The financial report is the most detailed document describing all the company’s activities for a certain period (Hasanaj & Kuqi, 2019). Based on the financial report, the interested person can consider and analyze the company’s problems, interpreting the data from different parts of the document (Investopedia, 2022). In this essay, the working capital issues will be diagnosed by using the cash flow statement, director’s report, and principal risks and uncertainties sections.
First and foremost, the cash flow statement represents the information concerning the liquidity funds movements throughout the given period. In the annual report, this is one of the three most viewed financial reporting sections (Palepu et al., 2020). In this case, the cash flow statement is situated on page 88 and is described as a ‘consolidated cash flow statement’ (Murphy, 2022). In other terms, it means that the data refers to the whole business and not only a specific branch of Mothercare (Mothercare, 2019). As might be seen from the table, the company has sold 25% of its inventories and increased short-term borrowing by nearly seven times, from 1.6 in 2018 to 11.5 in 2019.
Secondly, the director’s report demonstrates the general overview of the details of the company’s main events, organized by sections. As shown on page 51, 2019, the company increased its equity by distributing an open offer and funds placing (Mothercare, 2019). This action augmented working capital but also increased its cost for the enterprise due to the difference between inflation and average interest rates.
Finally, the risk section provision indicates the general risk pool weighted by probability and significance. As represented on page 18, liquidity and cash management represent the most significant risk for the company that has increased compared to the previous year. More specifically, volatility in the foreign exchange markets and interest rate changes could significantly affect a company’s possibility of financing its long-term investment projects.
In conclusion, the three analyzed financial statements’ sections that helped to identify working capital problems were the cash flow statement, director’s report, and risks provision. According to all the documents, there is a significant decrease in working capital mainly due to the increase in short-term borrowing and equity, which are costly due to the interest rate and inflation differences. In addition, the significant inventories sold decreased the company’s possibility of generating profits in the future.
Reference List
Investopedia. 2022. 12 things you need to know about financial statements. [online] Web.
Hasanaj, P. and Kuqi, B., 2019. Analysis of financial statements. Humanities and Social Science Research, 2(2), p.17.
Mothercare, 2019. Mothercare annual report. [online] Mothercare PLC. Web.
Murphy, C., 2022. Understanding the cash flow statement. [online] Investopedia. Web.
Palepu, K., Healy, P., Bernard, V., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis & valuation. 1st ed.