The report is prepared in relation with gathering appropriate set of information regarding the cash flow statement and the profitability. Review of the case study will be done in this report with the help of which an assurance will be made that proper support could be provided to Excellence Electricity Ltd. so that company could work on various financial decisions and could ensure to process the work in a proper way.
Profitability
There are various activities with the help of which organizations earn gains and keeps it with itself the amount which is being gained by the business is known as profitability. It is required that the organizations should work towards to generate more revenue and should ensure that it could earn effective amount of profit. Organizations in present scenario work towards to generate profit so that it could continue to work effectively in near future and could move on the path of success and sustainability (J. Edwards and Sturino, 2011).
CASH FLOW
Cash Flow is the summary of the total amount of the money which has came into or gone out of the organization (Kaur and Singh, 2013). There is various business activities in which the cash of the organization flows. It is required that the organizations in present scenario should work towards to reduce cash outflow and should try to increase its inflow so as to ensure that it could generate effective amount of profit and could ensure to succeed in the market.
Difference between cash and accrual accounting:
Major difference between cash and accrual accounting is related to timing of recording of revenue and expenses recognized in the books of accounts. Cash accounting system is the system under which transactions are recorded as and when they are cash is reflected or transactions where cash is reflected. On the other hand, under accrual accounting system revenue and expense are recognized in the books of accounts when transaction took place or when at the time of revenue is eared and expenses are incurred. This difference in accounting system will impact profitability of the business organisation and this becomes major point in terms of differing cash and profit of the business organisation. Difference between cash and profitability occurs in use these two accounting methods in the Excellence Electronic Limited. When cash accounting method is used there will be higher cash and low profitability and vice versa in accrual accounting system.
Following is the difference between cash flow and profitability:
|
Cash Flow |
Profitability |
|
Cash flow is the statement in which all the transactions of the organization are being recorded. |
Profitability is the gains and the amount earned by the company from the sale of products and services in the market (Luft, 2010). |
|
Cash flow statement includes capital injections which are done by the owner or the investors attached with the company (Niehaus, 2016). All the transactions related with the capital of the company are being recorded in the cash flow statement |
Profitability of the organization is being evaluated from the depreciation expenses, capital assets of the company. The value of the assets helps in determining the profitability of the company. |
|
Cash generated from the sale of the in should be recorded in the cash inflow and expenses made by the purchase of the asset will be recorded in the cash outflow of the organization (Pavlovic and Bogdanovic, 2013). |
There are various aspects like debts written down and writing of the uncollectible account receivables which are owned by the company are being recorded in the profitability earned by the company. |
|
Cash flow statement includes all the sources which help in boosting up the cash levels of the business but they cannot be termed as the profit or the organization. |
It includes the information related with whether the assets which are sold by the organization are sold on the loss or the profit. After depreciation if the organization gets more value than the value evaluated by the company then it is termed as the profit gained by the company, in case if the asset is being sold on the lesser than the evaluated value then the asset is being set to be sold on the loss (Rinofah, 2016). |
These are some of the difference between the cash flow and the profitability of the company, with the help of the difference provided in the report Excellence Electrics Ltd. will be able to manage all the three factories in an appropriate manner with the help of which organization will be able to make different accounts for the profitability as well as cash flow statement of the company (Sagner, 2014). Excellence Electrics Ltd. should generate effective set of cash flow statement so as to ensure that it could keep a track record of all the cash transaction of the company and could make effective set of decision regarding what cash it can flow outward and what is required to increase the inflow of the cash (Szpulak, 2015).
Excellence Electrics Ltd. should focus upon the profitability statement so as to ensure that the organization n could ensure to have a track record of the losses and the gains it has earned in the long run. It is the process which will help the company in eloping the strategies with the effect of which it will be able to sustain in the competitive market (Bamiatzi and Hall, 2009).
Working Capital
The amount of capital which is being invested by the organization to manage its day to day operations is known as working capital of the company (Sagner, 2014). It is the amount which is being used in the daily processes of the company so that it could process the work in a proper way and effective set of support should be availed to the customers available in the market. Excellence Electrics Ltd. could calculate the working capital by subtracting the current liabilities of the company by the current assets (J. Edwards and Sturino, 2011).
