Business Finance Report: Financial Analysis of Browns Plc (MOD003319)

This report presents a financial analysis of Browns Plc, examining key financial ratios and cash flow management. The analysis includes a detailed breakdown of the gross profit margin, operating profit margin, current ratio, quick ratio, inventory holding period, and payables payment period, comparing data from 2018 and 2019. The report delves into the concepts of profit and cash flow, differentiating between them and exploring the significance of working capital, receivables, inventory, and payables. It also discusses the impact of changes in working capital on cash flow and the importance of understanding financial information for effective business management. The report provides insights into Browns Plc's financial health and performance over the specified period.

Business report of Browns Plc

Table of Contents
PART 1: FINANCIAL RATIO ANALYSIS..................................................................................2
PART 2: Understanding Financial Information & Management of Cash.......................................7
2.1 Profit and cash flow...............................................................................................................7
2.2 Meaning of working capital and receivables inventory and payables...................................8
2.3 Changes in working capital impact the cash flow.................................................................9
2.4 Traditional or alternative budgetary system..........................................................................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................10
1

PART 1: FINANCIAL RATIO ANALYSIS
Particular Amount (2018) Amount (2019)
Sales 17835 20510
Cost of goods sold 16835 18970
Gross profit margin ratio 5.61% 7.51%
For 2018
Gross profit = 1000.00
Net sales = 17385
Cost of goods sold = 16835
Gross profit margin = net sales – cost of goods sold/ net sales
17835-16835/17835
5.61%
For 2019
Gross profit margin ratio= 7.51%
Gross profit = 1540.00
Gross profit margin = net sales – cost of goods sold/ net sales
20510-18970/20150
7.51%
Gross profit margin ratio refers to the overall change value of the company after covering all the
direct cost which is associate for the business (Sassen, 2017). Gross profit margin is one of the
metric which used to analyse the financial health of the company by calculating the total amount
of money which is left by sales and after deducting the cost of goods sold. This ratio is orphan
known as the gross profit because it is shows the percentage of net sales. In the year 2018 the
gross profit margin ratio is 5.61 % and India 2019 it has been increased to 7.51 % which clearly
shows that the sales of the company has been increased therefore the cost of goods sold also has
to increase and in result the company is generating more profit and revenue. This can be possible
due to the increase in home delivery and online of the company therefore the overall revenue and
sales has been increased and companies in generating good profitability. With the help of high
2

profit company can go for further investment as well and in result in future company can produce
more quality products and fulfil the market need.
Operating profit margin ratio
Particular Amount (2018) Amount (2019)
Sales 17835 20510
Operating income 530 650
Operating profit margin 2.97% 3.17%
For the year ended 2018
Operating margin = Operating income/net sales*100
530/17835*100
Operating profit margin
2.97%
For 2019
Operating income = 650
Operating margin = Operating income/net sales*100
650/20510*100
3.17%
Operating profit margin is used to measure the profit of a company which the company has
earned from the sales by deducting the entire variable and fixed costs such as wages raw material
cost of production etc. Operating profit shows the profitability and overall performance of the
company in the form of percentage (Ahlström, 2019). This ratio overall status about a company’s
earning and generating profit with the help of sales. It is being calculated by subtracting the
overall cost of goods sold and other expenses from the sales. So that the company may know
where there is standing in how much effort they have to put more so that they can increase the
overall profitability. Operating profit ratio for the company in the year 2018 was 2.97 % and in
the year 2019 it has increased to 3.17 %. It has been clearly seen that the overall operating
income of the company has been increased in 2019 the operating income was 650 as compared to
2018 in result it has been seen that the overall sales of the company and operating income has
increased. The design can be that company has increased the number of stores and also get
3

finance from long term borrowings in resulting company is able to make more investment in the
business therefore the operating income and revenue is continuously increasing.
Current ratio
Particular Amount (2018) Amount (2019)
Current assets 1610 1570
Current liabilities 2650 2920
Current ratio 0.60 0.53
Current ratio = Current assets/ Current liabilities
For 2018 = 1610/2650
=0.60
For 2019 = 1570/2920
0.53
Current ratio refers to the liquidity ratio of the company which clearly states that our company
can use their current assets so that they can repay their short term liabilities and obligations.
Current asset is very necessary for the company as it helps the company to pay working capital
expenses as well (Prince, 2017). The current ratio of this company in 2018 was 0.60 % on the
other hand it has been decreased to 0.53% which shows that company is not able to generate
money against their current asset and therefore it is unable to repay current liabilities. On the
other hand the current liabilities of the company is continuously increasing in 2018 the current
liabilities was 2650 on the other hand in 2019 it has been increased to 2920 which clearly shows
that company is taking more short term loans and applications apart from this the current asset is
continuously decreasing in the year 2018 the current asset was 16 10 and 2019 it has decreased
and becomes 1570 so come please unable to generate money against their current assets. It can
be possible that company is heavily rely on long-term liabilities and therefore they are not taking
care of their current assets and current liabilities in result the current ratio of the company is
continuously decreasing.
Quick ratio
Particular Amount (2018) Amount (2019)
Current assets 1610 1570
Inventories 1000 850
4

