.
 It is concerned with managing actions timely in respect to maximize profitability.
Pattern to gain
Sale made beyond the breakeven point brings profitability in organization. Treatment of
depreciation is here exerted as cost
 It is affected by the timings of payments into & out of the firm as profits can be manipulated
but not cash.
Timeliness
 Cash must be currently available in order to replenish supplies , pay employees, etc. But
profit comes when firm has become successful after bearing all these expenses.
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2.2 Explaining working capital, receivables, inventory and payables
 Working Capital
WC is the amount of money which is utilized in day to day practices by organization. It helps in
meeting short term expenses that due within year and it is obtained from the difference between
current assets and liabilities. Good WC ensures smooth processing of enterprise that lead to
attain sustainability.
Formula:
WC= Current assets – current liabilities
 Receivables
Receivables are referred as amount payable by customers to company as goods are sold
on credit. It is legally enforceable claim for payment held by business for goods supplied or
services rendered to customer but not paid. It aids in building good relationship with customers
and increases market share.
Payables
It is created any time when money is owed by a firm for services rendered or products
provided that has not yet been paid by organization.
Inventory
This is important term that is used for finished goods, raw material and work in progress
for the purpose of production . It is taken into practice for determining organizational efficiency
of manufacturing process (Dagnall and et.al., 2018). Stock decides firm’s capability of meeting
market forces which contributes in increasing market share to generate more revenue.
2.3 Reasons for changes in the working capital affecting the cash flows
The changes in the working capital of the company shall be affecting the cash flows in
case they are cash transactions as associated with the current assets and the current liabilities and
are resulting in the movements of cash (How changes in working capital affect your net cash
flow in business valuation, 2021). If there is an increase in the working capital of the company
then it shall lead to the drainage of the cash flows which is the indication that the management of
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the company is investing the resources for the short term. On the other hand if the working
capital of the company is negatively impacted then it means that there are cash inflows in the
form of short term borrowings to finance the operations of the business.
Receivables is important part of working capital which are recorded at the time of sale, it
decreases when payments are made by customers that is included in current assets par of balance
sheet. In order to have effective functioning of organization it becomes important for company to
formulate appropriate receivable collection period. Payables are recorded as liability side of
balance sheet as these are due to pay. Overcoming debt on time brings trustworthiness and
credibility which makes raising funds easier as compared to previous. Receivables and payables
are important part of working capital as it play role of increasing and decreasing cash flow of
company. Inventory contributes in reducing cash available within company.
Cash operating cycle is helps in measuring effective availability of cash tied up
with WC. Having effectual pattern of COC aids in gaining knowledge how much tiem firm
requires to convert out flows into inflows. Good WC is obtained through quick operating cycle
that signs lower amount of investment is needed to increase profitability and bring cash in
company. Offering credit can be risky for company s there is possibilities of occurring bad debt
which decline liquidity. The inventory holding decreases the ability of generating revenues and
results in unnecessary cost. It impacts the current assets side of WC which largely influence CF.
Company receives benefits from longer payable time as it gets ability to hold some cash for
utilizing in order to obtain smooth functioning. The benefits includes increasing efficiency of
operational practices, time to arrange funds for paying debt, capacity of meeting unforeseen
circumstances, etc. Appropriate availability of cash flow helps in removing situation of
bankruptcy via meeting payments on proper time.
There are different types of the transactions related to these both elements like if the
current asset increases keeping others constant then the working capital shall increase and the
free cash flows will decrease. In the similar way current liabilities increase then the working
capital decrease and the free cash flows increase. Lastly if the increase in the current assets is
higher than that of the current liabilities then again working capital will increase and the cash
flows shall be decreasing. These shall be important in the valuations of the company.
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2.4 Appropriateness of the traditional and the alternative budgetary system for the business
The traditional budgetary system for the company can be the method of incremental
budgeting. In this the management of the company shall be making the future projections based
on the past data and making the necessary adjustments as proposed in the future. The figures of
the past budget are only adjusted with the future changes like inflation, change in the demand
and supply forces and the level of the capacity at which the business shall be working. These
figures are then communicated to the employees so that the targets of the business are fulfilled.
Advantages of this system is easy to implement, promotion of decentralization, stability in
organizational function, etc. The related limitations are fixe & rigid nature, reliance on historial
data, improper allocation of resources, etc
Zero Based Budgeting
On the contrary the modern budgetary system involves zero based budgeting technique
wherein the budgets showing the future operations of the company are prepared from the zero or
scratch and accordingly every line of item that is involved shall be justified for the business. It’s
advantages includes that this does not consider the past figures rather accumulate all the
information based on the current trends of the business (Karmańska and Wiśniewska, 2020). It
can be assessed that the modern budgetary system is more appropriate for the businesses as this
shall provide with the accurate data after the analysis, the chances of the achievement of the
organizational objectives shall be higher, it will involve the optimum allocation as well as the
utilization of the resources. It is superior to the traditional methods as all the expenses are
justified and accordingly the profitability and the revenues of the Browns plc shall be boosted.
Disadvantages comprises the process of zero based budgeting is time-consuming and requires the
specialized staff that can enquire about each and every figure pertaining to the budgets.
Incremental budgeting
This prepared by making marginal changes in current budget for gaining competitive
advantages. As compared to traditional budgeting it is most simple to make some changes as per
the current scenario. With help of saving efforts through implementing alteration to current
budget fir can get operational and consistency stability. There is possibility of declining internal
rivalry as clarity regarding roles responsibility can be obtained. Drawback of it is includes leads
to extra spending, budgetary slack, waste of resources, based on unreal assumption, etc. It can be
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concluded that this is one of the most appropriate technique to gain efficiency and flexibility in
operational practices at all levels.
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