EFL Business Finance Report: Financial Analysis and Capital Investment

This report provides a comprehensive analysis of EFL's financial performance, addressing the critical difference between cash flow and profitability. It examines the impact of working capital, particularly the issues stemming from outstanding customer dues and excess inventory at the London site. The report explores capital budgeting methods, focusing on the evaluation of potential investment opportunities in Leeds and Bristol. The findings highlight the need for EFL to recover outstanding debts, manage inventory effectively, and implement sound capital budgeting practices. The report recommends strategies for improving cash flow, managing working capital, and making informed investment decisions, including the use of Net Present Value (NPV) for project selection. The report also emphasizes the importance of formal documentation in the capital budgeting process to compare actual project performance with initial estimates. The report also includes an executive summary that details the steps of capital budgeting and its importance.

Business Finance
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Part 1
Executive Summary
EEL is not having enough cash and there is a big difference between cash and profit because of dues
from customers and lined up inventory at the London site of business. EEL should try to recover the
dues and stop adding inventory at London site, as there is not work going in there, and consume the
inventory there by using it or selling it.
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Table of contents
Introduction ……………………………………………………………………………………………………............ Page 4
Findings ...…………………………………………………………………………………………………............ Page 5
Conclusion ……………………………………………………………………………………………………............ Page 7
Recommendation ……………………………………………………………………………………………………............ Page 8
References ................................................................................................................ Page 9
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Introduction
This report is prepared to provide the information about the difference between the cash flow and the
profitability of EFL and how these are shown in the accounts of it. It also puts impact of working capital
on the company and how it is used in the company and how it can be improved or financed so that it
can be used effectively as per the needs of EFL.
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Findings
a. Three factories are operated by EFL and generating turnover of £35 million.
b. Ownership is Dieter – 25% and 75% between Hild, Angela and Ragnar.
c. Operating profit for last year £5 million before interest and taxes
d. Debt increased to £18 million which was earlier £15 million.
e. £1.5 million owed by company by the customers Canterbury Cookers and £2 million of payment
is outstanding amount from customer Radio Formidable
f. Due to the disputes, large stock of inventory is lined up at the company’s London site which Mr.
Dieter thinks is the required level of stock needed after the dispute is solved and is unwilling to
put pressure on the customers to make due payments.
1. What is profitability and what is Cash Flow
There is a big difference between profit and cash. Profit can be defined as the amount of
money which a business makes after deducting all the expenses incurred by it from the
revenues earned, whereas cash is the amount of money which a business has in hand to pay
the expenses. There can be instances where the business may make good profit but is
unable to perform good as it does not have enough cash. There may be much reason for not
having enough cash, out of which the common one is the amount owed by the customers
and making payment for expense which is not being used currently.
The other reasons being as per the American Express Article published in year 2013 which
can affect the cash or profit or both:
- New products: When these are launched, it carries warranty repairs or product recall,
whereby customer service department has to work more, leading to customer
dissatisfaction as there may be no expansion in the staff as per the growth of the
product. This increases expense for repairs, refunds, etc.
- Over spending: During the success period of the business, spending decisions in the light
of overly optimistic becomes over. For example: purchasing costly machineries, etc.
- Problems related to operations- Where volume increases, there may not be immediate
action plan to overcome it, which can lead to increase in unexpected expenses.
- HR problems: Dissatisfaction among the staff due to change of supervisors, or payroll
problems may make the business deliver the products after the given period of time,
which can lead to extra penalty or expense.
2. Need for working capital and how it is used
Working capital as the name suggests means, capital needed for working. It is an important
term for business, as it is useful to know what is needed for day to day operations. There are
two concepts for it. One is quantitative and the other on is qualitative. Quantitative is
defined as the capital which is gross working capital. Qualititative concept focuses on the
source to finance capital. It calculates working capital as current assets excess over current
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liabilities. In the event of inadequate working capital, the company can face many difficulties
such as:
- Production department gets affected, as there are not enough funds to cater it needs.
- Less liquidity results into damaging credit worthiness.
- The day to day expenses can hamper because of lack of cash for paying repair and
maintenance.
- The shareholders will get fewer dividends as the funds are less or no.
- It may result into insolvency of the company because of non-payment of debts and
expenses.
3. How the working capital can be managed by the company effectively.
There are multiple ways to manage the working capital:
- Alternative funding: It means that there must be some other source of fund which must
be there to help operating expenses go easy Other than raising funds through debts, the
business can have finance through crowd funding, invoice discounting, etc.
