Business Finance: Profit, Cashflow, and Working Capital

This report provides a comprehensive analysis of business finance, focusing on profit, cash flow, and working capital management. Part 1 explains the meaning of profit and cash flow, highlighting their differences, and defines key concepts like working capital, receivables, inventory, and payables. It details how changes in working capital impact cash flow and explores strategies to improve cash flow through better working capital management. Part 2 delves into financial ratios, including sales growth and profit margins, and assesses financial performance. The report uses case studies of Uber Tools Ltd and Madagascar Industries Ltd to illustrate these concepts, providing a practical understanding of financial analysis and management. The report concludes by summarizing the importance of profit, cash flow, working capital management, and financial ratios in maintaining business operations and assessing a company's financial health.

Business Finance

TABLE OF CONTENTS
PART 1.......................................................................................................................................3
Executive summary....................................................................................................................3
MAIN BODY.............................................................................................................................3
1- Explain:..............................................................................................................................3
a. Meaning of profit and Cashflow and difference between the both.....................................3
b. Meaning of Working Capital, Receivables, inventory and payables..................................4
c. changes in working capital impacts the cash flow..............................................................5
2) Working capital management influence the financial results of the firm........................5
3) Steps to be taken to improve company’s cash flow through better working capital
management............................................................................................................................5
CONCLUSION..........................................................................................................................6
REFERENCES...........................................................................................................................7
PART 2.......................................................................................................................................8
EXECUTIVE SUMMARY........................................................................................................8
MAIN BODY.............................................................................................................................8
1) Financial ratios...................................................................................................................8
b) Calculation of ratios...........................................................................................................9
c) Interpretation-...................................................................................................................11
2) Assessment of financial performance-.............................................................................12
CONCLUSION........................................................................................................................13
REFERENCES.........................................................................................................................13

PART 1
Executive summary
Business finance is that business activity which is concerned with the acquisition and
conservation of capital funds in meeting financial needs and overall objectives of the business
enterprises. Present study based on Uber tool limited which deals in producing power tool
and Madagascar industry limited which is a UK listed company deals in gems and jewellery
segment. Further it explain the working capital management and financial ratios.
MAIN BODY
1- Explain:
a. Meaning of profit and Cashflow and difference between the both
Profit- The surplus that is realized when the revenue exceeds the expenses, taxes and costs of
the business. It is the difference between total revenue and total costs. Profit is a residual
income, so its size varies (Connolly and Jackman, 2017). Profit may be zero or even negative.
It is the financial gain that is used for the purpose of further investment. Higher profits leads
to the growth of the business.
Cash-flow- It is defined as the summary of receipts and expenditures of cash for a particular
period. Cash-flows are the cash inflows and outflows of the Uber Tools Ltd. Increase in cash
and cash equivalent reflects the inflows while decrease in cash and cash equivalent reflects
the outgoing of cash from the business (Roberts, 2015). These statements are prepared as per
the Accounting standards 3. It enables the firm in knowing the cash position of its business.
Difference:-
Profit Cashflow
It is the money left after the payment of all
the expenses, taxes and costs.
It represents money from several sources.
Profitability indicates the growth of the
Uber tools Ltd.
Cash-flow states the operating, investing
and financing activities of the company.
It is not critical to the firm’s survival. It is critical for the firm’s survival.
It reflects the financial performance of the
business.
It demonstrates the cash position of the
enterprise.

b. Meaning of Working Capital, Receivables, inventory and payables
Working Capital- It is that capital which is involved in the current assets of the
business. It is the capital which is required to meet the day-to-day expenses of the entity.
Working Capital includes those assets and liabilities which can be converted into cash within
one year. Net working capital is the difference between the current assets and current
liabilities (What Is the Meaning of Business Finance,2019). Current assets include the cash,
receivables and inventory etc. while current liabilities includes the creditors, payable and
overdraft. It is essential for every organization to manage its working capital effectively and
efficiently to reach the sound liquidity position and to achieve higher profits.
 Receivables- Account receivables are the asset accounts representing amount owed to
the firm as a result of the sale of goods or services in the ordinary course of business
(Mathuva, 2015). It represents the claims of the firm against its customers and is
carried to the “asset side” of the balance sheet under the titles such as bills
receivables, customer receivables or book debts. It is the result of extension of credit
facility to the customers for a reasonable period of time in which they can pay for the
goods purchased by them. Accounts receivables are created because of credited sales.
Hence, the purpose of receivables is directly connected with the objectives of making
credited sales.
 Inventory- It means stock of goods, or a list of goods. It may include raw material,
work-in-progress and finished goods. A stock of items held to meet future demand.
Inventory is a list for goods and materials that are available as stock by a business.
Inventory management is important for the firm to attain and uphold an optimal
inventory of goods while also taking note of all orders, shipping, handling and other
associated costs (Connolly and Jackman, 2017).
 Payables- Accounts payable is the amount owed for the purchase of goods or services
at a specific date. It is the money that a company owes to vendors for products and
services purchased on credit extended in the normal course of business. Supplier
offers credit to their customers, which is an arrangement of payment to pay for a
product or service after it has already been received. Payables are presented as current
liabilities under the liability section of the balance sheet. It represents a negative cash
flow for the company. It is considered as the short term credit extended to the
business expected to be fulfilled in less than a year.

