Business Finance Report: Cash Flow, Working Capital, and Performance

This business finance report defines and differentiates between profit and cash flow, explains working capital, receivables, inventory, and payables, and analyzes how changes in working capital affect cash flow. It applies these concepts to manage the effects of financial results for Uber Tools Ltd, recommending steps to improve cash flow through better working capital management. The report also examines elements of financial performance, calculates relevant ratios, and suggests how the board might assess the business's financial health. Key recommendations include increasing pricing, using electronic payments, leasing instead of buying, improving inventory management, and conducting credit checks. The report emphasizes the importance of effective capital management for achieving financial stability and growth.

BUSINESS
FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
a. What is meant by profit and cash flow and how it is different...............................................1
b. What is the meaning of working capital, receivables, inventory and payables......................2
c. Changes in working capital affect cash flow...........................................................................3
2. Apply the concepts for manage affects of financial results....................................................3
3. Analyse and recommend what steps should now be taken to improve this company's cash
flow through better working capital management......................................................................4
PART B............................................................................................................................................5
a. Elements of financial performance..........................................................................................5
b. Calculation of ratio..................................................................................................................6
c. Ratios might have change using the information in the scenario............................................7
2. Analyse and recommend how the board might assess the financial performance of the
business.......................................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business finance means the funds and credit employed in the business. Funds and money
invested in business or other business activities are known as business finance. For survive
business and conduct business activities required to funds and monetary resources which can be
obtained through debt and equity (McLean and Zhao, 2014). Finance is core need of a business
organisation in order to carry out its day to day activities like purchase of raw material, payment
salaries and bills and collection of cash from customers. Finance in business key aspects which
ensures survival and growth of an business organisation. Finance sources and financial decisions
have direct and indirect impact on organisation's liquidity and profitability position. The
particular report defines explanations about cash flow and profit and difference between each
other. There are defining meaning of accounts receivable, working capital, payables. There are
examine study on Uber tools Ltd which can own and operate a factory in new market for
manufacture power tools. Apart from changes in working capital affect to cash flow in the
context of company.
PART A
a. What is meant by profit and cash flow and how it is different
Profit – It is a financial benefit that is accomplished when the amount of revenue
obtained from a business activity exceeds the expenses. Profit is known as surplus which is
gained when total income of company more than to total expenses.
Cash Flow – It is a flow of cash and cash equivalents which can transfer into and out of a
business. Cash flow conduct different business activities which can divided into three parts, cash
flow from operating activities, cash flow from investing activities and cash flow from financing
activities.
Cash Flow Profit
There are money divided into different
activities which can gain from different
sources.
It is the money left over from sales revenue
once costs have been deducted.
It is depended on the timing of payment and
acquire resources from different sources.
Profit is calculated through money which can
receive from different sources.
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Cash flow represents the corporation strength
and help to achieve goal foe ensure about
solvency, general positive cash flow &
maximizes share price.
In the profit, sales made beyond a break even
point.
If management of Uber Tools Ltd is capable to manage the cash flow in effective manner
so they are recoded each activities related to cash and control business activities as a advantage
they can not face shortage of cash (Kotz and Podgorski, 2012). If the company have control
business activities and reduce amount of total expenses as compare to total income so it will
beneficial to business for expand in future perspective. The operating profit before interest and
tax is £36 Million.
b. What is the meaning of working capital, receivables, inventory and payables
Working capital – It is basically an indicator of the short term financial position of a
business which can measure and examine overall efficiency. Working capital is calculated
through current assets and current liabilities. There is applied a formula -
Working Capital = Current Assets – Current Liabilities
This ratio point out the company possesses for sufficient assets top cover their short term debt.
