RCL Company: Profit, Cash Flow, and Working Capital Analysis

This report delves into the critical financial aspects of a business, focusing on the distinctions between profit and cash flow, and the components of working capital, including receivables, inventory, and payables. It examines the impact of changes in working capital on cash flow and provides an analysis of a case scenario, offering recommendations to improve cash flow and manage working capital effectively. The report further explores capital budgeting, outlining its purpose, steps, and the advantages and disadvantages of various investment appraisal methods such as payback period, net present value (NPV), and internal rate of return (IRR). By comparing alternative investment options, the report provides valuable insights for financial decision-making and strategic planning within the context of the provided case study.

ASSIGNMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................3
1.a What is meant by profit and cash flow and how they differ.................................................3
1.b Meaning of working capital and in particular, the meanings of Receivables, Inventory and
Payables.......................................................................................................................................4
1.c Changes affects working capital and cash flow....................................................................5
2 Illustrating answer from the case scenario...............................................................................5
3. Analyse and recommendations to improve the flow of cash and to arrange the working
capital management.....................................................................................................................5
PART 2............................................................................................................................................6
1.a meaning of capital budgeting and summarise the purpose and key steps of the process......6
1.b advantages and disadvantages of each of the following.......................................................7
ii Comparison of the alternative investment options..................................................................8
iii Analysis and recommendations..............................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Out of the organisation, flow of money are considered as cash flow. Income those are
earned by rendering products and services apart from expenses are termed as profit. There is
huge difference between the concept of profit and cash flow are discussed in this report with
elaboration. Apart from this meaning of receivables, working capital, payables have been
discussed. From the case scenario, improvements and suggestions are provided to decrease the
debt by encouraging investors in term of profit. Also meaning to the pay back period, IRR and
NPV with their advantages and disadvantages have been discussed by providing,
recommendations and calculations.
PART 1
1.a What is meant by profit and cash flow and how they differ.
Money flows out of the firm can be called as cash flow. Profit and cash flow carries their
own differences while undertaking the processes of organisation. To meet the issues both are
important for the growth of the company or organisation (Difference of profit and cash flow,
2018).
Cash flow: To meet the financing and investing activities, flow of cash outside the company are
known as cash flow by meeting the present and near term obligations. The following are the two
things that are to be considered during cash flow.
 Though, businesses are considered as profitable but the cash flow may lack or
inadequate. In case of raising worst situation, inadequate cash flow can make the
company to considered as bankruptcy.
 Secondly, huge increases in sales cannot be considerer as profit. Borrowing of cash
increases the problem of increasing debt cost that boost the break even point. By this
organisation will dry-up and work may get failed consistently (Mathuva, 2015).
Profit: Net income is the another name of profit. From the revenue of sales expenses of firms are
deducted and the remaining amount are considered as profit. Organisation cannot survive at large

in case there is absence of profit. In order to restore the profit the cost of production can be
predetermined by knowing the problem and profit can be boost effectively.
Difference of profit and cash flow:
Profit there is sales, deducting variable costs and fixed cost gives net profit.
Cash flow: by adding cash inflow by deducting cash outflow gives net cash flow.
1.b Meaning of working capital and in particular, the meanings of Receivables, Inventory and
Payables.
Working capital: Differences between the current assets and current liabilities are called
as working capital. These are calculated and determined form balance sheet of the organisation.
In case there is shortage of cash can be well known with the help of working capital ( Baños-
Caballero, García-Teruel and Martínez-Solano, 2014). If an organisation carries assets form of
current inventories then it has to be sold.
Receivables: Receivables can also be termed as account receivables, which organisation
gets for rendering the goods and services from the consumers. These account receivables can
also be termed a trade receivable. It is prominent to monitor the account receivables to get form
those who didn't paid.
Inventory: Any of the tangible, intangible goods or the property that are carried with ca
be termed as inventories. It also incudes stock in hand, raw materials finished goods in hand etc.,
in order goods these are carried for the purpose of resale can be called as inventory.
Payables: For the purchased goods and services by consumer on credit and that have to
be paid back can be termed as account payable. It is a short term debt payment that needs to
execute to avoid default.
1.c Changes affects working capital and cash flow.
In the cash flow statement, impact of working capital can be seen. Cash flow statement
details about the needs of operating cash flow. The amount that are taken or spent for the
performance of production can be termed as operating cash flow. Increase in the working capital
is the positive sign that net outflow is boosting apparently (Ross and et.al., 2014). While,
decrease in cash flow allow the organisation or company to suffer in terms of borrowing,
bankruptcy etc., it is very prominent to see the changes in the working capital to evaluate the
profit of the business. The impact of working capital is higher and it may result in positive a