c. changes in working capital impacts the cash flow
As the working capital reflects the difference between the short term assets and short
term liabilities and the changes in the working capital are recorded in the operating cash flow
segment of the cash flow statement. Cash inflows and outflows get affected with changes in
the current assets and liabilities. The figure of working capital is said to be positive when
current assets exceeds the current liability which states that cash inflows are higher than cash
outflow. On the contrary, negative resultant of working capital indicates that cash outflows
are greater than cash inflows. If the short term assets and liability increases or decreases with
the same amount then the working capital will not have any effect (Durand, 2019. ).
For example- Purchase of inventory leads to payment of cash while selling of stock leads to
receivable of cash.
2) Working capital management influence the financial results of the firm
Working capital management is an accounting strategy that focuses on managing the
firm’s current assets and liabilities efficiently and effectively. It enables the organization in
ensuring the adequate cash flow in relation to meeting the short term obligations and routine
expenses. Working capital management is an important aspect of finance as it directly linked
with the liquidity and profitability position of the firm. The current assets of the entity should
be managed adequately. Excess of current assets leads to standard income on investment
while too low current assets results difficulty in functioning of operations smoothly. Working
capital management assists the firm in creating the value and to achieve the competitive
advantage by maintaining the optimal balance between the components of working capital
that are cash, receivables, inventory and payables. A well managed working capital impacts
positively to the financial performance of the enterprise. Excessive investment in the working
capital causes a reduction in the profits of the business because too much amount will be
engaged in the inventory and other current assets (Brown, 2019). On the other side too little
investment in working capital increases the risk in meeting the commitments. Therefore, it is
very essential for every company to maintain an adequate level of working capital so that any
uncertaininty or risk gets eliminated in the near future and the operations run smoothly.
3) Steps to be taken to improve company’s cash flow through better working capital
management
Working capital management refers to the management of current assets and current
liabilities with the objective of maintaining liquidity and attaining profitability of the Uber

tools Ltd. Working capital management establishes the best possible trade-off between the
profitability from net current assets employed and the ability for paying the current liabilities
as they become due.
 Incentivize Receivables- Giving incentives to those customers who make payment on
time. Not transacting with such customers who has defaulted in the past years
regarding the payment. Timely action should be taken for delay in payment to
prevent the account from aging.
 Fulfilling Debt obligation- By meeting the short term obligation on time using e-
payment techniques helps the Uber tools Ltd in improving the cash flow as it avoids
the penalty for delayed payments.
 Manage inventory- Maintaining adequate level of inventory improves the cash flow as
it helps in cutting those products that are idle or not performing (Harris, 2019). The
inventory should not be overstocked and the finished goods need to be sold as quickly
as possible so that idle stocks are not left over in the warehouse.
 Analyze costs- identifying the wasteful expenditure and taking necessary steps to
reduce such costs so that firm can reach the better liquidity position. This also helps in
increasing the revenue of the company.
 Examining interest payments- Early payment of the interest on loans helps the firm in
reducing the future cost of installment. Borrowing loans at lower interest rate acts as a
saving to the Uber tools Ltd cash flow and leads to better working capital.
 Using financial information- updating the financial statements and evaluating the
quick ratio at a regular interval enables the firm in knowing its financial position. By
this the entity can take timely action for any improvement (Harris, 2019).
CONCLUSION
From the above report it is concluded that profits and the cash flow are the essential part of
the business in maintaining the operations and for investing the money into various growth
channels so that Uber tools Ltd can functions its business with sustainability in the future.
Working capital management is also an important aspect of the company as it leads to
effective and efficient developing of cash flow and the liquidity and profitability can be
assessed with execellence.