Accounting Receivables – It is the amount that a business to right to receive after a
particular time period on the time when business has sold goods or services on credit. The term
of trade receivables is also used in place of accounts receivables. This amount is owned by the
company is recorded in general ledger account entitled accounts receivable. It is listed in assets
in side in the balance sheet under the head of current assets. As Uber tools Ltd owned £12million
pounds for a series of large orders placed by D&R last year. These amount used by company for
daily operational activities and try to minimize the credit time period.
Inventory – It is the term of goods available for sale and raw material used to produce
goods available for sale. Inventory represents one of the most essential part of any organisation
and mostly companies are depended on their stocks. The turn over inventory shows it is one of
the primary sources of revenue generation and subsequent earnings for the company's
shareholders.
Accounts Payables – It is presenting as accounting entry that was obligation of company
to pay off a short term debt to their suppliers and creditors. Accounts payables shows in balance
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sheet under the head of current liabilities. It is related to short term because it is provided by
creditors on short time period.
c. Changes in working capital affect cash flow
For survive the business in effective manner there is required to working capital to
conduct business activities on daily basis. For these activities need cash which can manage
through working capital and company can not fact shortage of cash. There are many changes
which are reflected to firm's cash flow statement.
When a transaction increase current assets and current liabilities by the same amount,
there would be no change in working capital. For example – if a company received cash from
short term debt to be paid in 45 days. There would be increase in the cash flow statement
because of proceeds from the load denotes as current assets and accounts payable denotes as
current liabilities so it is including in short term loan (Halbert and Rouanet, 2014).
If an organisation purchase a building which can decrease the cash flow of a corporation.
Working capital of an organisation would also reduce since the cash portion of current assets
would be minimize but there will be no change in the current liabilities due to it would be long
term. If UberTools Ltd sold their fixed assets than working capital & cash flow will be increase.
When a company invested for short time period so in this situation working capital did
not change because of cash reduce due to invest in short term investment but current assets
increase as investments. So cash flow can be minimize by the purchase of investment. The debt
of UberTools has increased to to £350 million from £250 million the year before as a result it
can show impact on cash flow. So if working capital has changed than it also affect the cash
flow.
2. Apply the concepts for manage affects of financial results
To understand the affects of financial results there is applied different concepts which can
help to understand to analysis of financial result. These concepts applied by company for
interpret of result of financial result -
Accrual Concept – The financial statement of a company are being prepared under the
concept of accrual. According to this concept all expenditures and income must identified in
same accounting period in which they relate rather than on cash basis. This concept explained
that when the income actually generate that time it is recorded and expenses are recorded in
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accounting books when they are actually happen. For example – the net profit earned by
UberTools Ltd is £350 million which are recorded in the same year in which it is earned.
Matching Concept – The matching concept represents difference between accrual
accounting and cash basis accounting. According to this concept revenues and other related
expenses can be recognised together in particular accounting period. It can show relationship
between expenses and income and record at the same time. The main aim of the principle that
neglect misstating earnings during accounting period. If UberTools Ltd does not identify income
& expenses in same time duration than its financial result does not show the true and fair
information and data (Cowling and Ledger, 2012).
3. Analyse and recommend what steps should now be taken to improve this company's cash flow
through better working capital management
Capital management is an financial strategy that desire to manage in sufficient and equal
level of current assets, current liabilities and working capital. It provide help to company to
achieve their expenses obligations while also maintaining sufficient cash flow and it is directly
related to short term financial decision. In the context of company understand the concept of
capital management as a financial tool. It is a power tool which can use by company in new
market for increase their turn over. The company has been focused on increase cash flow through
working capital management. It is tracking secure payment option, accounts receivable, clear and
brief invoices. The analysis of company observe and investigae cash inflows and cash outflows
in particular accounting period.
Steps to improve cash flow and their recommendation
 Increase Pricing – The concept of increasing price to scares many business owners and
they are many time worried about their sales which can reduce. It can help to understand
which amount customer wants to pay willingly according to that company set prices of
their products.
