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Module Code: LNDN

Module: CORPORATE FINANCE AND GLOBAL FINANCIAL

MARKETS

Student ID: B

Executive summary Corporate finance has focuses on resource utilisation to maximise profit and minimise risk in businesses. Profitability, liquidity and financial position of Roll-Up are analysed here 2021-

2022. It has been observed the company has increased its expenses and debt obligations which result in lower net income and less efficiency in managing financial ratios. It is recommended that this company implement a cost cost-efficiency strategy as a turnaround recovery strategy to improve its financial position.

Introduction Corporate finance maximises business values by planning and implementing resources through balancing profitability and risk of companies. Critical evaluation of financial management as a core part of business and role of senior financial manager in maximising firm value is purpose of this report. In this report profitability, liquidity and financial position of Roll-Up are evaluated for 2021 and 2022 based on a given case study. Current ratio, quick ratio, debtor payment period, creditor payment period, debt/assets and time interest earned ratios of Roll-Up are analysed for last 2 years. However, a recommendation is also given to this company to improve its financial performance and position in future. Causes of changes in profitability, liquidity and financial position Profitability Evaluation of profitability capacity of Roll-Up is important to understand its revenue generation capacity and profit retention ability. Profitability analysis of a company is important as it measures historical performance as well as project future profitability which is important for decision-making (Bilal et al. 2019). As per business case, revenue of Roll-Up is £2,000,000 in 2021 increased to £2,400,000 in 2022. Additionally, “cost of goods sold (COGS)” of Roll-Up in 2021 was £900,000 which also raised to £1,440,000 in 2022. Hence, gross profit of Roll-Up in 2021 was £1,100,000 and declined to £960,000. As a result, revenue of this company has increased from 2021 to 2022 though increasing COGS is also observed to reduce gross profit of the company. In addition, net income of this business unit in 2021 was £420,000 reduced to £133,000 in 2022. However, other expenses and interest expenses of this organisation have been increased in the last year from 2021 which causes a decline in net income in 2022. Tax payable expense has decreased from £180,000 in 2021 to £57,000 in 2022. However, other expenses of this company have increased from 2021 to 2022 causing lower net income in 2022. As defined by Nariswari and Nugraha (2020), net income of a company can drop due to higher expenses, lower sales or both. In addition, revenue has increased from 2021 to 2022 still overall expenses of Roll-Up increased which caused declining net income. In contrast, controlling costs can be beneficial for this company to improve their profitability capacity. Reduction of labour costs, decreasing operational costs and increasing sales price

can be effective for a business entity to increase net income (Martini et al. 2023). Hence, the main reason behind changes in profitability or lower net income of this company is higher expenses incurred in 2022. Liquidity Liquidity position evaluation of Roll-Up is essential to understand short term liabilities pay off capacity of the company by utilising its short term assets. According to Purwanti and Warasto (2023), liquidity position can be assessed for a business entity based on liquidity ratios such as “current ratio, quick ratio and cash ratio”. However, the current ratio of Roll- Up is given as 3.7 in 2021 that increases to 4 in 2022. Generally, higher value of current ratio is expected from a company as it reflects more effectiveness of businesses in paying its current liabilities. Hence, the current ratio of Roll-Up has been effectively maintained in the last year indicating a higher volume of current assets that pay its current liabilities. In contrast, quick ratio or acid test ratio is also given to measure relationship between current liabilities paying capacity of an organisation based on its quick assets that excludes inventories from current assets. A quick ratio of this business entity is 2.2 in 2021 which has been reduced to 1.5 in 2022. Managing a quick ratio is important for Roll-Up to measure its ability to convert its liquid assets into cash to deal with current financial obligations. As a result, quick ratio has not been maintained by this company as it should be higher for better liquidation capacity. A company can improve its quick ratio by increasing its cash, decreasing inventory and current liabilities (Amanda, 2019). Roll-Up has partially maintained its liquidity ratios as they have maintained current ratio though quick ratio has not been maintained. Reason behind managing current ratio is observed as a higher availability of current assets than current liabilities. In contrast, quick ratio has not been maintained due to lower quick assets that can be understood from the lower quick ratio of this company. Hence, insufficient quick assets cause lower liquidity capacity of this company. The company’s financial performance Financial position of Roll-Up can be evaluated based on its equity and other financial ratios related to solvency and efficiency ratios. As opined by Noviyana et al. (2023), solvency ratios are often known as leverage ratios that evaluate financial position of a company by analysing assets, equity and liability position of businesses. Additionally, equity of Roll-Up

distress. “Cost efficiency strategies, asset retrenchment strategies, change of leadership and focusing on core activities” of companies are part of turnaround recovery strategy (Nariswari and Nugraha, 2020). Hence, cost efficiency strategy can be beneficial for this company as it improves profitability of companies and makes it an integral part of business operations. Roll-Up should control its expenses such as other expenses and interest expenses to make higher profit. As stated by Rounaghi et al. (2021), cost efficiency of a company is important to ensure a business is sustainable, profitable and successful, which is important to survive in long run. Additionally, recovering outstanding payments that means control debtor level is also suggested to increase funding of the company. Managing debt is immensely important for this business unit as it benefits financial health. It is also recommended to improve cost management strategy to reduce business expenses and maximise profit in a financial year. Increasing effectiveness of inventory utilisation is also important as it can positively influence revenue generation of this company. Conclusion It can be concluded that Roll-Up is currently increasing its revenue still net income is decreased from 2021 to 2022 due to higher expenses in business. However, increasing current assets and lower current liabilities can be observed from its current ratio. Lower profitability capacity and liquidity capacities observed due to increasing expenses and lower quick assets of the company. High debt obligation and lower financial growth causes less efficiency in managing debtor payment periods. It is recommended to implement a cost efficiency strategy to control cost and make higher profit that is required to improve its financial position.

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