Current liabilities 2650 2920
Current ratio 0.23 0.25
For 2018
Quick ratio = Current assets- inventories/ Current liabilities
1570-850/2920
0.25
For 2019
=1610-100/2650
0.23
Quick ratio is being used by the company to measure the short term liquidity and its position in
the company and how can company meet their short-term loans and obligations with the help of
liquid assets (Hidayat and et.al 2021). It happens to the ability and capacity of the company to
instantly use their cash and also convert the current assets into cash and cash equivalents so that
they can easily be paid the current liabilities as this ratio is also known as acid test ratio. Quick
ratio produces more real and instant results to the competition that the management of the
company can take quick decisions related to current assets and liquidity of the company. Quick
ratio of this company 0.2 3% in 2018 on the other hand it has been increased to 0.25% in 2019
which shows that company has proper current assets and they are managing very well therefore
the company can convert their current assets into cash quickly. After converting the assets into
cash and cash equivalents company can easily repay their short term loans and liabilities. When
the company is able to repay the loans and liabilities then it also increases their goodwill and
reputation in the market.
Inventory holding period
Particular Amount (2018) Amount (2019)
Cost of goods sold 16835 18970
Inventories 1000 850
Inventory holding period 21 16
Inventory holding period
5

365*average inventory/cost of goods sold
For 2018 = 21 days
For 2019 = 16 days
Inventory holding period as to the number of days in which the business hold the entire
inventory. The formula of calculating inventory holding period is the entire inventory divided by
cost of sales and also X 365 days so that the holding month can get obtained. In the year 2018
the inventory holding period was 21 days on the other hand in 2019 inventory holding period
decreased to 16 days which clearly shows that computer do not hold inventory for so long and
they continue sleep invest their inventory and the production and producing sample of good so
that company can easily satisfied the market demand.
Payables payment period
Particular Amount (2018) Amount (2019)
Average accounts payable 2280 2100
Net credit purchase 17385 20150
Payables payment period 46 36
For 2018 = 46 days
For 2019 = 36 days
Payable payment period used to measures the average number of days which company is taking
to pay their suppliers (Langemeier and et.al 2018). To calculate this company need average
accounts payable which is being divided by cost of sales for the given duration. In the year 2018
the payable payment period of this company was 46 days on the other hand in 2019 it has been
decreased to 36 days Means Company is in Well condition. It clearly shows that company is
quickly pink to their suppliers earlier they were taking 46 days but now the companies taking 36
days and quickly repairing all the suppliers. This will help the company to produce more quality
products because when suppliers are being paid on time then they will also supply all the needed
raw materials to the company so that the production do not get hampered.
Receivable collection period
6

Receivables collection period is used to measure the overall cash flow of the company which is
being calculated by dividing average receivables with credit sales on daily basis. Receivables
collection period is not necessary to calculate because this company is not focusing on credit
sales as the entire sale of the product is being done in the cash only. Apart from this by cash sales
companies doing good and also generating high return so there is no need to sell the products On
credit basis. Apart from these selling products on credit is also risky for the company because
sometimes people me default and do not pay the prices and the bad debts of the company
increased. This will damage the overall goodwill and reputation of the company.
PART 2: Understanding Financial Information & Management of Cash
2.1 Profit and cash flow
Cash flow refers to the cash amount which constantly moves in and out of the business. When
any company purchase inventory then cash flow shows that the flow of money is going out of the
business apart from this any consumer buy products from the company it shows the influence of
the money within the business. Show the overall net balance of cash which is moving out and
coming in to the business is known as cash flow (Maris and et.al 2021). Cash flow may be
positive or negative as one. Positive cash flow shows that company has sufficient money and
earning more money as well on the other hand negative cash flow shows that money is going out
of the business.
Profit
Profit refers to the balance which remains when all the operating expenses of the business get
subtracted from the sales and revenue. Company can further distribute the profit among owners
and shareholders in the form of dividend and interest. Apart from this company Can reinvest
please profit into the company or they may purchase new inventory and equipments for the
company so that the overall profitability may increase in the future. Profit can be divided in
various forms such as operating profit gross profit net profit as per the annual sales of the
company.
Difference between cash flow and profit
Cash flow and profit are two critical aspect of any business because investors always look for
knowing the financial health of the company (Sahara, 2020). These two factor provides the
overall financial health and stability of the company both are totally different in nature. There is
a possibility for the business and company that by having a negative cash flow it clearly shows
7

