Business Finance Report: UberTools Ltd, Financial Analysis

This report provides a comprehensive overview of business finance, focusing on the financial performance of UberTools Ltd, a power tools manufacturer. The report begins by defining key concepts such as profit, cash flow, working capital, receivables, inventory, and payables, and explores how changes in working capital affect a company's cash flow. It then analyzes UberTools Ltd's financial situation, including its debt levels and expansion plans. The report further delves into strategies for improving cash flow through better working capital management, such as increasing sales, reducing costs, and optimizing debtor and creditor payment terms. Finally, the report examines key elements of financial performance, including sales growth, gross profit margin, operating profit margin, gearing, interest cover, liquidity ratio, return on equity, and return on capital employed, and provides calculations and interpretations of relevant financial ratios for the years 2019, 2020, and 2021. The report aims to offer insights into financial analysis and management for improved business outcomes.

Business Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
PART 1............................................................................................................................................1
1. Defining meaning of:..............................................................................................................1
a. Profit and Cash flow along with their differences...................................................................1
b. Working Capital, Receivables, Inventory and Payables.........................................................2
c. Changes in Working Capital affects Cash flow of the company............................................3
2. The company manage is affecting its financial results. .........................................................3
3. Improving company’s cash flow through better Working Capital management....................4
PART 2............................................................................................................................................5
1. Addressing the following:.......................................................................................................5
a. Element of Financial Performance..........................................................................................5
b. Calculating financial ratio.......................................................................................................6
c. Interpretations..........................................................................................................................7
2. Recommendations for financial performance improvement...................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Business Finance is a broad term which refers to procurement and effective utilization of
funds, cash, resources for carrying on the business operations and processes in a cost effective
manner. It emphasizes on raising of funds from different sources and investing them as per set
defined goals and objectives. The report is about UberTools Ltd producing power tools. The
report will provide the meaning of Profit and Cash flow along with their differences. It will also
define Working-capital, Receivable, Inventory and Payables meaning. How any changes in
working capital affects cash flow and measures taken for improving the cash flow will be discuss
in report. The report will disclose the financial statement of Madagascar Industries Ltd which is
producing jewellery by using imported gemstones from Madagascar and South Africa.
Furthermore, calculation of financial ratios such as Sales Growth, Gross Profit Margin, Liquidity
ratio etc. and their interpretation for assessing the financial performance will be disclose.
MAIN BODY
PART 1
1. Defining meaning of:
a. Profit and Cash flow along with their differences.
Profit – The word profit is also known by term Gain. Profit in simple words, is the amount of
financial gain which is remaining after meeting all the business related expenses. The amount of
revenue which is earned from conducting a business activity or trade, remains after meeting all
costs, expenses required for smooth functioning of the business organisation (Shackle, 2017). A
company earns money from trade or business activity after making payment of all the costs
which is incurred for carrying on manufacturing, production processes as required for making
sells of goods and services.
Cash Flow – The cash flow of a company depicts the movement of money, cash or fund in and
out of business. It defines as the net amount of between cash available at the beginning of a
period and the amount of cash available at the end of that period (Reid and Myddelton,
2017).With the help of Cash flow, the company is able to assess its liquidity, solvency position
and also reflects the financial performance of the company.
Difference between Profit and Cash Flow:
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S. No. Basis Profit Cash Flow
1 Objective It shows the profitability
situation of the company or
of a project.
It reflects the liquidity as well as
solvency position of the company.
2 Computation When all the business
expenses or costs are
deducted from revenue
amount, profit is ascertained.
When all the cash outflows of
company are subtracted from the
total cash inflows, net cash flow is
determined.
3 Preparation
Method
Profit is assessed by making
comparison between the sales
revenue of current year with
the previous year.
Cash flow is prepared on the basis
of Income Statement and Balance
sheet.
b. Working Capital, Receivables, Inventory and Payables.
Working Capital - Working capital is the amount of money available with the company
for meeting its day-to-day business operations and cash requirements for making payment.