 Use Electronic Payments – The company has used to electronic way for payment to their
different clients. It can help to Ubertools Ltd to know which party had to paid and which
can not. With the help of this pay improve cash flow by buying of time. It can provide
facility to customer on their credit card as 21 days.
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 Lease Don't buy – The process of leasing used to end up being more costly rather than
buying. In the company required to pay small increments which can help to increase cash
flow in effective way. Lease payment are the business expenses so it can be written off.
 Improve Inventory – There are meaning of increase inventory means management system
of a company get a good result. In the context of Ubertools Ltd managers required to sale
all products rather than purchase new products and there is applying FIFO method for
manage all inventory system.
 Conduct credit checks on credit – Many time customer does not want to pay in cash that
time ensure about the credit check. It depends on the efficiency of the client if client have
poor credit so assume about future perspectives that payment may be receive or not on
time. The late payment for company hurt their cash flow (Cole, 2013).
PART B
a. Elements of financial performance
To present financial performance of a company there are different factors used by
company. There are including assets, liabilities, revenue, expenditure, gain losses and equity.
With the help of these tools analysis financial wealth of an organisation and improve scope from
future perspectives -
Assets – An assets is a resource with economic value that an individual, business or
country owns or control with the expectation that it will provide a future benefit. It can record in
balance sheet and create value of the firm. It is helpful to generate revenues for company. There
is recognised assets of Ubertools Ltd is increasing in the year of 2009 which is £518000. It can
reflects as financial performance of a company which is good.
Liabilities – It is important part of any organisation and shows as obligation of a
company to pay their debts and it is burden on a company. There are identified long term
liabilities of Ubertools Ltd is increasing year on year in 2011 it is recognised as £360000 which
can not shoe good position of a company. Its profits can be reduce because of financial
performance can be hamper.
Expenses – These are gross outflow incurred by the business organisation for generating
revenues. It is deducted from income of related accounting period and shows in profit & loss
account in debit side. The expenses of UberTools Ltd is increasing from the year 2009 to 2011
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which can too much for the company. There are required to minimize the profit for corporation
and it is affected to financial performance of a company.
Equity – It shows ownership interest in a business in the kind of stock and their
combination of owner's equity and liabilities. When equity increase of the company so it shows
good position of Ubertools Ltd and financial performance indicate to expand business from
future perspectives (Bentley and Sharp, 2013).
b. Calculation of ratio
Ratio Formula 2009 2010 2011
Sales growth
ratio
Current year sale
- last year
sale/last year
sale*100
- 10.00% 15.90%
Gross profit
margin ratio
Gross profit/total
sales
revenue*100
63.88 63.63 59.25
Operating profit
ratio
Operating
income ÷ Total
revenue
30.00% 25.5 10.67
Gearing ratio (Long-term debt
+ Short-term debt
+ Bank
overdrafts) ÷
Shareholders'
equity
61.18 72.62 115.4
Interest coverage
ratio
EBIT/interest exp 12 8.41 3.06
Liquidity ratio Current
assets/current
liabilities
2.24 2.37 0.92
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Return on equity
ratio
Net
income/sharehold
ers Equity
25.98 20.74 7.55
Return on capital
employed ratio
net operating
profit/total asset –
current liabilities
28.8 47.86 101.95
c. Ratios might have change using the information in the scenario
Sales Growth ratio – Information in relation to sales are available in income statement
and from there it can be seen that sales are increasingly year on year. According to this ratio it is
recognised that approx 6% increase as compare to last year.
Gross profit margin Ratio – It has been analysed that the operating expenses of a
company deducted as gross profit amount. It has been declined in the year 2011 due to raise
amount of cost of sales.
Operating Profit margin – With the help of business operations the company get
operating profit. It can decline in 2011 due to increase operating expenses and depreciation
amount in particular year.
Gearing Ratio – This ratio helps to compare outside liability through shareholder fund.
For UberTools Ltd it is continuously rising and shows bad performance of a company.
