Working Capital Management: EFL Enterprise Report Analysis

This report provides a comprehensive analysis of working capital management within the context of EFL Enterprise, a company specializing in household electrical appliances. The report begins by differentiating between profitability and cash flow, highlighting their distinct roles in financial management. It then explores the application of working capital management principles, focusing on how EFL Enterprise can improve its strategies. The report also delves into capital budgeting, outlining the stages of the process and various investment appraisal methods, such as payback period, average return, internal rate of return, and net present value. The analysis includes potential applications of these budgeting methods to projects and a discussion of their appropriateness in the decision-making process. The report concludes with recommendations for enhancing working capital management practices, including strategies to improve profitability, manage assets and liabilities, and adapt to changing market conditions.

Working Capital
management

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1. Difference between profitability and cash flow......................................................................3
2. Application of the concept of working capital management..................................................5
3. Steps should be taken to improve the company's working capital management....................6
TASK 2............................................................................................................................................7
1. Stages of capital budgeting process and capital investment appraisal methods.....................7
2. Potential application of budgeting methods to the projects....................................................8
3. Analysis of methods appropriate for decision making process...............................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Working capital management is the term which describes the overall profit and loss of the
organization with the help of various essential methods and techniques to estimate the accurate
result. Basically, this report is going to cover overall description of EFL enterprise which is
famous for its household electric appliances and it has expanded its three businesses over three
factories situated in London, Birmingham, and Manchester producing all electrical devices for
their foreign as well as domestic clients by designing their product according to their demand
and choice (Ali, 2012). Apart from this, it also covers all essential factors available in the
internal and external factor which may influence operation of the business. In fact, working
capital management tries to show overall description of cash inflow and outflow of the
organization by using effective methods. In fact their major role is to keep on eye on the
company current assets and liabilities to minimize their losses.
TASK 1
1. Difference between profitability and cash flow
Cash flow and profitability both the term is different from each other in every aspect due
to their role and performance in working capital management or because of their different ways
of managing capital or relating in context with business capital (Ali, 2012). Cash flow is the
term which shows the relation of cash invested in the company while launching of a project or
manufacturing of product and the amount received by the organization in response to the
investment which means it express the relation of return on investment. Whereas profitability is
the word which shows the relation of revenue and expenses incurred by the organization while
performing their business work and task (Barine, 2012).
The major difference between cash flow and profitability are:-
Cash flow Profitability
Cash flow is the term which describes the Whereas profitability is the word which shows

inverse relationship between invested amount
in the organization and amount received in
response of investment which means
description of return on investment.
the positive relation of revenue and expenses
which may be incurred in the organization
while performing the essential task and
activities.
Cash flow is not about covering all the relevant
cost occurred in the organization.
Whereas profitability tries to include all
indispensable cost.
The main and foremost motive of the cash flow
is to pay all bills and expenses whenever it
arises in the organization to avoid any debt.
Whereas the first and foremost objectives of
the profitability is to earn more and more profit
which means profitability is focussed on
acquiring more money then it spends.
Cash comes from various relevant and
effective sources for example loans from banks
on fixed interest rate, sales, sales on assets,
collection of debt, etc.
Whereas profitability comes after paying all
the expenses which are necessary to be paid
which means it is revenue acquired after
fulfilling relevant expenses of the organization.
Cash flow is the amount that flows in and out
of the organization based on some current
activities or to cope up with present situation.
Whereas profitability is profit gained by the
organization by developing their overall
organization with appropriate rapid growth and
development.
These cash flow and profitability accounts are effectively expressed in the company’s
accounts in the form of appropriate statement with the help of income statement which shows the
amount incurred by the organization in emerging new and innovative products to increase their
profitability (Bhattacharya, 2014). In fact, cash flow statement shows the expenses occurred
while manufacturing electrical appliances for their customers by adopting various effective
strategies for accurate estimation of cost spend by the organisation while establishing of
particular plan. Apart from this, profitability of the organization signifies in the profitability
index by expressing all the relevant expenses incurred in the business to know about accurate
profit earned by the organization (Charitou, 2010). In additional an organization must aware
about their cash flow statement to overcome their financial problems and issues which may
emerge anytime due to the inappropriate usage of capital.

