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Question:

1. Critically review and evaluate the working capital management for a given
company
2. Critically review and evaluate the financial reporting of the given company

Introduction
This essay will investigate the working capital management and financial reporting of a company
by the name of Old Mutual which is an international long-term savings, protection and
investment Group. This essay will critically review and evaluate both aspects, of this company,
using the most up to date financial analysis. In this essay ratio analysis will be used to better
understand and evaluate the status of the company. A general introduction to the working capital
and financial statements will be provided for the reader to better understand the analysis of the data
being used. This essay will seek to critically evaluate the management and reporting undertaken by
the company and see whether it can be better done in an alternate manner or whether these methods
adopted by the company are in its best interest. Further recommendations will be provided.

Old Mutual is a international long term savings group, established in 1845 in South Africa it is now
a FTSE100 listed company operating in 34 countries.

Old

Mutual

operates in the
following business
principles to
varying degrees
1) Long Term
Savings -
Addressing
protection and
retirement saving
needs
2) US Asset Management - active direct asset management or selections of funds
for customers to invest
3) Banking - Major shareholder in South Africa’s leading banking franchisers, also in Sweden
4) Short Term Insurance - General insurance services in Southern Africa
5) Legacy - An offshore life business in Bermuda which is closed to new business.

Old Mutuals aim is to offer the best solutions in terms of business investment solutions, long-term
savings and protection to its customers. As such the business acumen of the company should be able
to represent its business interests as well.

Definition of Financial Statements


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Financial statements is the term given to all the summary statements that accountants produce at the
end of accounting periods, they are also known as final accounts. (BA1)
A companies financial statement is the companies formal record of its financial activities. The
balance sheet is but one third of this financial statement (the rest being the income statement and
cash flow) and it speaks of three important aspects of a business, Its assets, its liabilities and the
owners equity.

1.The Balance Sheet


The Balance sheet of a firm records the monetary value of the assets owned by the firm (J. G.
Siegel, N. Dauber & J. K. Shim, "The Vest Pocket CPA", Wiley, 2005.) or could be alternatively
termed as a statement detailing the financial position of the business on the last day of the year and
relates to the day on which it is prepared (ACM BOOK, p28). This can be considered a financial
snapshot of the firm.

Assets
Assets can be further divided into two sections , Fixed assets and Current assets. The difference
between these two being literally the time factor.
Fixed assets are assets which are used over long periods of time and thus termed ‘Fixed’. e.g.
Premises, Fixtures and fittings,
Current assets on the other hand are the firms more liquid assets, i.e. that which can be easily turned
into cash with no significant loss in the capital. e.g. cash in hand and bank, Stocks,

In financial accounting assets are economic resources. Anything tangible or intangible that is
capable of being owned or controlled to produce value and that itself which is held to have positive
economic value is considered an asset. Assets represent ownership of value that can be converted
into cash, even though cash itself is considered an asset. (Sullivan, Arthur; Steven M. Sheffrin
(2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice
Hall. pp. 272)
There are different methods of assessing the monetary value of the assets recorded in a balance
sheet. for eg in some cases the historical cost is used, which is basically the monetary value of the
asset at time of purchase is used as its monetary value. In other cases its present fair market value is
used to determine its monetary value.
Assets consist of property of all kinds, such as buildings, machinery, inventories of goods and motor
vehicles, other assets include debts owed by customers and the amount of money in the
organization’s bank account (BA1, p8)

Liabilities
Liability is the term given to assets provided by people other than the owner in a firm. Liabilities is
the collective term given to the amounts owing to these people. Probably the best accounting
definition of liabilities is provided by the International Accounting Standards Board (IASB), The
following is a quotation from IFRS framework.

“A liability is a present obligation of the enterprise arising from past events, the settlement of which
is expected to result in an outflow from the enterprise of resources embodying economic benefits”

Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an
IOU.

This can be represented as an equation in this manner.

Assets = Capital + Liabilities


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Or written in words to better explain this equation

Resources: What they are = Resources: Who supplied them


(Assets) (Capital+Liabilities)

No matter how you represent the above accounting equation the totals of both sides will always be
the same irrespective of the number of transactions. The actual assets, capital and liabilities may
change but the total of the assets will always equal the total of Capital + Liabilities (BA1, p8)

Liabilities include amounts owed by the business for goods and services supplied to the business
and for expenses incurred by the business that have not yet been paid for. They also include funds
borrowed by the business (BA1, p8)

Liabilities that are reported on a balance sheet are usually represented in two ways, Current and
long term liabilities. The difference between the two merely being the reasonable expectation of the
liability to be liquidated within the year (current) or not (Long term).

