1.0 Introduction

For the management to stand out effectively, matters to do with cash management carry the most significant weight. Soundness of the operations depend much on how well, for example, the managers put forward strategies to reduce chances of incurring high costs in the activities; this leads to considerably high profits for the firm. With high benefits, the stakeholders feel privileged to have an association with the firm. Since the managers face many kinds of functions, the allocation of resources become a critical issue to them. Working capital needs to come up in a reasonable proportion so that the cash invested in the same do not deprive the firm of the money available for meeting the short term obligations as and when they become due. Cash flows and profitability are two main concerns for the businesses since if the two don’t get realized instantly there comes a problem in the going concern of the organization. The UTL company has operated under some issues that relate to cash flow and profitability mismatch. Thus, the idea of profitability and cash flow is crucial to understand before the company can make informed decisions (Atrill, and McLaney, 2014).

1.2 Cash flows

Cash flows go by many names including fund flows, money flows, to mention but a few. Cash flows refer to the movement of cash in and out of business. When the funds find their way to the organization, then they qualify the name of cash inflow. Vice versa is also true whereby if the firm gives out cash for different reasons; they experience cash outflows. For example, if the firm “A” buys some machines to expand its operations, then the ultimate thing is to have funds flowing away. If the same company decides to sell the same device to another company or person, definitely it will receive some cash in the form of fund inflow (Aktas, Croci and Petmezas, 2015).

1.3 Benefits

Benefits refer to a form of cash flow that remains after the management has deducted the cost of sales and other types of expenses. The profits are of different kinds including the gross profits, operating profits, net profits, etcetera. The name results from the type of cost or expense compensated for in the trading profit and loss account. Gross profit results when the revenue from sales is lessened the amount used to come up with the commodities sold. Operating gains come when the compensation for the costs of operations take place. Net profit is the one that results when the expenses of trading get deducted from the gross benefits. The changes in the profit affect the capital of the firm especially in cases where the firm decides to report it under capital gains section of the balance sheet (Atrill, and McLaney, 2014, p. 77).

1.4 Distinction of benefits from fund flows.

It is a violation of no law to say that many people confuse the cash flows with profits. At some point, the cash flows increase the benefits but it does not mean that gain can only result from cash flows; it may as well come from credit sales. Profits usually determine the growth of the business entity, but the cash flows do not directly contribute to the increase in any way. The reason for the cash flows not directly contributing to the growth of the business entity is that there are very many ways in which the cash exchange hands. Some of the ways include the donations as well as allowances given to the employees.it is clear that profits are immediately received when a sell is made, but cash inflow comes when the cash is transferred from the customer to the trader (Aktas, Croci and Petmezas, 2015, P. 96).

1.5 Working capital

Working capital is the bloodstream for the company since it makes the company’s activities keep moving. Like the blood, working capital helps bring coordination to the operations and processes of coming up with the products. It is the investment made in a short term basis. Precisely, working capital is the figure one gets after deducting the non-fixed liabilities from the non-fixed assets. Operating capital helps in putting the excess cash in productive activities for the company to keep growing. It should come out clear that as the firm produces, the amount of operating employable capital increases. Thus the more significant the organization, the larger the amount of working capital. Vice versa becomes true as well; this is to say that the less large the organization, the smaller the working capital (Aktas, Croci and Petmezas, 2015, P.101).

1.6 Inventories, receivables and payables

The three items, inventories, debtors and creditors form the main elements used in the determination of the working capital of a firm. Stocks and debtors fall under the current assets while the creditors fall under the current liabilities. The reason as to why these items get classified under this category is that they can easily convert to cash with less cost involved (Atrill, and McLaney, 2014, p. 78).

1.7 Analysis

 

Inventories, also known as stock, refer to the amount of stock available for sale. The stock may take the form of the finished goods, unfinished goods or raw materials. The different types of firms store different types of stock depending on the nature of activities they involve themselves in as they carry on trading. The level of stock kept depends on the size of the firm since it is quite logical to have the big companies stocking a couple of items as inventories (Atrill, and McLaney, 2014, p. 79).

A receivable is an amount expected from the individuals who bought goods on credit from the company under consideration. A firm may use receivables to create and sustain the loyalty of the customers. The more the company works hard to maintain the customers through the issue of credits to clients, the more likely for the company to realize a default in the money owed.

Buying and selling is the routine of any successful company. Purchases can take the form of credit; when this happens, then it goes by the name payables. Credit purchasing helps the firm to have sales even at the times when it is at the situation of insufficient cash. The only bad thing with credit payables is that it deters the rate at which a firm can realize cash inflows.

The significance of operating capital on the cash flow (Atrill, and McLaney, 2014, p. 81).

The more the firm commits funds to the non- fixed assets, the more impact it possesses on the cash flow; it experiences more cash outflow than inflows. The company that has sent a lot of cash to invest in current assets faces liquidity challenges whereby it may not pay its liabilities as quickly as possible. It would come out with a wise thing to spend less cash in the current assets as it reduces the amount of cash outflow (Aktas, Croci and Petmezas, 2015, P.102).