2. Application of the concept of working capital management
Working capital management is the term which mainly describes the overall assets and
liability of the organization acquired by enterprise to overcome various other problems existing
in the income statement of the organization (Elfani, 2010). In fact, it shows the appropriate
balance between growth, profitability of the company and liability with the help of useful data
analysis and quantitative research. Application of the concept of working capital management
express the current assets of the company and current liabilities to indicate the adequate flow of
cash to handle the short term or long term debts with the help of useful methods and techniques
of working capital. In fact, working capital plays a very eminent role in determining the amount
of debts or expenses faced by the particular plant and machinery or while launching any
innovative product to identify their effective roles in the organization betterment (Lois, 2010).
Apart from this, working capital reflect the current situation of a cited organization by showing
their assets or liabilities and showing their day- today expenses incurred during production
process and with the use of appropriate techniques of working capital of organization try to
overcome all the current and recent problems which may occur due to the inappropriate working
of the enterprise due to the less attentive nature (Enqvist, 2014).
EFL excellence electrics Ltd, is the enterprise trying to manage their current situation
with the useful role of working capital and due to the appropriate management of working
capital. In fact it also help in identifying their hidden problems or issues and come to know about
the actual reason behind the failure of their business terms. Apart from this working capital act as
a very effective tool and method which may help the organization to get aware about their risk so
that they can hedge their risk by using effective strategies and planning to meet their company
objectives by fulfilling their goals and targets. Cited organization must adopt the various useful
policies with the use of relevant or accurate data and information to achieve their organization
needs and wants (Graham, 2014).
At the end, application of working capital management mainly deal with the overall cost
invested by the organisation to get high return on it by understanding their objectives just to
achieve their target and goals. It means, a cited organization updated about their losses and
profits with the help of income statement which may describe overall situation of the
organization and guide them to cope up with difficult and critical situation (Nikkinen, 2014).

3. Steps should be taken to improve the company's working capital management
An organization need to improve their working capital management by adopting various
effective policies and by making essential strategies to improve their current situation to achieve
their organizational targets and motives by fulfilling their customers’ demands and needs
according to their choice. In fact it also considers various relevant internal and external factors
which may affect the working capital management because of their broad concept and complex
nature. A cited organization need to take various essentials steps and initiatives to improve their
working capital management (Jain, 2013).
Earning profits: - An organization always tries to earn more and more profits to reduce their
liabilities due to which the company has to face many financial problems. In fact, increase in
profits resulted in change in scenario of working capital which encourage enterprise to cope up
with any financial issue by raising their living standard by setting the standard (Singh, 2013).
As an accountant of organization, it is very indispensable to replace the short term debt into
long term debt to get extra duration for improving their condition or to arrange fund to fulfil all
the necessary expenses which may incurred in the organization while conducting various
essential programmes.
Working capital is the overall presentation of the organization expenses and profit occurred
so one of the most effective ways of improving the condition of working capital is to convert
long term assets into cash by selling the particular assets to acquire more and more fund which
may act as a very useful while improving the working capital (Yadav, 2013).
Try to generate more and more assets by reducing their liabilities and by taking various
effective initiatives towards improvement.
Quantitative research method is used to gather statistical data and information which may be
very helpful in improving the condition of the organization. It means working capital plays a
very eminent role in improving the balance sheet of the organization
Improvement in working capital management increases the wealth and value of the
organization by reducing their risk due to the appropriate analysis of the condition of the
enterprise (Kaddumi, 2012).
It is very indispensable for the organization to change their strategy so that they can do
effective and essential reforms according to the requirement in the company.