Working capital helps in measuring the liquidity, solvency, profitability position of the company
for a specified period of time (Working Capital, 2019). It indicates the short term financial
position of the business organisation by measuring the overall productivity, operational
efficiency.
Receivables – Also known as Accounts Receivables. The term receivables basically
means the amount or proceeds in the form of payment received by the company from its
customers who have purchased goods, products and consumed services on the credit basis (Min,
2016). Receivables are in the form of bills or invoices which is raised by the company against its
customer and is then delivered to them for making the payment which is due within the
stipulated time period.
Inventory – The term inventory means the quantity of goods, stock or materials which
available with the business organisation for making sales or for meeting the customer
expectations. Correct valuation of inventory helps business in earning more profit as the
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company is able to ascertain the quantity of stock it is holding and thus can reorder it before
stock out situation arises.
Payables – The term Payables means when the company makes purchases of goods,
products or has consumed services on credit basis from suppliers, creditors, vendors etc. which
has to be paid back within a short period of time or as decides time period. It is also known as
Accounts Payable which is a short-term obligation on part of company.
c. Changes in Working Capital affects Cash flow of the company.
Working Capital is defined as the amount of money available with the company for
meeting day to day expenses or for paying its short-term expenses related to business operations
(Epstein, Buhovac, and Yuthas, 2015). Cash flow on the other hand shows the movement of cash
and funds inflow and outflow out of the business for a definite time period.
Changes in working capital affect Cash flow in following way:
1. The amount due from customer should be collected on time by delivering them invoices
or bills. Company should also focus on early collection of due amount from its customers
to remain liquid. If customer doesn't pay amount on time it affects the working capital of
the company thereby creating negative impact on cash flow.
2. The company should also focus on increasing the creditor payment period as by doing
this the company will have cash with itself which it can use for meeting its expenses on
daily basis (Min, 2016). Early payment to creditor can make company short of cash
which will make cash flow negative.
2. The company manage is affecting its financial results.
In case of UberTolos Ltd, the company is engaged in the business of producing power
tools with a turnover of £400 million last year. The company was having operating profit of £36
million. Debt proportion has increased from £250 million to £350 million. Further the company
is thinking of expanding its business in new product line i.e. Chainsaws for which a 3 year
license has been acquired by the company with an investment of £20 million including advance
fees of £18 million as paid to the design company. The company is not able to generate profit or
after making investment because of outstanding dispute it is facing,
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Also, the inventory management of company is not very accurately and effectively
managed. The company for overcoming inventory related issues has to adopt good inventory
management techniques. The company should formulate effective business strategies and plans
related to its inventory valuation so as to assess the stock level held by company.
3. Improving company’s cash flow through better Working Capital management.
The Cash flow of UberTools Ltd can be improved by focusing on the following factors:
1. Selling of goods or services – The company should emphasizes on increasing the sales of
its products and services to customer at large scale which in turn will generate sales
revenue and thus improve the cash flow.
2. Reducing cost expenditure – UberTools Ltd should focus on reducing the cost related to
production, manufacturing and other business operations (Mathuva, 2015). Every
company should aim at minimizing its cost of production by improving the operational
efficiency of the business processes and maximization of profits.
3. Selling price of products should be increased – The company should providing quality
products and services should charge for its products and services the best price which
provides maximum benefits to customer as well as to the company. By increasing the
price of product, the company should not only focus on goal achievement but also takes
into consideration customer perspective as well.
4. Debtor collection – UberTools Ltd should emphasizes on timely collection of debt
amount due from customer so as to have liquidity and solvency in the business (Min,
2016). The company should always focus on decreasing the debtors' collection period by
collecting money quickly and easily form its customers.
5. Paying slower - The company should always makes emphasize on increasing the payable
period. Making payment due to its suppliers, vendors at later period helps company in
keeping cash or cash-equivalents with itself for meeting day-to-day expenses.
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PART 2
1. Addressing the following:
a. Element of Financial Performance.
