Task 2: Part B (Annex C)

In this part of the assignment, a fund flow statement has been prepared for the organization
called DFS Ltd. The year 2015 and 2016 are taken into consideration

Statement of Working Capital (FY 2015 and 2016)

2015 (In million GBP) 2016 (In million GBP)

Net Value of Current Assets 68.10 73.50

Net Value of Current Liabilities 233.90 248.50

Net Working Capital -165.80 -175

Difference in Net WC -9.20

The net working capital used has increased in the year 2016 by 9.20 million GBP. This will
be transferred to the statement of fund flow of the organization.

Fund Flow Statement

Funds generated from net operations are as follows:

Net profit after tax for the year 2016 64.5

Add: Depreciation/Amortization 18.60
Loss on sale of assets -
Gain on sale of assets -
Income from interest 0.30
Expense for interest 11.60
Funds generated from net operations 94.40

Funds generated from operations

Fund Flows from operation = Net Income + (depreciation + amortization + loss on sale of
assets) - (Profit on sale of assets + income from interest)

FFO = 94.40 million GBP

Other sources
Total application of fund = 9.20 million GDP

Total = 9.20 million GBP (Funds applied for the year 2016)

Net worth in of purchase of machinery for the year 2017 7.5 million GBP

Dividend paid -
Decrease in working capital (9.20) million GBP
Other expenditure from finance interest (net of income) 11.30 million GBP
Repayment of borrowing (0.40) million GBP
Total 9.20 million GBP

The total application of funds amount to 9.20 million GBP. The funds from operations have
declined from the year 2015 to the year 2016. The funds have been used for the purposes of
purchase of plant, property and equipment and repayment of interest and borrowings. The
decrease in net working capital of the organization has also contributed in decline in overall
current assets and also cash equivalents. This decline indicates that the working capital is not
being used by the company efficiently.

Fund Flow Statement is used for various purposes such as evaluating changes in working
capital, estimation related to source of funds and evaluating inventory changes easily and
effectively.

Ratio Analysis

Ratio analysis is one of the most common tools used to measure the performance of a
business organization. In this study also, various ratios have been calculated, explained and
interpreted in detail. Some of the ratios calculated are as under:

Gross Profit Ratio

The ratio which shows the relationship between gross profit and total revenue from sales. It is
shown in percentage. This ratio depicts and evaluates the operational performance of
organizations and firms.

FORMULA: Gross Profit/Net Sales

It is desirable that this ratio is high because it might lead to a higher net profit ratio. In
addition to this, the business organization will also be able to attain a higher level of break
even sales quite fast and thus leads to risk reduction. To arrive at the gross profit figures,
material, direct labour and various manufacturing expenses are required to be deducted from
sales figure. The ratio is computed by dividing gross profit by net sales. There are various
reasons because of which these changes occur in ratios, such as

A. Price realization changes

B. Product mix changes

C. Raw material cost changes

D. Changes in Labour Productivity

E. Changes in Production Quantity

The above mentioned factors can either positively or negatively contribute in change in
ratios. This ratio is extremely essential to calculate for the business organizations. The
outcome of calculation should be such that all the expenses get covered and there is some
profit left. The ratio can be compared with previous year's figure, to evaluate the increase or
decrease in performance.

The ratio for the given business organization is as under:

2016- 134.3/756 times 100=17.76%

2015- 122.3/706.1 times 100=17.32%

From the above calculation it can be seen that the performance of the company has improved
slightly. This is indicative of the steady trading conditions with respect to cost of production
and selling prices. Continuous improvement is indicated if there is an increase in the gross
profit ratio over the years.

EBIDTA Ratio
This ratio is calculated to establish a relationship between operating profits and sales revenue
of a business organization. In other words, the income generated by a business organization
due to the business operations are evaluated with respect to sales irrespective of the method
applied for assets financing.
Formula: (Operating Profit/ Sales) *100

This ratio broadly indicates the overall effectiveness of the operations of businesses during a
particular period of time.

2016- 94.4/756 * 100= 12.49%

2015-77.6/706.10 *100=10.99%

From the above calculation, it is clear that there has been an increase of 1.5% in operating
profits which is indicative of the fact that cost of operations is in control as compared to
turnover. There is a drop of approximately 12.03% in administrative expenses and this has
contributed in improving the operating ratio.

Earnings Per Share

This represents to that portion of the net profit after taxes which is attributed to the risk
bearers who are also the owners of the company called the shareholders. Dividend policy of a
company is determined by the size of earnings and also the steadiness in earnings per share.
The EPS of the shareholders of DFS has increased from 4.3 pence to 28.3 pence, largely due
to decrease in finance charges.

Current Ratio
It is a measure of liquidity position of a company. In other words, measurement of the ability
of a company to pay off its short term as well as long term obligations is done by current
ratio. For this purpose, total current assets are considered relative to the total current
liabilities.

Formula: Current Assets/ Current Liabilities

The calculation of current ratio of DFS is as under:

2015- 131.9/169 =0.77

2016- 95.4/160.3= 0.59

The current liabilities of the company are significantly higher than the total current assets of
the company. This means the liquidity position of the company is not favourable and the
company is not able to pay off its current liabilities with the available current assets. .
Quick Ratio
It is an indicator of the short term liquidity position of a company. It strives to measure the
ability of a company to meet its obligations of short term with the available most liquid assets
of the company. Quick assets include assets like cash equivalents and trade receivables.
Inventories are specifically excluded from this ratio because they cannot be easily converted
into cash. Quick Ratio is calculated as under:

Formula: (Current Assets- Inventories- Prepaid Expenses)/ Current Liabilities

2016- (131.5-34.9)/169.0 =0.57

2015- (95.4-28.3)/160.3=0.42

From the above, it can be seen that the short term paying ability of the company has
improved from the year 2015 to 2016. But the company is still not able to cover up all of its
current liabilities with quick assets.

Trade Payables (in months)

Credit period given by suppliers to businesses is essential source of finance. It fulfils the need
of working capital in the company. However high credit period is also risky because of the
costs attached with it.

Formula: Trade creditors/ average cost of sales (monthly)

2016- Average cost of sales (monthly) is 621.70/12=51.81.

Creditors/average cost of sales (monthly) =159.3/51.81= 3.07 months

2015- Average cost of sales (monthly) is 583.8/12=48.59

Creditors/average cost of sales (monthly) =145.2/48.59 = 2.99 months

Payment to creditors in 2016 is done in 3.07 months and in 2015 in 2.99 months. In 2016
payment is delayed a little and this can create pressure of cash flows on the company.

Inventory Turnover Ratio

The duration for which the inventory is being held by the company is determined by this
ratio.

Formula: Inventory/ Average Cost of Sales

2016- Average COS- 621.70/12=51.81

ITR- 34.90/51.81 = 0.67 months

2015- Average COS- 583.8/12=48.59

ITR- 28.30/48.59=0.58 months

The inventory is being held for less period of time which save it from becoming obsolete.

Other Tools

Other than ratio analysis and fund flow statement, there are several other financial tools such
as capital budgeting and preparation of budgets for dealing with various financial issues.
Capital budgeting is a technique with the help of which a business organization can make
decisions whether to invest in a project or not. On the other hand, budgets help in undertaking
the financial activities and operations and keeping them under control. The budgets serve as
an essential tool to highlight financial impact of plans. Also, the business organizations can
compare the deviation in actual outcomes from the budgeted outcomes.

Conclusion

The ratio analysis of the company suggests that it must devise a way by which its ability of
paying short term obligations are fulfilled. However, all the ratios depict that the business
organization so selected has steady financial records and performance.