Managing Working Capital
Managing working capital is a typical task for any company because it includes all the day to day activities related with the transactions and the capital expenditures but for smooth flow of the work and process it is required that the company should focus upon managing the working capitals because it helps in delivering appropriate set of information related with the investments that are required to be made by the organization in the further processes (Kaur and Singh, 2013).
Manage Procurement and Inventory: It is one of the ways with the help of which organization will be able to manage its liabilities (Rinofah, 2016). It is required that the Excellence Electrics Ltd. should focus upon the excessive stocks and should indulge in the practices which could help the organization in minimizing and managing the excessive stocks in an appropriate manner (Luft, 2010).
Pay Vendors on Time: Another aspect which will help in managing the working capital of the company is that the organization should focus upon the payments and should ensure that they should get the payment within the time period (Niehaus, 2016).
Improve the receivables Process: It is another aspects which will help in managing the working capital of the company in a proper manner (Pavlovic and Bogdanovic, 2013).
Funds of business organisation can be divided into two parts i.e. liabilities and equity fund. These two shall be used in different types of situations of the business organisation. Equity capital is the internal funds of the Excellence Electronic Limited and therefore shall be used in procuring long term non-current assets of the company. This will mitigate risk of solvency in terms of risk of failure. Using more equity shares or equity funds in the business organisation can be costly. Dividends are required to be paid on funds used as equity shares and at much higher rates as compared to debt funds.
Application of Just in time method
Excellence Electronic Limited shall implement just in time method to manage their working capital requirements. In just in time method, raw material will be demanded or purchased from supplier at the time of need i.e. when raw material is actually required for the production. In this situation, Excellence Electronic Limited will be able to reduce its carrying cost of raw material and will be able to manage raw material inventories (Sagner, 2010). Just in time method requires long term contract with supplier and higher ordering cost.
Discount for quick payment
Another measure that can be used to manage or to improve working capital position of Excellence Electronic Limited is to give higher discount to promote prompt payment of sales made. There shall be effective discount policy that will influence debtors to make quick payment and offer higher discounts (Knauer and Wöhrmann, 2013). For this management has to consider or lowers their profit margin, then discount policy shall be developed.
Higher credit period (for suppliers): In this case, Excellence Electronic Limited has to undergo negotiation with suppliers or raw material suppliers to increase credit period. Credit period is the period allowed by the raw material suppliers (sundry creditors) of the Excellence Electronic Limited for making the payment of raw material procured (Ramiah et al., 2014). By increasing credit period from suppliers, Excellence Electronic Limited will be able to defer its payments of raw material and will be able to utilise more funds or for longer period. Negotiation with supplier shall be undertaken to increase to credit period and to pursue them to provide higher discounts at the time of payment.
Conclusion
Understanding and gaining appropriate information in relation with cash flow statement as well as profitability it could be concluded that both the aspects have different place in the books of accounts and has the equal value. It is required that the organizations in present scenario should gain proper set of information in relation with the profitability as well as cash flow statement so as to ensure that it could sustain in the market.
This report is addressed to shareholders and this includes analysis of capital budgeting process and various techniques. In this report, reasons for application of capital budgeting techniques have been demonstrated and techniques which shall be used are identified.
Capital budgeting is the process under which different or one capital project or long term investment opportunity is evaluated. Capital budgeting techniques provides decision making techniques information to the management so that they are able to take correct and select most profitable capital project (Bas, 2011). Capital budgeting has systematic process that is required to be followed by Excellence Electronic Limited has to follow for evaluation of undertaken two capital projects. Following is the process or stages of capital budgeting process:
Identification of capital project
First of all capital project or long term project requiring huge cash resources is required to be identified so that process can be defined. In order words, opportunity for business expansion or increasing operational capacity of the business organization needs to be identified (Batra and Verma, 2017). In present case, Excellence Electronic Limited has been considering two different proposals or capital projects that are required to be undertaken i.e. Leeds or Bristol. The capital project requires evaluation differently and most profitability, liquidity and solvent investment will be selected (Batra and Verma, 2014).