swell as negative. Hence, the determination of working capital during the running of organisation
is highly needed.
2 Illustrating answer from the case scenario.
As per the case scenario, there is huge drawback relating to the profit of the organisation.
Detailed by knowing the operating profit of RCL's is £18 millions in the previous year whereas
and the debt of the organisation increased from £120 to £157 millions, increase in debt defines
about the deductions that are facing by the RCL company, which have to be determined earlier to
avoid such circumstances (Aktas, Croci and Petmezas, 2015). Within a year the debt are higher
than the profit should be considered effectively by encouraging more number of shareholders to
get invested in RCL company by which working capital can be raised and that may allow
increasing the profit by deducting the debts. There are huge differences between the profit and
debts that incurred in RCL. Later on the investment also made on the Robo mower which is
automatically grass cutting and operated by smartphone. To increase the profits and working
capital effective functioning is highly needed by analysing and evaluating. Gradually they also
got the order by D&R by owing £12 million by RCL an outstanding dispute £20 million.
3. Analyse and recommendations to improve the flow of cash and to arrange the working capital
management.
There is huge and drastic condition that are faced by RCL as the working capital got
decreased with increasing huge debt. Later on, they focus made on investments that impacted
positively up to an extent. The following are the improvements that are to be considers by RCL
to boost the working capital accordingly.
 Huge concentration to be made on decreasing the debt of RCL. As it was up to £18 which
increase till £ 120 million. The operation and functioning of RCL should be considered
by Steve.
 Also. Steve distributed his 75% of share among the grandson that could be encouraged to
reinvest in the organisation to boost the profit and working capital (Enqvist, Graham and
Nikkinen, 2014).
 Apart from this, investors should be encouraged at large to meet the cash flow and
working capital of organisation.

 Well decision taken by RCL by investing in Robo mower which is automatically grass
cutting by getting the advance fee of £8 and investing as £10 millions pounds. This
shows an expansion and widening if organisation by taking effective decision.
 Also, outstanding of dispute of £20 million consignment should be cleared to boost the
cash flow and working capital as it is taken place with Brico France (Pais and Gama,
2015).
 Beside this £12 millions pound are for which orders are placed by D&R are owed by
RCL this helped them in boosting working capital.
PART 2
1.a meaning of capital budgeting and summarise the purpose and key steps of the process.
Process of evaluating the capital expenditure are known as capital budgeting.
Expenditures of building, plant and equipment are known as capital expenditure and processing
of those are capital budgeting. It can be more elaborated as allocation of cash expenditures to
investments which carries its own longer life than period of operating normally a year. Also to
meet the opportunities of investments can be termed as capital expenditures. For the analysis of
financial terms, managers of organisation must understand and get well known about the
techniques and procedures of capital budgeting for the purpose of long term investments. The
following are the steps or processes involved in capital budgeting.
Generation of ideas: Project analysis is very important for capital budgeting as, the good quality
of project or work can boost the generation of ideas by number of sources who are included in
the functioning of management.
Analysing proposals: Either the accepting or rejection of project determines the cash flow in the
future. Hence, they have to be analysed by forecasting, their flow of cash by determining
profitability at each stage.
Creating the corporate capital budgeting: short-listings are made of profit related projects, as
some may prove as attractive and fit exactly to the set strategy ( Mun and Jang, 2015).
Monitoring and post Audit: The roles and responsibility of managers and others who are
involved in forecasting of processes are executed with the help of capital budgeting process is
reliable.

