Excellence Electrics Ltd. - Business Finance

5/7/2017[pic 1]

Table of Contents

Introduction        2

Part 1        2

1. Differences between profitability and cash flow and the way these are expressed in the company’s accounts.        2

2. Application of the concept of working capital management to the company and how the current situation is a reflection of how the business in managed.        5

3. Steps needed to be taken to improve the company’s working capital management.        6

Part 2        7

1. The stages of the capital budgeting process and the main capital investment appraisal methods.        7

2. The potential application of these methods to the projects under consideration.        9

3. Analysis of the most appropriate method for the decision making process in this case.        11

Conclusion        12

References        13

List of Figures

Figure 1: Profitability in the Income Statement        4

Figure 2: Liquidity in the Cash Flow Statement        4

Figure 3: Capital Budgeting Process        7

Introduction

Business organizations require proper financing for its operation. A business without money cannot execute its functionality and therefore finance is considered as the fuel for every business. In order to carry out business effectively, management of proper financing is the must. The present report has been prepared considering the issue of managing business finance and to support the content, the case of Excellence Electrics Ltd. has been analyzed. The scenario and details have been presented in two different parts for proper evaluation of the financial situation and thereby making effective recommendations for further improvements.

Part 1

1. Differences between profitability and cash flow and the way these are expressed in the company’s accounts.

The two most common phrases in financial accounting are the cash flow and profitability. These two tools are used to measure the disparity between company’s gain and losses but yet they differ from each other not only in terms of nature but also in different perspectives (Burns, 2014). For this reason, both cash flow and profitability are recorded in the company’s financial accounts in a separate way and also expressed in different format to represent their different prospects.

Cash Flow refers to the inflow and outflow of cash in the business. It represents the disparity between the received and paid cash by the company. Cash flow shows the cash a balance representing the difference between how much money is available at the beginning period and how much cash is left at the ending period (Cartney, 2012).

Profitability refers to the ability of the business to make profit. It represents the disparity between the revenues and expenses of the company. Profitability shows the extent to which an organization can produce its profit. Usually profitability shows the balance of real earnings representing the difference between how much money a company earned and how much money it incurred (Jury, 2012).

Differences between Profitability and Cash Flow

Cash flow and profitability both are considered as the most crucial aspects in financial accounting. However, there are some critical different between them that make them both play the crucial roles from their perspectives. The first difference between them arises from their nature of operation. Cash flow covers all the actual cash transactions whereas profitability covers all the cash and noncash transactions. Cash flow results from operating, financial and investing activities whereas profitability refers from financing and investing activities. Cash flow is a narrow concept whereby profitability is considered as a broader concept. Besides, the timeframe of recording is different too for these two aspects. Cash flow records the cash transactions occurred on a regular basis. On the other hand, profitability records the transactions on periodic basis. Another difference between them lies in terms of representation. Cash flow at one side represents the liquidity of the company and on the other side profitability is represented by the profit segment. Cash flow measures the liquidity maintenance capacity of a company whereas profitability measures the capacity of the company to yield profit (Cinnamon, Helweg-Larsen and Cinnamon, 2010).

Ways of Expressing Profitability

In the accounts of the company, profitability is expressed through the income statement. Income statement of a company can be of two types. The first one is the single step income statement and the second one is the multiple steps income statement. The single step income statement involves a single source from where all the incomes and expenses are arisen. On the other hand, in the multiple steps income statement there are varieties of sources. In both cases, these sources are known as the profit generating sources for the company and the profit hereby is calculated from the Net Profit section.  The following sample income statement is provided with the net income company earned over times that dictates the profitability of the company for the accounting periods.

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Figure 1: Profitability in the Income Statement

Ways of Expressing Cash Flow

In the accounts of the company, liquidity or cash flow of a company is expressed through the cash flow statement. Cash flow statement of a company records both inflow and outflow of the cash transaction and involves two major types including the direct and indirect methods. In both cases, there are three major areas of cash transactions (Jury, 2012). The first one is operating activities; the second one is the investing activities and the third one is the financing activities. However, all these areas are known as the identifier of the cash balance for the company and the liquidity hereby is calculated from the net cash balance section. The following sample cash flow statement is provided that dictates the liquidity of the company for the certain accounting period.

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