Business Finance: A Comparative Analysis of Two UK Companies

Desklib provides past papers and solved assignments for students. This report analyzes the financial performance of two UK companies.

BUSINESS FINANCE

Executive summary
Financial management of a company is highly necessary for controlling and monitoring the
financial resources. The present study has focused on the two major companies of UK, namely
Madagascar Industries Ltd. and the UberTools Ltd. the financial performances of the
organizations have been discussed in the study. Definitions of cash flow, working capital,
payables, inventories and receivables have been discussed in the study along with showing the
performance of the company in these areas. Recommendations have also been provided to
develop the performance of UberTools Ltd. in their Working Capital management. The profits,
sales growth, gross and operating profit margin, liquidity ratio, return on equity and others have
been discussed regarding the Madagascar Industries Ltd. The study has also provided few
suggestions for the company related to their inventory management, asset management and other
things for expanding their market in the respective country in a proper manner.

Table of Contents
Part 1................................................................................................................................................4
i. a. Differences between Profit and Cash flow............................................................................4
b. Definition of Working Capital, Receivables, Inventory and Payables....................................4
c. Impacts of changes of working capital on cash flow...............................................................6
ii. Ways of managing the financial statements of the company...................................................7
iii. Recommendations for improving the cash flow of the company...........................................8
Part 2................................................................................................................................................9
i. a. Elements of financial performance of the company.............................................................9
b. Calculate the ratio based on organizational financial report..................................................10
c. Analysis of the outcomes.......................................................................................................10
ii. Assessment of the financial performance by the Board of the organization.........................11
Reference list.................................................................................................................................13
Appendix........................................................................................................................................15

Part 1
i. a. Differences between Profit and Cash flow
Profit is mainly a financial gain or the excessive amount after expenses. Profit is also considered
as net income and the financial benefit that is realized after gaining an amount from business. As
per the viewpoints of Atrill (2014), profit depends on both the income and costs of a business.
On the other hand, cash flow is the amount which helps to define the increase and decrease in
business in a proper manner (Aktas et al. 2015). Practically, in the financial term, the cash flow
is used to describe the currency which is consumed for a provided time period. Therefore, cash
flow is regarded as moving money for a particular business.
However, it is highly necessary to know the differences between cash flow and profit in order to
present the proper financial statements of a business. The most important difference between
these two is that cash flow can present without having any profit within a company whereas the
profit cannot come without proper cash flow in business. It is also estimated that the concept of
profit is narrow as it focuses only on expenses and incomes. Contrarily, the cash flow is highly
dynamic which focuses on the thorough movement of currency of a business in an accurate
manner (Gorondutse et al. 2016). In the context of the UberTools Ltd., it has been found that
they have £36 million operating profit in the year 2017 whereas their cash flow amount has
exceeded from their profit margin.
b. Definition of Working Capital, Receivables, Inventory and Payables
 Working Capital
The working capital is a main capital of business that is used in their business related operations.
Working capital is calculated depending on the both the current assets and current liabilities of
an organization. It is also known as the net working capital that is defined through the
organizational liabilities and assets (Atrill, 2014). It helps to measure operational efficiencies,
liquidity and short term financial conditions of a company. For interpreting the sales ratio of a
company, it is important to measure the working capital in a proper manner. The following
figure shows the work cycles of the working capital within an organization.

Figure 1: Working Capital cycle
(Source: As influenced by Afrifa, 2016)
 Receivables
Receivables are considered as the amount on which the organization has a proper right. This type
of right has come for the organization as the amount has been provided by the company to its
customers for their services previously (Afrifa, 2016). In such a case, a proper agreement needs
to be done by the customers and the management of a company in a proper way. In case of
UberTools Ltd, it has been found that they have received of £35 million from BricoFrance as a
receivable for their organization. Therefore, the company has huge right on these amounts.
 Inventory
Inventory means the finished goods, raw materials, merchandises of a company which is owned
by the management of a company and sold after few days. Practically, inventory is a financial
term that is used to define the stages of making the product for sale (Atrill, 2014). Organizations
try to maintain their inventories in order to protect their increasing factors on demands. Material
flowing is also maintained by the inventories in a systematic way. From the case scenario of