that the expenses are hire in the company on the other hand when the cash flow is positive it
shows that increasing sale but in such situation it is difficult to make a profit. Profit tells
company about the right direction on the other hand cash flow suggest the company to take the
right direction. Profit cafes to the overall procedure of creating cash on the other hand cash flow
is the procedure of Sourcing different materials for earning profit. Profit can survive for long
period of time even the companies having negative income and cash flow cannot survive in the
situation of lack of cash and it shifted to demise. So both are totally different in nature.
2.2 Meaning of working capital and receivables inventory and payables
Working capital
It refers to the total amount of cash which is being needed by the business to prepare the short
term financial position of the company (Mulyadi and et.al 2020). Working capital is being
calculated by subtracting current liabilities from the current assets and the gap is known as
working capital. Working capital is needed to pay the amount of raw material wages and salaries
of the workers. Working cycle has a period of 60 to 90 days through which company need
working capital to find this cycle.
Receivables
Receivables popularly known by account receivables which show that debt owned by the
company from the consumers on the behalf of goods and services that have been already
delivered but not paid yet. Receivables will easily get decreased when consumer made the
payment to the company.
Inventory and accounts payable
Inventory referred to the raw material which is being produced by the company so that they may
create further production. Accounts payable is generating inventory on credit purchase.
2.3 Changes in working capital impact the cash flow
Working capital and cash flow are the most fundamental factor of Business and especially
financial analysis. Working capital is totally related with the balance sheet on the other hand cash
flow as associated with cash flow statement of the company (Basalama, and et.al 2017). Changes
in working capital directly reflect in the cash flow statement. If any transaction which increase
current assets and current liabilities then it will show no change to the working capital but this
will be mentioned in the cash flow statement. If any company buy fixed asset suggest machinery
building plant so the cash flow will decrease but the working capital will increase. On the other
8

hand if the company sell fixed assets then it will definitely boost and increase the cash flow as
well as working capital. Apart from this vendor company purchase any kind of inventory by cash
payment then it will not cause any change in the working capital because inventory and cash
both are current assets however the overall cash flow will get reduced by the Purchase because
cash is moving out from the business.
2.4 Traditional or alternative budgetary system
Traditional budgeting system States about the over Royal sales and the value of the company
along with this it also estimates Venus expect and prediction profit for the company. Traditional
budgeting system is one of the oldest concepts and it is good to put those businesses and
companies who are established and generating good source of income therefore they can use and
take right and from the previous budgets as well and also them adjust their inflation and different
changes in the business.
Alternative budget
Alternative budgetary system initiates different strategies which helps the company to imitate the
overall public budget and also social issues as well (Kumar and et.al 2019). Alternative is night
method which is used by the company when their original budgetary not meet the Expectations
this is the second plan of the organisation so that will help alternative that company can survive
in the market and also increase the sales in difficult situations. Traditional budget will be suitable
for the company because it is one of the oldest concepts and each and every company uses
traditional budget because it provides all the necessary details about the expenses and income of
the company. Traditional budget will help the company to survive in difficult situation as well.
Conclusion
After analysing the entire report it can be concluded that this report focuses on Business Finance.
This report provides detailed information about various financial ratios such as gross profit
margin, operating profit margin, current ratio, quick ratio, inventory holding period and payables
payment period. This report also demonstrated profit and cash flow and also the difference
between the same. This report also provides information that how changes in working capital
affects the overall cash flow of the company.
9

References
Books and Journal
Ahlström, H., 2019. Policy Hotspots for Sustainability: Changes in the EU Regulation of
Sustainable Business and Finance. Sustainability. 11(2).p.499.
Basalama, I., Murni, S. and Sumarauw, J.S., 2017. Pengaruh Current Ratio, Der Dan
RoaTerhadap Return SahamPada Perusahaan Automotif Dan KomponenPeriode 2013-
2015. Jurnal EMBA: JurnalRisetEkonomi, Manajemen, Bisnisdan Akuntansi.5(2).
Hidayat, A., Sari, W.I., Nuryani, Y., Nuryani, A. and Simangunsong, R.R., 2021, January. The
Effect of Current Ratio on Gross Profit Margin at PT. Pharos Indonesia Jakarta.
In Proceeding The First International Conference on Government Education
Management and Tourism (Vol. 1, No. 1, pp. 33-37).
Kumar, A. and De Souza, M.M., 2019. A p-channel GaNheterostructure tunnel FET with high
ON/OFF current ratio. IEEE Transactions on Electron Devices.66(7). pp.2916-2922.
Langemeier, M. and Yeager, E., 2018. Operating Profit Margin Benchmarks. farmdoc daily, 8.
Maris, R., Dorner, Z. and Mills, R., 2021. Cost Efficiency Analysis using Operating Profit
Margin for the New Zealand Dairy Industry (No. 21/04).
Mulyadi, D. and Sihabudin, O.S., 2020. Analysis of Current Ratio, Net Profit Margin, and Good
Corporate Governance against Company Value. Systematic Reviews in Pharmacy.11(1).
pp.588-600.
Prince, T.E., 2017. Behavioral finance and the business cycle.
Sahara, H., 2020. Pengaruh current ratio dan quick ratio terhadap return on investmen (roi)
pada PT Jaya kontruksimanggalaPratamatbk (2011-2018) (Doctoral dissertation, IAIN
Padangsidimpuan).
Sassen, S., 2017. Finance and business services in New York City: international linkages and
domestic effects (pp. 132-290). Routledge.
10

11