REFERENCES
Connolly, E. and Jackman, B., 2017. The Availability of Business Finance. RBA Bulletin,
pp.55-66.
Durand, P., 2019. On the impact of capital and liquidity ratios on financial stability (No.
2019-4). University of Paris Nanterre, EconomiX.
Locker, A. and Grosse-Ruyken, P. T., 2019. Working Capital Management. In Chefsache
Finanzen in Einkauf und Supply Chain (pp. 135-171). Springer Gabler, Wiesbaden.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Roberts, R., 2015. Finance for small and entrepreneurial business. Routledge.
Online
What Is the Meaning of Business Finance.2019.[Online].Available through. <
https://smallbusiness.chron.com/meaning-business-finance-4108.html >

PART 2
EXECUTIVE SUMMARY
The ratio analysis is one of the most powerful tools of financial analysis. It is use as a device
to analysis and interprets the financial health of the Madagascar industries Ltd. It is very
helpful in financial forecasting and facilitates the evaluation of the financial position and
performance. The report summarizes that the performance of the industry is ascertained by
assessing the ratios and the changes in each of the ratio impacts the operations, profitability
and the liquidity of the industry.
MAIN BODY
1) Financial ratios
a) Description of the financial performance of the ratios
Sales growth- It indicates the percentage change in the revenue growth between the
current year sales and the past year sales. It depicts the increase and decrease in the sales of
the Madagascar Industries Ltd from one period to another. This ratio shows the revenue
trends of the business.
Gross profit margin- It is a profitability ratio that states the relationship between the
net sales and the gross profit of the Madagascar industries Ltd. It is a tool that helps in
evaluating the operational profits of the business. It is calculated by dividing the gross profits
by net sales. When the ratio is depicted in percentage form it is called as gross profit margin.
Gross profit is computed as subtracting cost of goods sold from the net sales.
Operating profit margin- operating margin ratio is the ratio of operating income to
the revenue of the business. It highlights the operating income of the Madagascar industries
Ltd as a percentage of the revenue. It tells about the contribution of company’s operations
towards the profitability. The higher the ratio, the better it is. A high operating profit margin
indicates that a firm can make a reasonable profit on sales, as long as it does good tax
planning.

Gearing ratio- The gearing ratio looks at the financial leverage of the business. It
compares the proportion of equity v/s debt that the business is using to finance its assets. A
high ratio often indicates that the business has been aggressive in financing growth via debt
(Penman, 2015). This can be an issue due to interest expenses, especially in volatile
economic times. It compares owner’s equity to borrowed funds and shows how risky the
company is financially.
Interest cover- It measures a Madagascar industries Ltd operating profit relative to the
amount of interest charges which the company pays. It indicates the comfort with which the
firm may be able to service he interest expense on its outstanding debt. Higher the interest
coverage ratio, higher the capability of the company to meet its interest expenses pertaining
to its debt obligations and vice versa.
Liquidity ratio- These ratios analyze the short-term financial position of a firm and
indicate the ability of the firm to meet its short-term commitments out of its current
resources. They are also known as solvency ratios. Current ratio and quick ratio comes under
the purview f liquidity ratio. Higher the liquidity ratio, higher the cash holding in the business
that can be utilized in future and other areas while low liquidity ratio indicates that the firm is
facing trouble in meeting its current obligations.
Return on equity- It means the amount of net income returned as a percentage of
shareholders equity. Return on equity measures a corporation’s profitability by revealing how
much profit a company generates with the money shareholders have invested. Generally
return on equity of around 15-20% is considered as a good ratio.
Return on capital employed- This is the most appropriate indicator of the earning
power of the capital employed in the business. It also acts as a pointer to the management
showing the progress or deterioration in the earning capacity and efficiency of the business
(Brown, 2019). An ideal capital employed ratio is equal to 15% or above and reflects the
higher productivity of the capital employed and vice versa.
b) Calculation of ratios
Ratio Analysis
particular Formula 2009 2010 2011