UberTools, it has been found that the company has various inventories which have been shown
their proper financial processes.
 Payables
Payable is such amount of money which needs to be paid by an organization as per their
purchasing on credit. Apparently, the payables need to be provided within mentioned as well as
short time period. It is also considered as liability and short term debt payment paid by
organization to avoid their default (Melville, 2017). It is also true that the account payables are
not limited within a particular company; its shareholders may responsible for the payments in
various areas. In the case of UberTools Ltd., it has been found that the payable or the debt of the
company has been increased from £250 million to £350 million for which the shareholders have
paid huge amount to reduce the quantity of their debt. Even, the authority of the organization has
been paid £12 million as a large order placed by D&R in the year 2017.
c. Impacts of changes of working capital on cash flow
Any change in working capital or the entire balance of working capital affects the cash flow of
an organization. In other words, if the balance of working capital increases in a proper manner,
operational cash flow is decreased. Similarly, if the entire balance of working capital decreases,
the cash flow of business operation increases in a systematic manner. With the reduction of
working capital of an organization, cash portion or the current assets reduce in a gradual manner.
However, the current liabilities remain unchanged due to which long term debt is increased
hugely (Melville, 2017). Thus, the cash flow starts to accelerate in a high manner for preventing
the long term debt of the organization. Cash flow mainly tries to include the planned monthly
expenses in a proper manner whereas the working capital has not responsibility to check the
expenses (Head, 2016). In the context of UberTools Ltd., it has been seen that with the reduction
of the working capital, the organization has increased their cash flow in a proper manner.

Figure 2: Impacts of working capital on cash flow
(Source: As influenced by Frankel and Sun, 2018)
ii. Ways of managing the financial statements of the company
From the above discussion, it can be said that the management of the above company needs to
maintain their cash flow, profit, working capital and other things in order to enhance their
financial results (Moodley et al. 2017). At first, the company needs to try to increase their
working capital through which their cash flow can be controlled. On the other hand, they can
also define the factors related to their cash flow through which their payables can be managed. It
is also necessary for the organization to reduce the level of their debts and payable amounts for
decreasing the company loss.
The company needs to develop the economic characteristics based on which they can operate
their business related functions in a proper manner. It can also assist them to make proper
financial statements to gain right financial results. As per the notations of Frankel and Sun
(2018), the core financial strategies of the company can also be identified by the organization,
namely UberTools Ltd. Through which the financial statements can be present in a thorough
manner to accelerate their proper financial results. In such a case, the assessment of financial

statements can also be necessary which needs to be conducted by the financial analysts of the
organization in an accurate manner.
iii. Recommendations for improving the cash flow of the company
It is estimated that the financial managers of an organization need to provide proper working
Capital Management through which the cash flow of a company can be maintained. In such a
case, the company needs to follow the below mentioned steps in a systematic manner:
 The management needs to pay incentives to the customers who pay timely to the
organization through which their working capital can be increased.
 The financial analysts can also meet all the debts of the organizations within short time
span which can improve their payment systems (Moodley et al. 2017).
 The financial department of UberTools Ltd. can also examine their interest payments
along with maintain proper modifications. It can also increase their future instalments as
well as help them to manage their working capital for cash flow.

Part 2
i. a. Elements of financial performance of the company
The financial performance of a company is determined by analysing the financial statements.
According to Karadag (2015), the financial statements like income statement and profit and loss
statement give a company an overview about their position in the market. The elements of
financial performance like gross profit margin, operating profit, liquidity ratio and many others is
analysed. Here the financial statements of Madagascar Industries Limited are observed in order
to identify the financial performance of the company.
Sales growth
Growth in sales is determined by the percentage increase in sales from that of the previous year.
The increase in sales of goods and services help in increasing revenue of the company. The
financial sales of Madagascar Industries Limited have been increasing from $360000 to $459000
for which the profit of the venture has been maximised.
Gross Profit Margin
This determines the financial health of the venture and is the revenue left after accounting of cost
of products sold. The company's cost of sales has been diminished to $ 187000 in 20X1 from $
$13000 in 20X9. This resulted in profits to be diminished to $ 272000.
Operating Profit Margin
The financial performance indicator is obtained after subtracting the expenses, taxes and the
interest charges (Robinson et al. 2015). In this case the operating expenses and the operating
charges are increased for the jewellery chain venture, resulting in diminished operating profit
margin.
Gearing
Gearing ratio is also considered as liquidity and helps in assessing the long run sustainability of
the business. The risks prevalent in the business can be easily assessed with the help of this ratio.
An increase in total liability can identify the rising risk in the business.
Interest Cover
A higher interest cover is good for a company as lower is the interest cover, higher is the burden
of debt and greater is the chances of default. Therefore, as stated by Kim and Im (2017), a high
interest cover determines that the business is less vulnerable to the increasing interest rate.