An organization is required to change overall existing scenario by applying various other
effective strategies to improve the condition of working capital management by reducing risk
and challenges which may occur while the improvement process(Ramadan, 2012). In fact an
organization need to take appropriate initiatives towards improvement by following planning
process for accurate estimation. Moro ever improvement is very indispensable for every
organization to change their policies according to the customer demand or taste and preferences
to complete their objectives by capturing the attention of the society. Improvement is the step
towards changes and reforms
TASK 2
1. Stages of capital budgeting process and capital investment appraisal methods
Capital budgeting is the term which is mainly used to determine effective project by
identifying various projects with the help of appropriate methods or techniques to analyse the
useful and profit oriented project with maximum life ( Kieschnick, 2013). Capital budgeting is
used by the cited organization so that they get aware about the project and profit oriented project
to earn more and more profit with maximum life it means this budgeting method is used to select
the best alternatives among both the project(Laplante, 2013). In other words or in simple terms, a
cited organization is going to invest their money in two different projects one is the Leeds
venture having a life of nine to ten years . Whereas another project is the Bristol venture with
low investment but life of the project is not more than six years. So capital budgeting process is
used by the higher authority or entrepreneur of the organization to decide which project is going
to more effective and useful for overall society as well as enterprise also or easy to understand by
applying most effective method of capital budgeting. Some of the useful and essential tools and
techniques of capital budgeting is:-
 Payback period method is used in identifying the minimum or maximum year of the
project by determining accurate duration of completing project.
 Pay back profitability is another method of capital budgeting which is used for solving
the issues and determining the amount of profit earned by the organization.
 Average return method is also one of the very effective techniques to calculate the overall
average of a project.

 Internal rate of return plays a very vital role in decision making process because it is
appropriate method which consider all the relevant internal and external factors of the
business (Moussawi, 2013).
 Net present value is last method in selecting process which helps in selecting best
alternatives from various projects by showing their advantages and disadvantages.
These above methods or techniques are helpful in deciding the useful project from both
the project by appraising the best capital investment methods which is more profit oriented and
full of positivity or positive and accurate results (Lind, and et. al., 2012). A cited organization
wants to select the best investment methods by appraising appropriate technique of a
investment. So that they get aware about the relevant information and data by using quantitative
research method. In fact quantiative method acquired information in the form of numerical or
statistical which act as very useful while decision making process in selecting best project
between both of them . To earn more and more profit by satisfying their customers need and
wants with adoption of effective policies by following all the relevant path or direction. In fact a
cited organization need to follow the appropriate procedure to avoid any challenges and risk by
overcoming all the challenges which may occur establishing a new plant (Mathuva, 2015).
2. Potential application of budgeting methods to the projects
These above capital budgeting methods have potential of solving various problems and
issues which may emerge in the organization while selecting the best alternatives among both of
the project. Basically this term potential application of capital budgeting method of the project
tries to describe overall ability of methods to understand the project benefits and disadvantages.
In fact, potential application is the term which defines the usefulness of budgeting methods due
to which a cited organization come to know about the role played by effective and appropriate
methods to select best techniques of selection process. Apart from this, it also plays the essential
role while project selection procedure to attain their goals and target by understanding their
overall objectives with consideration of all the relevant internal and external factors(Preve,
2010).
In other words, capital budgeting is a capital investment method which is very helpful in
selecting the best project by determining their potential of all the methods available in the capital
budgeting. All the methods of capital budgeting plays a very eminent and vital role in the
selection process due to their qualitative nature because it act as a problem solver in the