1. Sales Growth – The term sales growth means when the company is having increase in its
sales without making any increase in the expenses such as cost of goods sold (Burns and
Dewhurst, 2016). It is a concept by which the company measures increase in sales over a
specified period of time. With increase sales, the company also has increase in its revenue
amount.
2. Gross Profit Margin – It is a financial measure which includes that amount of profit which
helps in determining the financial position of the company (Shackle, 2017). The gross profit
shows the percentage of money which is remaining after deducting the business related expenses
such as cost of goods sold, cost of production etc. from the total revenue amount earned.
3. Operating Profit Margin – The operating profit margin indicates the amount of revenue
which is remaining after making payment of expenses including all operating expenses of the
business such as overheads.
4. Gearing – It is a concept which measure the financial leverage level, the company has
employed into its business organization. Gearing ratio helps in the assessing the extent by of how
much the business is funded by equity capital funds in comparison with debt funds. It represents
the funding amount as contributed by the lenders in comparison with funds contributed by
shareholders.
5. Interest Cover – The interest cover is a financial measure which calculates the interest
coverage ratio for the company (Epstein, Buhovac, and Yuthas, 2015). It is the ratio which
focuses on debt and profitability aspect of the business by determining that how easily the
company is able to pay its interest expenses on the outstanding debt.
6. Liquidity Ratio - The liquidity ratio is a financial measure which shows the ability of
company in meeting the amount due as short term financial obligations or other expenses within
one year by converting liquid assets available with company. The term liquidity defines the
company's extent of purchasing current assets from the market or converting into cash easily
without creating any negative impact on the asset price.
7. Return on Equity – It means the return or part of profit which shareholders is expecting to
receive against holding of company's shares or stock, whenever the company is making profit. It
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is a measure which helps in assessing the ability of the company in generating profit amount with
the equity amount available.
8. Return on Capital Employed - This is a financial measure which helps in determining that
how much the company will generate profit with the capital invested (Bellucci, Borisov and
Zazzaro, 2017). It helps in assessing the operational efficiency and productivity with profitability
of the company.
b. Calculating financial ratio.
Particulars Formula 2019 (in £000) 2020 (in £000) 2021 (in £000)
Sales Revenue 360 396 459
Sales growth (in %)
(Sales RevenueY2-
Sales Revenue Y1)/
Sales Revenue Y1
- 10% 15.91%
Gross profit 230 252 272
Sales Revenue 360 396 459
Gross profit margin
(in %)
Gross Profit/ Sales
Revenue 63.89% 63.64% 59.26%
Operating profit 108 101 49
Sales Revenue 360 396 459
Operating profit
margin (in %)
Operating Profit/
Sales Revenue 30.00% 25.51% 10.68%
Total debt 29 48 102
Shareholder funds 304 347 344
Gearing (in %)
Total debt/ (Total
debt + shareholder
funds)
8.71% 12.15% 22.87%
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Operating profit 108 101 49
Finance expenses 9 12 16
Interest coverage ratio Operating profit/
Finance expenses 12 8.42 3.06
Current assets 65 114 94
Current liabilities 29 48 102
Current ratio Current assets/
Current Liabilities 2.24 2.38 0.92
Net Profit 79 72 26
Shareholders fund 304 347 344
Return on equity (in
%)
Net profit/
Shareholders funds 25.99% 20.75% 7.56%
Operating profit 108 101 49
Total debt 29 48 102
Shareholders fund 304 347 344
Return on capital
employed (in %)
Operating profit/
(Total debt +
Shareholder Fund)
32.43% 25.57% 10.99%
c. Interpretations.
1. Sales growth – The sales of Madagascar Industries Limited has been increasing from 10% to
15.91% from year 2020 to 2021. The sales of company are increasing leading to increase in
revenue amount because of high demand of company's product & services.
2. Gross profit margin – The gross profit of Madagascar Industries Limited has decreased form
63.89% to 59.26% within 3 years which shows that the company has less revenue with itself
after meeting all direct expenses related to sales. It shows that cost of goods sold is high in
comparison with sales revenue.