Liquidity Ratio
This ratio measures the company’s liquid asset with that of its short term liability. The low ratios
of liquidity expose a business to higher risk. Therefore, high ratio determines the company’s
capability of paying the short term debts. The short run debt of the Madagascar Industries
Limited is increasing to $ 37000 which is exposing it to a high risk.
Return on Equity (ROE)
This financial performance indicator showcases the way a business is utilises the investments
made to enhance its earnings. As per the mentions of Demerjian and Owens (2016), it shows a
firm’s efficiency to deploy the assets employed.
Return on Capital Employed (ROCE)
ROCE also measures a company’s efficiency in generating higher profits from the capital
employed for the business. A higher return is better as it helps a firm to clear its past debts,
reduce risk and improve profits in future.
b. Calculate the ratio based on organizational financial report
(Refer to appendix 1)
c. Analysis of the outcomes
i. Sales Growth- An increase in sales has been observed for Madagascar Industries Ltd. The
percentage of sales was 10% in 20X9 which increased to 16% in 20X0. The growth in sales for
20X1 cannot be determined as the next year’s sales are not provided. This increase in sales of the
company indicates that the growth in its revenue throughout the year. In the mentions of Melville
(2017), a higher growth in sales is good as it can enhance the company’s profitability. The
growth in sales is calculated by subtracting the sales of the final year with that of the previous
year and dividing the result with the initial year.
Sales growth = (Sales in final year - sales in previous year)/ sales in previous year
ii. Gross Profit Margin
This financial indicator is obtained by dividing the gross profit by the percentage of sales. The
gross profit margin of the venture has remained stable in 20X0 to 64%. However, in 20X1, it has
reduced to 59%. This is due to the increment in the cost of sales of goods from $ 130000 to $
144000 in 20X0 and $187000 in 20X1.
iii. Operating Profit Margin

The operating profit is calculated by dividing the operating profit by the sales. In the present
case, the operating profit has been reduced to 26% from 30% and later reduced to 11% in 20X1.
This reduction is observed due to the improvement in the operating expenses and the rising
depreciation of the firm.
iv. Gearing
After calculation, the percentage of gearing ratio is remained at the same level. A lower gearing
ratio is suitable for the firm as it determines the low liability. In this case the constant liability
indicates that the company is unable to clear out its debt in the short term and long run too.
v. Interest Cover
The percentage of finance expense of the organisation has been increasing after a 7% interest is
charged on the operating profit. This has also resulted in the decrease in profits of the firm. The
profit before tax (PBT) has also reduced due to this expense. After calculation it is identified that
the interest cover has reduced from 12 to 3.1 (‘000 dollars). This implies that the company is
exposed at a higher risk of the increasing interest rates, thereby exposing it at a higher risk
(influenced by Frankel and Sun 2018).
vi. Liquidity Ratio
The liquidity ratio of Madagascar Industries Ltd. is initially increased from 2.2 to 0.9 from 20X9
to 20X0 but later diminished more drastically to 0.9. This indicates that the organisation is
lacking its ability to pay its short term debts
vii. Return on Equity
The ROE is also observed to be decreased at a higher rate to 8% in 20X1 from 21% in 20X0 and
26% in 20X9. The findings signify that the venture is not efficient in employing its assets
Therefore; it has to adequately manage its assets, inventories and others in order to enhance the
return.
viii. Return on Capital Employed (ROCE)
The ROCE is also observed to be diminishing to 19% in 20X0 from 21% in 20X9. Again, the
return has been further seen to be decreased to 9% in the next year due to inefficiency in the
employment of capital and resources in a right manner.
ii. Assessment of the financial performance by the Board of the organization
The analysis of the financial statement of Madagascar industries Ltd. has shown a deteriorating
performance. The increasing cost of sales, increasing depreciation and liabilities can be referred

by the Board about the declining performance of the firm. The gross profit of the firm has been
improved to $ 272000; however the operating profit is seen to be reduced. In this respect, if it
can try to reduce the cost of the sales of good then it can enhance its profit to a larger extent.
Again, to enhance the operating profits, it is required that the expenses of the firm are reduced.
The assets of the firm are required to be managed well such that the depreciation can be
minimised. In this respect the company has to increase the current asset in order to reduce its
financial obligations. This would help in preventing the company from liquidation.
In addition to this, the organisation is needed to utilise and employ its capital invested in an
efficient way such that the return on capital employed and the equity return can be increased.
The main concern of the company is to reduce the accumulated depreciation and the
management of inventories such that the assets can be protected from depreciation. Additionally,
the business has to pay the debts at least in the short run in order to ensure a sustainable business
in the long run. This would also help in attracting the investors and the shareholders of the firm.
As a result, the venture can also strive for expansion in the future.