- Making expenses visible: there are many such expenses which a company can avoid
such as late fees, penalty, travel expenses, etc.
- Management of stock: Stock is one of the most important parts of production, without
which production cannot be carried easily. Over stock or under stock, both are harmful
to the business. Overcrowding stock will make increase chances of wastage, theft,
storage expenses, etc. and the amount of purchase money is also blocked. It will not be
realized, unless they said inventory comes into production and it gets sold.
- Managing payments or receipt effectively: Payment to suppliers and receipt from
customers should be timely met. With suppliers discount can be negotiated so that the
total cost of purchase decreases. In case of receipt from customers, proper invoices
should be maintained. Fees or penalty may be charged to them for late payments, to
increase the receipt of dues from them.
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Conclusion
1. Difference between profit and cash.
There is variance between cash and profit, as the former is the money which is present in
hand, and the latter is accrued amount of net profit. As profit and cash are two separate
terms and cannot be merged with each other, a business earning good profit does not mean
that it has enough cash.
In case of EEL, the two main customers of it are Canterbury Cookers Ltd and Radios
Formidable SA. Alone Canterbury is owing £1.5 million of amount for the large
orders which it placed and for the other customer Radio formidable, there
is a dispute going on due to which £2 million amount is withheld by it. It
clearly shows that though the profit made by EEL is £5 million, but £3.5
million is the amount which is still not received. This shows that the
company is short of £3.5 million of cash.
2. Application of working capital for EFL and causes for it.
In respect of the business, the current assets include debtors. The customers are having
outstanding balance of £3.5million which is a lot of amount and can affect
working capital completely to finance the operating needs.
There is not enough cash in the hands of business to cater the expenses.
3. Steps to improve EFL’s working capital requirement.
In EEL, there are two major problems of getting money blocked because of which the
working capital is not managed properly.
One is dues from customers and other is inventory. Amount due from customer is £3.5
million which is a large sum. The area of work suspended in company’s
London site, suspended the inventory, due to which it is getting lined up.
The company should insist the customers to pay the balance amount with
them soon.
As for the inventory, no more should be purchased for the London site,
and any other inventory available there must be consumed.
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Recommendations
Cash and profit both are different. Cash is net of receipts over payment, whereas profit is net of
income over expenses. Being profitable does not mean that the cash system of the company is
sound. To make it sound, the difference of amount between the profit and cash should be
minimized. The major points which create difference between ash and profit are dues from
customers and unused inventory at London site. The company should insist the customers to
pay the balance amount on time and take necessary actions to recover the amount left with
them.
Both of these are current assets and also form working capital. There may be no difference in
working capital amount when calculate with debtors or cash, as both are part of current assets,
and the amount shifting from debtors to cash will make no change in the net amount. However,
unused inventory will make false decision on working capital.
The company should pay attention in recovering its receipts from both the customers and
should eliminate the inventory stocked up at London site by either using it or selling it.
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References
Reference. 2017. What is the difference between cash and profit? | Reference.com. [ONLINE] Available
at: https://www.reference.com/business-finance/difference-between-cash-profit-d7cfabcb8adb893e#.
[Accessed 10 April 2017].
Susan J. Penner RN MN MPA DrPH CNL, 2013. Economics and Financial Management for Nurses and
Nurse Leaders: Second Edition. 2 Edition. Springer Publishing Company.
bdc.ca. 1801. 11 ways to manage your working capital. [ONLINE] Available at:
https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/pages/managing-working-
capital-10-tips.aspx. [Accessed 10 April 2017].
8 ways to… improve working capital | CIMA Financial Management Magazine. 2017. 8 ways to… improve
working capital | CIMA Financial Management Magazine. [ONLINE] Available at: http://www.fm-
magazine.com/feature/list/8-ways-%E2%80%A6-improve-working-capital. [Accessed 10 April 2017].
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Part Two
Executive summary
This report details out the steps of capital budgeting process and why it is important to keep formal
documentation of it. It states the different methods of capital budgeting and why the chosen method
Net Present value is considered for selecting or not selecting a project.
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Table of contents
Introduction ……………………………………………………………………………………………………............ Page 12
Findings ...…………………………………………………………………………………………………............ Page 13
Conclusion ……………………………………………………………………………………………………............ Page 16
Recommendation ……………………………………………………………………………………………………............ Page 17
References ................................................................................................................ Page 18
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Introduction
This report is prepared to see which method of capital budgeting is useful in selecting a project and
what are the steps for capital budgeting appraisal.
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