1.b advantages and disadvantages of each of the following
1. Pay back period: This method are usually expressed in years, and cash is taken for
capital investment of project which equal to initial cost of investment. The determination
can be made by simple calculation dividing the amount of investment by projected flow
of cash per year.
Advantages : they are simple and easy to understand, by giving more importance for
liquidity, to make the decisions regarding the proposals of investment. The huge advantage is, it
is universally used by all and easily understood at the same them. Method of pay back deals with
risk, as this can be determined by short project has limited risks and long has more risks.
Disadvantage: the major disadvantage in this is value of money is not recognised, huge
concentration on liquidity and profitability is ignored (Onaolapo and Kajola, 2015). Before pay
back period cash flow is considered and later on it is meaningless.
2. Net present value: it provides importance to the time and value for money. Both the terms
before cash flow and after cash flow over the span of life are considered. Risk in this are
considered as high.
Advantages: time value of money is considered as important. Over the lief span both
before the cash flow and after the cash flow are considered. High priority is given to the
profitability and risk of the projects. Thin method also helps the organisation to increase the
value of firm.
Disadvantage: Though it has many benefits it is very difficult to use. Also, it does not
accurate decision, and investment of amount of mutual exclusive projects are not equal. Correct
decisions are not given as there is unequal life. In case of discount rate the calculation is not
appropriate.
3. Internal rate of return: The rate of interest at which net present value of all the flow of
cash including both positive and negative are made from projects or investments equal
zero. It helps in evaluating the attractiveness of projects or investment those are made. In
case there is fall in IRR as per the requirements the project gets rejected and also it
should be.
Advantage: It enables to perfect use the time value of money theory, by showing the
high rate of interest from the investment made. Consideration of ash flow are given equal
importance. Ranking is based on uniformity and there is no particular selection.

Disadvantage: it is difficult and hard to understand. They are based on unrealistic
assumption. For the comparison of projects it is not helpful to analyse between to mutually
exclusive investments.
ii Comparison of the alternative investment options.
Steve is contemplating on how to work on the situations to get the company again on its
normal working conditions. He is taking considerations regarding two projects lined up. The
Reading venture involves construction on an abandoned site which will cost £20 million and
would operate for 9-10 years. The other project with Bristol involves £16 million investment and
will have an expected useful life of 5-6 years (Bhattacharya, 2014). The company is now
focusing on only profitability as its long term goal. Which project to be taken depends solely on
profitability (Gervais, 2010).
For instance, let us assume the discount rate to be 10 %, (amount in pounds)
Project M yield 12000, 21000, 16000 for three years with initial investment of 45000
Project N yield 21000 for two years with initial investment of 45000
NPV M = 10662
NPV N = 8954
The higher NPV implies higher profitability of the project. Thus project M should be considered
to be in the investment decision as compared to the project N. The financial viability of a project
is defined by in how many years it will yield the principal or initial investment made. All the 3
methods are useful for determining the best investment decision (Liu and Wang, 2008).
iii Analysis and recommendations
The various techniques are used to determine which project should be undertaken by the
company. Steve has used the NPV, IRR and payback period methods to evaluate the two projects
Reading and Bristol available to the company for increasing the company's profitability in the
coming years (Storey and Greene, 2010). The projects available are Reading venture which
involves construction on an abandoned site costing £20 million for 9-10 years, another project
Bristol involves £16 million investment and will have an expected life of 5-6 years. The
calculations based on all the three methods is as follows:
Net Present Value
Discounted
cash flows