Use of a Balance Sheet

What can be derived from a balance sheet is the current financial position of that company at the
time of the balance sheet, i.e it is the most accurate account of the financial position of the company
on the day the balance sheet was done. The balance sheet also gives a very good indication of the
liquidity of the companies assets with cash or money in hand being the most liquid asset. A balance
sheet also gives indication of how a companies assets have been financed, either by borrowing
(liability) or by owners own money (owners Equity).

2.Income Statement

In order to make good business decisions one must know the current health of the business.
knowing the assets, liabilities and equities of the business is something you can glean from the
balance sheet. However that is only one aspect of the health of a company. the direction in which
the company is heading cannot be easily gleaned from a balance sheet. Predicting the direction in
which a company is heading is not a exact science by itself but to a great extent you can gauge how
well the company is doing by studying the income statement.

Success depends on whether the business uses its assets wisely to produce goods and services.

Success is generally measured in the amount of profit it earns, the growth or decline of its stock
assets. Another crucial term is net profit, which is the accounts way of saying the amount of profit
for a set period of time.

Use of a Income Statement

A income statement gives you an indication of how profitable a company is and how good they are
at making money from the assets they have. The income statement will either indicate net profit, or
net loss by way of showing the net income for the company. This would be a good indicating factor
about the direction in which the company is heading and further business analysis would indicate
the health of the company aiding further business decisions. If you can read an income statement

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you can learn how a company got where they are. How profitable they are and how good they are at
making money from the assets they have.

3.Cash Flow

So far we have seen the balance sheet and the income statement and how this can help us
understand about a companies assets, liabilities, equities and its net income and how this has
changed over a period of time. But these statements only give a partial view of the current situation
of a company and so companies include a third financial reporting method called the cash flow.
Cash flow is the movement of cash into or out of a business, project, or financial product. Cash flow
statements result from the combining of three important activities, i.e.

1) Operating activities - Cash received or expended as a result of the company's internal business
activities. It includes cash earnings plus changes to working capital

2) Investing activities - Cash received from the sale of long-life assets, or spent on capital
expenditure

3) Financial activities. - Cash received from the issue of debt and equity, or paid out as dividends,
share repurchases or debt repayments.

Uses of Cash Flow

Cash flow statements are concerned with examining the reasons underlying the rise and fall of cash
funds over a period of time (FWBA1, p395), or conversely why cash flowed in and out of the
company (ACM, p127). Cash flows help to understand for e.g. how certain business parameters
have been met, like determining how a projects rate of return has been. In determining how
profitable a venture has been. Cash flows also help us understand how for e.g. that a company has
made healthy profit but there is no cash in the bank, or conversely why it has a good bank balance
but no profit (ACM, p127)

For e.g.. Cash is received from the issuance of bonds and was paid to share owners as dividends.
This is an important operation that is simply not recorded in an income statement but is the bread
and butter of a cash flow statement.

The purpose of the statement of cash flow is to provide valuable information on management’s use
of financial resources available to it and to help the users of the statements to evaluate the
company’s liquidity, its ability to pay its bills as and when they come.
(http://www.customwealth.com.au/?p=163)

Definition of Working Capital


Working capital is a term for the excess of the current assets over the current liabilities of a business
and is the same as “net current assets” (BA1, p329). It can be understood as current assets minus
current liabilities. The figure that we obtain refers to the amount of resources the business has in a
form that is readily convertible into cash. (BA1, p748)

Net Working Capital = Current Assets − Current Liabilities


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A company can easily have assets and profitability but be short in liquidity, if its assets cannot be
readily converted into cash. Positive working capital is required to ensure that a firm is able to
continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and
upcoming operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable and cash.

The overall objective of any firm is to strike a balance between having fixed assets enough to
continue production, sales and profit and having enough liquid funds to keep the firm solvent.
(ACM, p147)

Working Capital Management

Working capital management involves the relationship between a firm's short-term assets and its
short-term liabilities. The goal of working capital management is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and
upcoming operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash
(http://www.studyfinance.com/lessons/workcap/index.mv)

This can be achieved following numerous methods, for e.g.

1. Speeding the Debt collection period

2. Quickening the rate of selling stock so as stock maintenance doesn't cost much

3. Leasing, which enables considerable smaller sums to be invested rather than a massive capital
outlay on for eg. equipment. this ensures you have access to modern technology for a fee per year
rather than costing you the amount to purchase it or raising loans.

4. Factoring, a process by which a firm sells its debtors to a factoring company to recover a part of
the cost ensuring fluidity and availability of cash at the expense of profitability.

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