Assessment of resources required
Next stage of capital budgeting process is of assessment of requirement of resources for completing capital projects that are under consideration. Resources mean both financial resources and operational resources. In this stage of capital budgeting process detailed internal and external research is required in terms of assessing requirements of capital project. Financial resources include initial investment required and other operating expense of the capital project. Operational resources include human resource requirement and other assets requirements. Another consideration is of evaluating expected life of project under consideration (Mukherjee, Al Rahahleh and Lane, 2016). In this case of Excellence Electronic Limited, their initiation investment is of £ 10 million and £ 6 million for Leeds or Bristol projects respectively.
Identification of expected cash flows
This stage of capital budgeting process is most important as in this stage or phase expected cash flows will be analysed on the basis of experience and on some trends (Shastri, Kuldeep & David, 2011). In this stage, figures of cash flows that capital projects will be able to generate will be demonstrated here. In this case, if Excellence Electronic limited has undertaken same project in past then same basis of calculating cash flows will be used. In case, Excellence Electronic Limited has not undertaken such project in past then similar project will be evaluated for calculating cash flows.
Risk assessment in cash flows
In this stage of capital budgeting process, risk involve in assessing cash flows will be analysed and mitigating techniques of risk will be used. Risk assessment is requited in capital budgeting process in order to analyse correctness and effectiveness of cash flows of capital project (Kalyebara and Ahmed, 2011). Another type of risk that Excellence Electronic Limited is required to analyse here is of failure of capital project. Beta in the market is the most important factor that is required to be considered in this case.
Selection of methods or capital budgeting techniques
In this stage, capital project manager in consultation with management of the business organisation identify most suitable technique or techniques of capital budgeting techniques. There are many types of capital budgeting techniques which can be used in evaluating capital project. Following are some techniques that can be used for the same:
Net present value: In order to evaluate and calculate profitability of the undertaken capital project, then net present value is used for the same. Net present value uses the concept of time value of money under which nominal cash flows are converted into real cash flows i.e. with inflation effect. Net present value use cost of capital or hurdle rate as inflation rate for future period of time. In case of Excellence Electronic Limited, capital projects (Leeds or Bristol) having higher profitability will be selected.
Payback period: Another technique that can be used in the present case of Excellence Electronic Limited is of payback period under which liquidity of the capital project will be assessed. In this case, capital project of Leeds and Bristol will be assessed and project having lower payback period will be selected. Payback period is the period which denotes recovery period of initial investment that is made in capital projects.
Internal rate of return: Internal rate of return is the most important capital budgeting technique which is used to calculate breakeven rate of return that is required from the capital investment. Internal rate of return is the point in rate of return of capital project at which present value of cash inflows are equals to present value of cash outflow. Internal rate of return is the minimum rate of return that management requires from the project in order to cover cost of financing or coat of resources that are invested in capital project (Karim, Geoffrey and Teresa, 2010). In case of Excellence Electronic Limited, in order to recover all cost associated with capital project, IRR is the base for decision making for management whether projects are able to recovers IRR or not. Higher rate of return from IRR will be acceptable and vice-versa.
Implement and post implementation Audit
At this stage of capital budgeting, capital project are implemented or work related to capital project will get started. Prior to this stage, decision in terms of selection of capital project that is required to be undertaken shall be taken. At this stage, implementation plan is required to be developed by Excellence Electronic Limited so as track cost, cash flows and other attributes (Tang and Chang, 2012). After implementation, post implementation audit is required to be carried out. In this audit, variances, if any, will be calculated and analysed so as to identify pitfalls.
Excellence Electronic Limited will require implementation of selected capital budgeting technique or appraisal method so as to analyse profitability and liquidity in the undertaken projects. Capital budgeting techniques or appraisal methods are applicable on capital projects only. In case of Excellence Electronic Limited, following are some points which entails the same:
In order to assess requirement of capital budgeting techniques that can be applied on capital project analysis of project is required to be done here. Following are attributes that will analyse which capital budgeting technique shall be used:
Conclusion
It can be concluded that capital budgeting process is systematic analysis approach that shall be undertaken in various steps. Selection of capital budgeting techniques to be undertaken is most vital decision that is to be taken by management.
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