Introduction

Business finance is considered as the tough job for any organization. Every business organization needs for financing for operating daily operations or for conducting the new project. Every organization thinks for financing in the short term and in the long term. For making the proper financing, there is needed proper planning. In this assignment, there are evaluated the two company’s (Wild Frontier Builders Ltd. (WFB) and Eye Watering Inc.) financial position and situation. There are also analyzed some various aspects that is related to financial operation of the two companies.

Part 1

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

Cash Flow and Profitability both are the common and most important terms in the accounting aspects of the company. Both of these measures include the difference between the cost and expenses. For this reason, many people think that profitability and cash flow are same as they share some similarity. However, there are some crucial and significant differences between them for which they are recorded separately in the accounts of the company.

Cash Flow represents the differences between the actual amount of cash received by the company and the amount of cash actually paid by the company. Although it shows the inflow and outflow of the company’s cash, it is narrower concept than profitability.

Profitability represents the differences between the revenues company earns and the expenses company incurs. It is a broader concept than cash flow as profitability covers all the costs and expenses including the cash and non-cash transaction.

Differences between profitability and cash flow

Cash flow majorly focuses on the cash transactions whereas profitability considers all the cash and noncash transactions. Cash flow differs from profitability in terms of timing too. Cash flow statements show the inflow and outflow of cash on a regular basis whereas profitability of a company is shown for a certain period of time. Profitability is represented by the Income statement of the company whereas cash flow is represented by the Cash flow statements of the company. Profitability dictates the ability of the company of earning profit whereas cash flow dictates the ability of the company to maintain liquidity. Therefore profitability is a long term concept whereas cash flow is a short term concept (Moeller, 2005).

Ways of Expressing Profitability

Profitability in company accounts is measured with the Income Statements. The income statements can be of single step or multi step. The single step income statement has the single sources for the company costs and income whereas the multi-step statement has the variety of sources for the costs and income. However, all these sources generate profits for the company over time and which is expressed in the income statements through Net Income. Profitability of a company therefore is expressed in terms of the net income which is also called the bottom line of the company (Allen, 2000).

In the following, a sample income statement is provided with the net income company earned over times that dictates the profitability of the company for the accounting periods.

Ways of Expressing Cash Flow

Cash flow is considered as running wheel. In an organization or a company there are kept record of both in flow of cash and out flow of cash. By measuring the cash out flow and cash inflow, it can be known about the present condition of current cash amount. After a certain period, a company normally wants to know the transaction that is related to the amount of paid and the amount of received. Those record of out flow of cash and inflow of cash is recorded in the income statement. The more the received of cash amount the more the company will be able to maintain its daily regulatory activity.

There are shown below about the cash flow statement which expresses the present condition of liquidity after a certain period.

Profitability is considered as more crucial for a company according to accounting terms. Profitability refers the actual revenue that is earned in a certain period. A company can gain profitability even if the company is less cash in hand.

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.

Working capital is the combination of current assets and current liabilities. In the working capital, the daily operation of both the current asset and the current liabilities are included. When a comp-any enjoys the amount of current asset is more than the current liability then the company is considered as more efficient in working capital management. On the other hand a company enjoys the amount of current liability is more than the current asset then the company is considered as less efficient in working capital management. Working capital management shows that a company has really adequate in good cash flow or not. Working capital management also denotes that a company is be able to operate the daily operations with effectively and efficiently. Total assets and liabilities are shown in the working capital ratio analysis and also in collection ratio & inventory turnover ratio.

Ø Working Capital Ratio: working capital of an organization is known when the current assets divide by the current liabilities. The formula of working capital ratio:

Working Capital Ratio = Current Assets ÷ Current Liabilities

Ø Collection Ratio: collection ratio is defined by calculating average period of a company which in turn accepts payment from customer. Collection ratio can be formulated in this way:

Collection Ratio = (Accounts Receivable ÷ Net Sales) × 365

Ø Inventory turnover ratio: in the inventory turnover ratio there are calculated the inventory paid sold and the inventory replaced in a certain time. A company’s turnover of products is calculated through this ratio.

Inventory Turnover Ratio = COGS ÷ Inventory

It is determined the liquidity, capital and inventory after a certain period of the company Wild Frontier Builders Ltd (WFB). WFB suffers in case of lower level poor management and in poses of threat to the public health issue. By considering WFB in their market position, the condition of WFB is not good as to their expectation. Neil Geezer, the manager of WFB is deployed for monitoring total inflow of cash and outflow of cash. But it is regret that the present condition cash flow of WFB is caused deficit. The company WFB not only faces cash flow deficit but also makes bank overdraft. It can be said that there is a great mismanagement in maintaining working capital management of WFB. Moreover, the flow of inventory in and out is also not satisfactory. The payment collection rate from the client is not making properly (Arnold, 2005).

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

In this crucial stage by the company WFB, there should be taken action of maintaining working capital management correctly by their own effort. Wild Frontier Builders Ltd (WFB) can be able to improve their liquidity, capital and inventory as per proper action is made timely and also the payment collection process is gone hurry. By improving working capital management in the short term, the critical moment can make up by WFB (Atrill, 2007). Wild Frontier Builders Ltd (WFB) can follow some steps:

Steps needed to be taken by WFB

Ø WFB can hurriedly regulate the working capital and can also replace the provided short term loan into debt. There by the capital inflow will increase.

Ø The payment collection process should focus more for getting the payment hurriedly. Those collected payment should also engaged in current account.

Ø The inventory management system should focus more and more so that WFB can avoid stocks that are unimportant to that situation.

Ø WFB should also focus on irrelevant expenses so that working capital can stay in good position.