1.8 Analysis of UTL company

The company has so many amounts of payables that make it not recognize the significance of the profits made. Again it has made excess investments which have drained out the cash from the business; these investments include purchasing license, designers, and the like. The company is highly liable since it already has outstanding proceeding at the court (Aktas, Croci and Petmezas, 2015, P.104).

 

1.9 Recommendations

For the betterment of its life, the company is advised to take keen note of the amount worth investing in the current assets. The amount needs to get reduced by cutting some spending which seems immaterial to the going concern of the business. Looking for alternative sourcing of finance is a good step since this would reduce the chances of remaining in debts. The liquidity problem can effectively become solved if the company reduces the amount of working capital. Working effectively to ensure no or fewer cases of lawsuits is another kind of advice for the company. If the company heeds to the recommendations given, then the dents in its life would decline (Aktas, Croci and Petmezas, 2015, P.105).

 

2.0 Part two: Ratio analysis

We cannot talk about business growth without considering checking how the different ratios appear for the company. The central rates for concern are the liquidity ratios, activity ratios, gearing ratios, among others. Some of the proportions call for the analyst to make a comparison among other firms or from year to year (Watson, and Head, 2016).

1. Sales growth ratio

Growth refers to the increment in the size of sales in a business. Sales growth ratio, therefore, measures the degree to which the sales’ volume increases from time to time. High growth ration tells us that the company is doing good in establishing customer relations which increases the product demand. The formula applicable for this ration is: Sales growth= Sales Y2 – sales Y1)/sales Y1 2 (Watson, and Head, 2016, P. 77).

computations

Sales y20x9=	360
Sales y20x0=	396
sales growth=	(396-360)/360
sales growth=	0.1

 

Sales for year 20×0=	396
Sales for year 20×1=	459
Sales growth     =	(459-396)/396
Sales growth =	0.1591

The rate of growth for sales is acceptable since it meets the standard expected for the company. The company is a large one following the fact that if the ratio is equal or above 0.1, it denotes that the company operates on a large scale. The growth ration has grown from 0.1 to 0.1591 to mean that the products of the company find favor in the preference of the clients.

2.Gross profit margin

Gross profit margin shows how much profit the firm generates per unit sales. Gross profit ratio is a percentage of gross profit attributable to the sales made in a specific financial year. If a firm realizes a high gross profit ratio, it is said to have operated effectively. The formula for this ratio is Gross Profit Margin = Gross Profit/Sales (%) (Melville, 2017).

calculations

Gross profit for year 20×9=	230
Sales for year 20×9=	360
GPM                          =	(230/360)*100
=	64%

 

Gross profit for year 20×0=	252
Sales for year  20×0=	396
GPM=	252/396
=	64%

 

Gross profit for year 20×1=	272
Sales for year 20×1=	459
GPM                                     =	272/459
=	59%

 

An approximate ratio of 60% has prevailed in this company; this is out of high gross profits realized over the years. Again it could be attributed to the increment in sales year after the other. A rational investor can, alongside considering other factors, consider this ratio as a good indicator of the first entity for investment.

3.operating profit margin

Operations are a critical contributor to the economic growth of the business. Operating profit margin is a measure of the level in which the firm’s activities get executed. Earnings before interest and tax are the primary concern in this ration. The ration helps to know to what extent does the management cut the operating costs. The formula defines the ratio: Operating Profit Margin = Operating Profit/Sales (%) (Atrill, and McLaney,2014, P. 409).

Calculations

Operating profit for year 20×9=	107
Sales for year 20×9=	360
OPM=	(107/360)*100
=	30%

 

Operating profit for year 20×0	101
Sales for year 20×0	396
OPM                                   =	(101/396)*100
=	26%

 

Operating profit for year 20×0	101
Sales for year 20×0	396
OPM=	(101/396)*100
=	26%

 

Operating profit margin was somehow high in the year 20×9, but this dropped in the subsequent years meaning that the management might not have ensured effectiveness in cutting the operating costs. The administration might have been paying high salaries to the workers.

4. gearing ratio

Gear means to use debt in the capital structure targeting the benefits that come with borrowed funds. The formula that fits this ratio is Gearing = Total Debt/Total Debt + Shareholder Funds (%). This ratio measures the extent to which the firm has used money from lenders to magnify its returns (Watson, and Head, 2016, P. 83).

Total debt for the year 20×9=	214
S’ holders’ fund for the year 20×9=	304
Gearing ratio=	41%

 

Total debt for the year 20×0=	300
S’ holders’ fund for the year 20×0=		347
Gearing ratio=		46%

 

 

Total debt for the year 20×1=	462
S’ holders’ fund for the year 20×1=	344
Gearing ratio=	57%

It is like the company has concentrated on the need to increase the funding from the lenders. It is a good idea, but the challenge sets in when the potential investor can trust the management since the notion is that more of the profits would always go to the pockets of the lenders. The fact that the ration has increased over time spells a possible situation of facing difficulties in paying the debt in case the profits are less or not realized.