Year READING BRISTOL
Discounting
Factor @
10% READING BRISTOL
1 4000 2500 0.9091 3636.36 2272.73
2 5200 8520 0.8264 4297.52 7041.32
3 8900 6800 0.7513 6686.70 5108.94
4 12000 8200 0.6830 8196.16 5600.71
5 12800 9800 0.6209 7947.79 6085.03
6 13000 7900 0.5645 7338.16 4459.34
7 15100 0.5132 7748.69
8 18000 0.4665 8397.13
9 19002 0.4241 8058.70
10 11000 0.3855 4240.98
62307.22 30568.07
Less: Initial investment 20000 16000
Net present Value 42307.22 14568.07
According to the NPV project Reading should be considered by the company, as this
projects yield the maximum return which will increase the profitability of the company.
Internal Rate of Return
Year READING BRISTOL
Initial investment -20000 -16000
1 4000 2500
2 5200 8520
3 8900 6800
4 12000 8200
5 12800 9800
6 13000 7900
7 15100
8 18000
9 19002

10 11000
IRR 39.89% 32.97%
According to the tabular values it is clearly visible that project Reading is earning higher
return as compared to the other project. The Reading has an IRR of 39.89% while Bristol had
only 32.97%
Payback Period
Cumulative cash inflow
Year READING BRISTOL READING BRISTOL
1 4000 2500 4000 2500
2 5200 8520 9200 11020
3 8900 6800 18100 17820
4 12000 8200 30100 26020
5 12800 9800 42900 35820
6 13000 7900 55900 43720
7 15100 71000
8 18000 89000
9 19002 108002
10 11000 119002
READING = 3+(20000-18100)/12000 = 3.16
BRISTOL= 2+(16000-11020)/6800 = 2.73
According to this technique, the initial investment is covered in 2 years in project Bristol
while it takes 3 years to cover the initial investment of project Reading (Filbeck, Zhao and Knoll,
2017). The pay back period emphasizes on project Bristol to be incorporated.
CONCLUSION
In the above report the basic knowledge about the meaning of cash flow, working capital,
and impact of the both has been elaborated. With analysing the issues and drawbacks the
necessary recommendations are made to it. Rcl's capital budgeting they are elaborated with

highlighting pay back method and other two methods simultaneously. Later on,
recommendations for the both also provided.

REFERENCES
Books and Journal
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital
management, corporate performance, and financial constraints. Journal of Business
Research.67(3). pp.332-338.
Ross, S.A., and et.al., 2014. Fundamentals of Corporate Finance: Introduction to corporate
finance Chapter: 2 Financial statements, taxes and cash flow PART 2 Chapter: 3
Working with financial statements Chapter: 4 Long-term financial planning and
corporate growth PART 3 Chapter: 5 First principles of valuation: TVM Chapter: 6
Valuing shares and bonds PART 4 Chapter: 7 Net present value and other investment
criteria Chapter: 8 Making capital investment decisions Chapter: 9 Project analysis and
evaluation PART 5 Chapter: 10 Lessons .... McGraw-Hill Education (Australia).
Aktas, N., Croci, E. and Petmezas, D., 2015. Is working capital management value-enhancing?
Evidence from firm performance and investments. Journal of Corporate Finance. 30.
pp.98-113.
Enqvist, J., Graham, M. and Nikkinen, J., 2014. The impact of working capital management on
firm profitability in different business cycles: Evidence from Finland. Research in
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Pais, M. A. and Gama, P. M., 2015. Working capital management and SMEs profitability:
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Mun, S. G. and Jang, S. S., 2015. Working capital, cash holding, and profitability of restaurant
firms. International Journal of Hospitality Management, 48, pp.1-11.
Onaolapo, A. A. and Kajola, S. O., 2015. What are the determinants of working capital
requirements of Nigerian firms. Research Journal of Finance and Accounting. 6(6).
pp.118-127.
Bhattacharya, H., 2014. Working capital management: Strategies and techniques. PHI Learning
Pvt. Ltd..
Filbeck, G., Zhao, X. and Knoll, R., 2017. An analysis of working capital efficiency and
shareholder return. Review of Quantitative Finance and Accounting. 48(1). pp.265-288.