s
Sales 360 396 459
Sales
growth
current year sales-past year sales/past year
sales
NI
L
(396
-
360)
/
360
=
10% 16%
Particulars Formula 2009 2010 2011
gross profit 252 272
230
operating profit 108 101 49
Sales
36
0 396 459
gross profit ratio gross profit/sales*100 64% 64% 59%
operating profit
ratio
operating
profit/sales*100 30% 26% 11%
Particulars Formula 2009 2010 2011
gearing ratio
Debt 186 252 360
Equity 304 347 344
debt-equity
ratio
long term debts/shareholders
funds 0.61 0.73 1.05
Particulars Formula 2009 2010 2011
interest cover
Earning before interest and tax 108 101 49

interest expense 9 12 16
interest coverage
ratio
EBIT/interest
expense 12 8.42 3.06
particulars Formula 2009 2010 2011
liquidity ratio
current asset 65 114 94
Inventory 14 36 43
quick assets 51 78 51
current liability 29 48 102
current
ratio
current asset/current
liability 2.24 2.38 0.92
quick
ratio
quick asset/current
liability 1.76 1.63 0.5
particulars Formula 2009 2010 2011
return on equity
net income 79 72 26
shareholders funds 304 347 344
return on
equity
net income/shareholders
funds*100 26% 21% 8%
particulars Formula 2009 2010 2011
return on capital employed
operating profit 108 101 49
total assets 518 647 806
current liability 29 48 102
capital employed 489 599 704
Ratio
operating profit/capital
employed*100 22% 17% 7%

c) Interpretation-
From the above analysis it is interpreted that the sales of the Madagascar industries
Ltd has been increased from 10% to 16% in the current year which states that the revenue of
the company has increased by reaching higher sales in 2011. The profitability ratio includes
the gross profit and operating profit ratio that is decreased from the past year resulted as 64%
to 59% and from 30% to 11%. It means a huge decrease in the margin which indicates a
negative sign for the entity as the profitability of the business is at downfall. The gearing
ratio of the Madagascar industries Ltd is at increasing trend year by year that is from 0.61 to
1.05 in the current year which depicts a negative sign for the organization as it is more
moving towards the borrowed funds and more of the financing is done through leveraging
which makes risky for the industry to run sustainably in the future. The interest coverage ratio
of the enterprise is decreasing from 12 to 3.06 which indicate that the firm is losing its ability
to meet its interest expense in coming years which can cause a negative impact on the image
of the company. The liquidity ratio involves the current ratio that is resulted as reducing from
2.24 to 0.92 and the quick ratio is also reducing from 1.76 to 0.5 that means the ability of the
Madagascar in meeting its short term obligation is reducing from previous years. The return
on equity is also at a decreasing trend that is from 26% to 8% which affects the entity’s
growth adversely. The return on capital employed is lowering from 22% to 7% which
demonstrates the negative effect on the investments made by the firm.
2) Assessment of financial performance-
The Madagascar industries Ltd can assess the financial performance by analyzing the
financial ratios. The sales growth enables the firm in knowing its changing trends in the sales
so that it can determine its increase or decrease in revenue. The gross profit ratio helps the
company in evaluating the operational performance of its business. The operating profit ratio
assists the industry in attaining the results relating to its operating profits so that overall
profitability could be known by the company (Harris, 2019.). The gearing ratio measures the
leverage position of the firm so that necessary steps can be taken if the company is facing
high borrowed funds. Interest coverage ratio helps the Madagascar industries limited in
ascertaining its ability to meet its interest expenses so that it could maintain and keep control
over its expenses. Liquidity ratio ensures the liquidity position of the firm. The return on
equity ratio enables the enterprise in determining its income from the shareholders funds that
directly links to the financial performance of the business. The return on capital employed
helps the industry in assessing the income generated from its capital employed so that it could

be able to measure that the investments made are inculcating profits or not and can make
decisions regarding further investment in other business ventures.
CONCLUSION
From the above report it is concluded that working capital management is essential
for Uber tool limited for attaining the sound and better financial performance of its business.
In the part second financial ratios of Madagascar industries limited and the financial
performance of the company is lowering down year by year.
REFERENCES
Books and journals
Durand, P., 2019. On the impact of capital and liquidity ratios on financial stability (No.
2019-4). University of Paris Nanterre, EconomiX.
Penman, S. H., 2015. Financial Ratios and Equity Valuation. Wiley Encyclopedia of
Management. pp.1-7.
Brown, S., 2019. Company finance: the importance of working capital. Finweek.2019(24
January).pp.19-19.
Harris, T., 2019. How do you finance your business?. In Start-up (pp. 69-84). Springer,
Cham.