Interest cover ratio

Interest refers to the cost of the debt; it is the amount payable to the owners of the debts used by the company in production. Interest cover ratio is a kind of ratio that gives a sense of the frequency in which the company can pay the interest on the borrowed funds without falling short of profits. Interest Cover = Operating Profit/Finance Expense (x) (Melville, 2017, P. 365).

Operating profit for the year 20×9=	107
Finance expense for the year 20×9=	9
interest cover                                  =	( 107/9)
=	12x

 

Operating profit for the year 20×0=	101
Finance expense for the year 20×0=	12
interest cover                                =	101/12
=	8x

 

Operating profit for the year 20×1=	49
Finance expense for the year 20×1=	16
interest cover                                         =	49/16
=	3.1 x

The interest cove ration has negatively grown over the three years. This decrement may be attributed to the increased finance expense. The higher the cost of debt, the lower the chances that the interest will be covered with a high frequency; this scares the shareholders to a great deal since the ration denotes that the company is growing weak in its ability to pay debts.

5. liquidity ratio

From the nature of the term, liquid means something that can smoothly flow from one point to another. In the management, liquidity ratio explains to what extent the company can pay up its obligations with no difficulties. We use the formula “Liquidity Ratio = Current Assets/Current Liabilities” when calculating the figures for this ratio (Melville, 2017, P. 367).

Current assets for the year 20×9=	64
Current liabilities for the year 20×9=	28
current ratio=	2:1

 

 

Current assets for the year 20×0=	114
Current liabilities for the year 20×0=	48
current ratio=	2:1

 

 

Current assets for the year 20×1=	93
Current liabilities for the year 20×1=	102
current ratio=	1:1

 

The ratio has been good in the previous year but come 20×1 it went too low. The low rate was due to increment in the liabilities that came as a result of sourcing funds mostly from creditors. A ratio of 2:1 is acceptable but when it went below the firm became under a mess.

6. ROE

ROE is an abbreviation for the return on equity. The ration compares the earnings after tax to the funds that come from the ordinary shareholders. As the ratio goes up the company sends an excellent gesture to the stakeholders about the possibility of growth. Return on Equity = Net Profit/Shareholders Funds (%) (Watson, and Head, 2016, P. 88).

Net profit for the year 20×9	79
Shareholders’ funds for the year 20×9	304
return on equity                                  =	79/304*100
=	26%

 

 

Net profit for the year 20×0	72
Shareholders’ funds for the year 20×0	347
return on equity                               =	72/347*100
=	21%

 

Net profit y 20×1	26
Shareholders’ funds y20x1	344
return on equity                                     =	26/344*100
=	8%

The declining profits have impaired the return on equity; this is seen from the figure that has consistently downgraded. There exists a need to correct this impairment.

8. ROCE

ROCE is the shortened form of return on capital employed. The return concentrates on the total funds regardless of whether it is from the shareholders or the creditors. Return on Capital Employed = Operating Profit/Total Debt + Shareholders’ Funds (%) (Watson, and Head, 2016, P. 100).

Operating profit for the year 20×9=	107
Total debt for the year 20×9=	214
Shareholders fund for the year 20×9=	304
ROCE=	21%

 

Operating profit for the year 20×0=	101
Total debt for the year y20x0=	300
Shareholders fund for the year 20×1=	347
ROCE=	16%

 

Operating profit 20×1=	49
Total debt y20x1=	462
Shareholders fund y 20×1=	344
ROCE	6%

 

The decline in profits has made the company to realize a reduction in the figure for ROCE. Again the debts have increased over the years making the ration to continue diminishing.

2.1 Recommendations

From the above computations, it is clear that the firm has in most cases the profitability together with the debts are the main reasons to worry about. The board should try to reduce spending on different factors of production if necessary; this will upgrade the situation it is currently encountering. The issue to do with the sourcing of capital is causing alarm to the management. The board should put forth strategies on how to avoid employing so many debts in the firm. Expenses in the operations should also be cut to improve on the different rations that incorporate the same in their calculations (Watson, and Head, 2016, P. 109).

 

 

Bibliography

Aktas, N., Croci, E. and Petmezas, D. (2015). Is working capital management value-enhancing?

Evidence from firm performance and investments. Journal of Corporate Finance, 30, pp.98-113.

Atrill, P. and McLaney, E. (2014). Financial accounting for decision makers. Harlow:

^7th Ed. Pearson Education Limited, chapter 3 pp. 70-106, and chapter 10 pp. 408-453

Melville, A. (2017). International Financial Reporting: A Practical Guide. Pearson Education

Canada. Pp. 361-387

Watson, D. and Head, A. (2016). Corporate finance. New York, NY: 7th ed. Financial

Times/Prentice Hall, chapter 2 and 3, pp. 54-110