Part 2

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

Capital budgeting process describes the long run process of decision making on investment projects and evaluates that project finally. The main task of this process is to determine the company’s investment and planning for new projects. Capital budgeting process is made up of six components. Those components are identifying initial investment projects, evaluating investment projects, selecting the investment project, implementation, monitoring performance and post auditing. Those stages are describe below:

ü Identifying Initial Investment Projects: the first stage of capital budgeting process is identifying Initial Investment Projects. The task of the first stage is to determine the investment. There are also making identification of initial opportunities that more specifically the investment opportunities. Any company normally wants to find out the new profitable project as newly investment. The company usually wants to incur potential project and also want to invest that project (Brealey, 2006).

ü Evaluating the Investment Projects: the second stage of capital budgeting process is evaluating the Investment Projects. After identifying the potential project where the investment is done, the next task is to evaluate the investment projects. Here in this stage the evaluation refers that the potential benefit is be able to gain possibly.

ü Selecting the Investment Project: after evaluating the investment project the next topic is to select the investment project from the selected many investment projects. From the assumption of many project, in this stage there are select the best investment project. The selection made based on generating the best return and also on best alternative project combination.

ü Implementation: the fourth stage of capital budgeting process is implementation. In this stage the project is implemented according to plan. The company follows proper guideline for implementing the project and also plan for the budget of investment.

ü Monitoring Performance: the final stage of capital budgeting process is known as monitoring performance. Monitoring performance refers that reviewing performance of the selected investment project. In this stage there are also measure the feedback and desire further improvement.

ü Post Audit: post auditing is considered as the additional stage of capital budgeting process where there are measure the efficiency and effectiveness of the project work. If there are occurs any wrong task in the project then the correction method is applied for thinking the welfare of the project (Cagan, 2007).

Capital investment appraisal methods

For measuring the worth of capital the company is working with the capital investment appraisal method or technique. From the view of accounting, there have many Capital investment appraisal methods. From those method the four methods is regarded as the main methods. Those main four method is describe below:

ü Accounting Rate of Return (ARR): the first capital investment appraisal method is accounting rate of return. Here in this rate of return, there are determine the profitability of a company. The rate of return is discover on the basis of company’s earning.

Advantages: Accounting Rate of Return (ARR) is known as the easy and comfortable method to measure the profitability and made decision on investment.

Disadvantages: Accounting Rate of Return is not considered when the high rate of project is maintained and also considers the value of time.

ü Payback Period (PP): when a company measures the Payback Period then the company considers the time period of cash flow and the investment in a project. Those method also cover investment outlay.

Advantages: Payback Period is used for assessing the risk of investment and also this is considered as simple way of risk measurement.

Disadvantages: in the Payback Period method there are not used of value of time and not maintain the cash flow.

ü Net Present Value (NPV): Net Present Value is considered as the third investment appraisal method. Net Present Value (NPV) works with the term that is cash inflow and cash outflow of the project in a certain period.

Advantages: Net Present Value (NPV) is known as the best predictor of investment decision on a project and also works with the time value of money.

Disadvantages: Net Present Value (NPV) is also known as the sensitive case whereas the inflow of cash and the outflow of cash can’t work with that kind of project.

ü Internal Rate of Return (IRR): the last method from the four main capital investment appraisal method is Internal Rate of Return. IRR represents the discount rate and also the NPV is considered as equal to zero. IRR is used in the measurement of supporting the best capital investment decision.

Advantages: Internal Rate of Return (IRR) considered the easy way of capital investment appraisal method which includes the time value of money.

Disadvantages: IRR is not dependent on project that is contingent and economies of scale.

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

The application of the potential method on gaining the investment project’s consideration Eye Watering Inc. must more concentration on not only the calculation but also evaluation of the method of process. Eye Watering Inc. can be able to gain a clear understanding on the investment project (Cinnamon, 2010).

Application of ARR

ARR can be calculated as following:

ARR = Average Accounting Profit ÷ Average Investment

ARR don’t think of considering time value of money. Eye Watering Inc. should give approval if the project is gain higher calculation than the required ARR.

Application of Payback Period

PP can be calculated as following:

If cash inflows of the project are over the equal payback period then the cash flow of the project is measured or determined as follows:

Eye Watering Inc. should first focus on two project that can be formulated with the help of payback period and must consider the lower payback period of the two project.

Application of NPV

NPV can be calculated as following.

For even cash flows:

For uneven cash flows:

NPV is considered as the most known or popular measures when the capital investment decision is taken. NPV is measured including time value of money. Eye Watering Inc. should focuses on calculating the project if the calculation of NPV shows positive upon a project. Eye Watering Inc. should also consider higher NPV in the project (Cooke, 2003).

Application of IRR

IRR can be calculated as following:

Now the IRR is higher than the expected ones. The higher IRR should accept by the Eye Watering Inc.

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

The two project of Eye Watering Inc. is Call of Assassins and Coalmining. These two projects are selected on future oriented. In these two project, calls of Assassins needs focuses on more investment and Coalmining needs focuses on less investment. The expectation of starting Calls of Assassin project is 2 to 4 years on the other project Coalmining, the expectation of starting this project is 1 to 2 years (El-Masry, 2007).

The projects have to evaluate by the beginning of the assessment of payback period which will provide the required time for determining the term. Accounting Rate of Return (ARR) is an effective method using for determining the suited appraisal method upon the two projects. Accounting Rate of Return (ARR) provides measurement of the profitability of the two projects and also implemented investment project. From the discussion of appraisal method, the Internal Rate of Return (IRR) is best suited for providing appropriate result of the two projects. Thereby the company will be able to make a good decision on investment. This issue is more effective for the life time of the company. NPV is considered as the best decision maker tool of appraisal method (Ozkan, 2001).