Interest Coverage ratio – In this ratio include amount of interest which can earned by
company as interest expenses in particular accounting period. There are recognised that
UberTools Ltd for earnings the company has decline their efficiency to cover interest expenses.
Liquidity ratio – It reflects the amount of current assets as well as current liabilities
because both are part of liquidity ratio. There are liquidity ratio declining by 0.92 due to unable
to pay current debts by selling current assets.
Return on equity ratio – It has been recognised that in 2011 7.55 from 25.98 which can
show operations are no more effective to earn efficiently.
Return on capital employed - t is the amount of operating profits earned by Uber Tools
LTD by employing funds as capital in business operations. There is fall in this ratio from (28.8)
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to (101.95). This is because of more borrowings from the market and amount of working capital
is reducing (Tutunea and Rus, 2012).
2. Analyse and recommend how the board might assess the financial performance of the business
As per the above table I has been analysed that UberTools Ltd bear many financial issues
in the company because most of the ratio has been decreased in the year 2009 to 2011. There are
identified that operating profit ratio is reduce by 30% to 25.5% in the year of 2009-10 and
25.5% to 10.67% in the year 2010 to 2011 due to increase in total revenue of the UberTools Ltd.
Liquidity ratio firstly increase 2.24 to 2.37 in the year 2009 to 2010 and than decrease 2.37 to
0.92 in the year 2010-2011. This one is the drastic fall in the liquidity ratio. It is happen due to
increase in the current liability of UberTools company
Recommendation
 There are recommended that Ubertoold Ltd can identify their financial performance with
the help of financial statement which can presents true and fair value of a company. So
the manager time to time recorded all transaction in accounting books and analysis the
performance of a company through comparing assets and liabilities.
 Ratio analysis help to compare performance from previous year and know about actual
financial performance of a company. It can analysis on year basis and it can identify
liquidity and profitability of Ubertoold ltd.
 The company also prepare income statement which can help to know profit of the year
and with the help of this statement know all expenses and income of a company. If
company have too much expenses so manager can apply strategy to control business
activities and expenses (Lee, Sameen and Cowling, 2015) .
CONCLUSION
From the above discussion it has been analysed that finance is lifeline of any business
because it is primary resource to conduct business activities of any organisation. It is required for
making decision and achieve success from future perspective. With the help of finance financial
performance and there are including different statements such as income statement, balance
sheet, cash flow statement and working capital. There is analysis ration to present liquidity and
profitability of company.
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REFERENCES
Books and Journals
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Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
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Evidence from the surveys of small business finance. Financial Management. 42(4).
pp.777-813.
Cowling, M., Liu, W. and Ledger, A., 2012. Small business financing in the UK before and
during the current financial crisis. International Small Business Journal. 30(7). pp.778-
800.
Godechot, O., 2012. Is finance responsible for the rise in wage inequality in France?. Socio-
Economic Review. 10(3). pp.447-470.
Halbert, L. and Rouanet, H., 2014. Filtering risk away: global finance capital, transcalar
territorial networks and the (un) making of city-regions: an analysis of business
property development in Bangalore, India. Regional Studies. 48(3). pp.471-484.
Kotz, S., Kozubowski, T. and Podgorski, K., 2012. The Laplace distribution and generalizations:
a revisit with applications to communications, economics, engineering, and finance.
Springer Science & Business Media.
Kraemer-Eis, H., Lang, F. and Gvetadze, S., 2015. European small business finance outlook. EIF
Research & Market Analysis.
Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the
financial crisis. Research policy. 44(2). pp.370-380.
McLean, R. D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external
finance. The Journal of Finance. 69(3). pp.1377-1409.
Tutunea, M. F. and Rus, R.V., 2012. Business intelligence solutions for SME's. Procedia
Economics and Finance. 3. pp.865-870.
Online
Meaning of Profit. 2019. [Online]. Available through: <https://investinganswers.com/financial-
dictionary/businesses-corporations/profit-2042>
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