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3. Operating profit margin - The operating profit margin of Madagascar Industries Limited has
also been decreasing form 30% to 10.68% over the year which shows high level of operating
expenses as compared to sales revenue or decline in sales.
4. Gearing - The gearing ratio of company has increase from 8.71% to 22.87% i.e. that shows
company is highly debt financed. It describes the financial ratio which compares the equity or
capital part of the owner with the borrowed funds of the company.
5. Interest coverage ratio – The interest coverage ratio of company has decreased from 12% to
3.06%, that means company will face problem in cash generating capacity required for paying its
interest expenses.
6. Liquidity ratio – The liquidity ratio of company has been decreasing to 0.92 in which
improvement has to be made to bring it above 1, so that company don't have to sell assets for
meeting its short-term debt expenses.
7. Return on equity – The return on equity has been decrease from 25.99% to 7.56% because
low profit is generated from sales.
8. Return on capital employed – The return on capital employed has been decreasing from
32.43% to 10.99% which has to be improved by reducing its cost expenses & by increasing
sales.
2. Recommendations for financial performance improvement.
1. Increase in Sales – Madagascar Industries Ltd should focus on increasing its sales which
in turn will increase its revenue amount by making improvement in the quality of product
& services (Feng and et.al., 2018). Customer satisfaction along with minimum cost of
production should be main aim of company.
2. Operating expenses – Madagascar Industries Ltd should focus on minimizing its cost
expenses incurred in carrying on business operation. Also, the company should focus on
lowering its operating expenses such as: cost of goods sold.
3. Current ratio – The company should be sound in terms of liquidity and solvent. It should
have more current assets in comparison with current liabilities so that it can meet its day
to day business expenses. This ratio helps in determining the liquidity and solvency
position of the company.
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4. Debt Ratio should remain low – The debt is considered as liability for company on which
interest has yo be paid (Bellucci, Borisov and Zazzaro, 2017). The company should
maintain a mix of debt equity and should be financial leveraged.
CONCLUSION
From the above report it can be concluded that finance is considered as blood of every
business organization as it helps in smooth functioning of business operations. The report has
discussed about the UberTools Ltd having operating profit of £36 million which is facing a
problem of inventory management. The report has also discussed the effect of working capital
changes on cash flow. This report has provided the calculation of financial ratios of Madagascar
Industries Ltd along with its interpretation. At last the report has disclosed financial performance
improvement measure for Madagascar Industries Ltd with the help of financial ratios.
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REFERENCES
Books and Journals
Bellucci, A., Borisov, A. and Zazzaro, A., 2017. Bank organization and loan contracting in small
business financing. In THE WORLD SCIENTIFIC REFERENCE ON ENTREPRENEURSHIP:
Volume 2: Entrepreneurial Finance—Managerial and Policy Implications (pp. 171-199).
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Epstein, M. J., Buhovac, A. R. and Yuthas, K., 2015. Managing social, environmental and
financial performance simultaneously. Long range planning.48(1). pp.35-45.
Feng, M., Yu, W. and et.al., 2018. Green supply chain management and financial performance:
The mediating roles of operational and environmental performance. Business Strategy and the
Environment. 27(7). pp.811-824.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Min, H., 2016. Global business analytics models: Concepts and applications in predictive,
healthcare, supply chain, and finance analytics. FT Press.
Reid, W. and Myddelton, D. R., 2017. Cash flow statement. In The Meaning of Company
Accounts (pp. 16-16). Routledge.
Shackle, G. L. S., 2017. Expectation, enterprise and profit: The theory of the firm. Routledge.
Online
Financial Ratios. 2019. [Online]. Available through:
<https://www.accountingcoach.com/financial-ratios/explanation/4>.
Working Capital. 2019. [Online]. Available through: <https://investinganswers.com/financial-
dictionary/financial-statement-analysis/working-capital-869>.
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