organization(Sarria-Allende, 2010). The main objectives of the cited enterprise is to select
appropriate project according to their demand and usage at the market place to fulfil the terms
and condition by analysing effective method to be adopted. In additional, potential application is
the element of a capital budgeting method which helps in decision making process to get
accurate results.
3. Analysis of methods appropriate for decision making process
In this research project, an organization need to acquire appropriate data and information
by adopting various other effective methods to take effective decision in the organization. To
analyse in proper way they mainly use capital budgeting method in which it include some
techniques and methods which helps to provide reliable data related to the company (Usama,
2012). By using this above methods it is very easy to calculate company losses with the help of
applicable method. This helps in taking effective decision and providing better solution to the
company. Analysing process is the systematic process in which it evaluates and determines
collected information by using methods. Capital budgeting method involves many methods like
Interest rate return (IRR), net present value( NPV), average rate of return(ARR), profitability
index(PI), payback period(PBP) and so more. All these help to provide valuable and reliable
information related to the company (Ukaegbu, 2014). With the use of methods an organization
can easily calculate the return, future value, present value, cost estimation and all. In both the
projects, the company need to analyse their expenses and profit. IRR (interest rate return) is a
appropriate method to calculate the interest rate when by the company invest money in the
market and any other sectors so it is required to calculate how much will be gained in the future
and in the present. In this, using IRR method it will help to provide actual and real data of
interest with the help of lower and higher discounting rate. IRR method through easy to evaluate
profitability of invest in the effective manner and help to take proper decision by the company's
head also they can estimate before investing the fund in many sectors into the market. IRR
through estimate the future value of assets and their share price of the company (Uremandu,
2012). This method help to take better decision also help to select better project to develop their
business in the systematic process. If interest rate high comparison to invest in this case this
project will be selected but interest rate return lower comparison to invest so that project will be
rejected on the basis of calculation by this method of both project. Its help to take decision and
help to develop business in the effective manner and help to select project by head of the

company. At the end these methods plays a very vital role and act as a indispensable technique
while decision making process because decision is the relevant factor in business success (Enyi,
2012).
Decision making process is not an easy task which required a proper concentration and
learning skills because overall enterprise is depend upon one single decision. Whereas an
organization need to adopt various effective and essential methods or technique which may act as
a very useful in decision making process as it required accurate information and data. Apart
from this decision making is a appropriate process which required a proper planning and
strategies to control any mistakes and errors.
CONCLUSION
This report is all about overall description of working capital management by identifying
their role in EFL enterprise. The main motive and aim of the cited organization is to
manufacture a product of household electric appliances by expanding their business in three
countries with introducing or launching new and innovative product across the globe. To
achieve their organization objectives an organization need to focussed on their working capital
management because working capital is the term which shows the description of company assets
and liability which is very helpful and useful while decision making process. Apart from this, a
cited organization want to expand their business by establishing new plants or project and tries to
determine the best alternatives or effective project with the help of capital budgeting method. In
fact this method plays a very eminent role in deciding the best project by expressing the accurate
duration and time period of completing the project.

REFERENCES
Books and Journals
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profitability: Empirical evidence from an emerging market. Journal of Business &
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firm profitability in different business cycles: Evidence from Finland. Research in
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Jain, P.K., Singh, S and Yadav, S.S., 2013. Working Capital Management. In Financial
Management Practices (pp. 177-255). Springer India.
Kaddumi, T.A and Ramadan, I.Z., 2012. Profitability and working capital management: The
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shareholders’ wealth. Review of Finance, 17.(5). pp.1827-1852.
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Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
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Ray, S., 2012. Evaluating the impact of working capital management components on corporate
profitability: evidence from Indian manufacturing firms. International Journal of
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Sharma, A.K and Kumar, S., 2011. Effect of working capital management on firm profitability
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profitability: Evidence from developing economies in Africa. Research in International
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Uremandu, S., Ben-Caleb, E and Enyi, P.E., 2012. Working capital management, liquidity and
corporate profitability among quoted firms in Nigeria: Evidence from the productive
sector. International journal of academic research in accounting, finance and
management sciences, 2.(1).
Usama, M., 2012. Working capital management and its affect on firm's profitability and
liquidity: In other food sector of (KSE) Karachi stock exchange. Arabian Journal of
Business and Management Review (Oman Chapter), 1.(12). p.62.