Finance for Decision Making

This document provides an evaluation of the financial performance of Marks & Spencer Group PLC, including profitability, efficiency, liquidity, and financial gearing. It also discusses the investment appraisal of the organization, focusing on the net present value and internal rate of return. The report highlights the challenges faced by Marks & Spencer and the impact of economic crises, mismanagement of financial resources, employee turnover, and marketing expenditure. The document is suitable for finance students studying decision making and investment appraisal.

FINANCE FOR DECISION MAKING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK1 ............................................................................................................................................1
Evaluation of financial performance of ......................................................................................1
TASK 2............................................................................................................................................1
Brief
description regarding investment appraisal of ............................................................................1
TASK 3............................................................................................................................................1
Brief description regarding potential acquisition of ...................................................................1
CONCLUSION................................................................................................................................1
REFRENCES...................................................................................................................................1

INTRODUCTION
Finance is defined as the term which is used as a source of income. It is circulated as blood
of any business corporation. Without managing of Finance no organization can able to
maintain their position within a competitive business environment. To understand the
concept of decision making regarding finance, Marks and Spencer group PLC has been
taken. This organization is situated in London. It is one of the most famous brand in the
retail sector of the UK this report has been defined uses of financial ratio for analyzing
business performance of Mark and Spencer. This report also included use of investment
appraisal techniques which help in taking decision regarding best alternative. They are
decided for use capital budgeting net present value technique for take decision regarding
acquisition investment. It also contains a usefulness of potential acquisition as the company
decide to run business with Ocado. Growing company and provides best platform for super
market through using online business platform. This will help Mark & Spenser to spread
their market share within competitive business environment. The main purpose of choosing
this organization as it become This report also contain its limitation and challenges faced by
Mark and Spencer if they take decision regarding acquisition of entity which belong from
the same sector.
TASK1
Evaluation of financial performance of Marks & Spencer Group PLC
Business organization to understand profitability and capability formulate a financial
statement through which they can interpret the financial position of their company to external as
well as internal stakeholders. Marks & Spencer Group PLC is one of the most famous brand
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names. By calculating essential ratio, the manager can able to recognize financial performance.
A Ratio is a part of financial management, which helps in taking decisions and useful in
comparison from other organizations (Ashraf, Rizwan, and L’Huillier, 2016).
Profitability of Marks & Spencer
Particular 2015 2016 2017 2018 2019
Net profit 777.36 613.77 153.81 34.1 43.98
Revenue 16640.53 15921.87 13886.14 14193.3 13623.32
Net profit
ratio =
= 4.67 3.85 1.10 0.24 0.32
Profitability of Ocado
2015 2016 2017 2018 2019
Net revenue 1,103.6 1,267. 1,454.5 1,598.8 1765
profit 371.1 431.3 495 547.5 591.8
Net profit
ratio =
4.56 5.6 5.8 5.15 6.7
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Interpretation: This ration helps in defining revenue recognition and effect of profitability on
business organization. Marks & Spencer’s net profit value had been declineing since 2015. The
main reason of change aeries within ratio is due to changes of economic business policies as well
as organization apply investment policies which directly impact on generating high rate of cash
outflow. The impact of Brexit agreement also become the main reason of changes within the
ratio of organization.The vvalue of the net profit ration is calculated 4.67 % in 2015 and in 2016,
the rate of the net profit decreases, 3.85, and it declines even after years. This indicates that the
organization not able to turn-out high rate of ration and them even not able to maintain revenue
position in the market. This showcase that Ocado able to generate more profit as compare to
Marks & Spencer, even this is a major organization and have wider business area.
Efficiency
Particular 2015 2016 2017 2018 2019
Stock 519.32 486.76 416.51 409.15 423.38
COOGS 10208.73 9694.51 8542.19 8823.74 13410.12
19.65 19.91 20.53 21.57 31.70
Efficiency of Ocado
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Particular 2015 2016 2017 2018 2019
Stock 399 457 567 786 789
COOGS 45 67 78 78 89
17 15 12 23 11
Interpretation: This ration helps in understanding effectiveness an organization have to
fulfil their obligation. Stock turnover ratio interest their user day’s .take convert their stock into
cash and stock material required for completion of operating business cycle. Marks
& Spencer’s stock turnover r ratio period has been increaseddays. Ocado able to fulfil their
liability and stock convert easily and less time as compare to Marks & Spencer. It has been
increases due to use of effective management policies regarding with cash management.
Organization ;s revenue rate has been increases.
Liquidity
Particular 2015 2016 2017 2018 2019
Current
assets
2348.07 2204.39 2252.87 1748.45 1956.59
Current 3407.7 3174.9 3095.68 2422.55 2925.44
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liabilities
0.68 0.69 0.72 0.721 0.66
Liquidity of Ocado
Particular 2015 2016 2017 2018 2019
Current
assets
2345 2456 2678 2884 2956
Current
liabilities
234 250 345 234 345
0.23 0.34 0.56 0.67 0.56
Interpretation: By calculating liquid ratio, a manager can easily analysis, liquidity
position of their organization. Which represent financial capital an organization have to fulfil
their debt liabilities as well as fund they have in the form of cash. Marks & Spencer organization
have sufficient assets in 2015, they have 0.68 values of the current ratio. Which describe that as
compare to current liabilities even thus they have a sufficient balance of current assets. This
balance has been increasing, since 2015 which depicts that they even the organization’s
profitably rate has been declinene, they have sufficient balance and cash source to fulfil all
complete financial obligations. Ocado’s liquidity ratings are comparatively higher. Which means
they have sufficient cash assets.
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Financial gearing of Marks & Spencer
Equity ratio:
Particular 2015 2016 2017 2018 2019
Total equity 5162.22 5194.06 4118.51 3919.37 3519.48
Total assets 13226.86 12785.89 10840.79 10016.85 9452.42
0.39 0.49 0.37 0.39 0.37
Financial gearing of Ocado
Particular 2015 2016 2017 2018 2019
Total equity 3456 3550 4230 4550 4650
Total assets 12345 13456 123456 14567 14789
0.41 0.45 0.56 0.45 0.56
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Interpretation: Business organization uses financial gearing ratio through which
they can evaluate and measure financial leverage performance. It defines the value of equity
and debt area and their relationship of which relates to the organization. Marks & Spencer
value of the equity ratio represent the relationship between asset and equity have
organization. The rate of this ratio had not been incurred measure financial challenges as it
is really hard for organizations to determine relationships between equity and asset. But in
case of Ocado its performance is better. 2015, organization able to grantee .39 from its
equities and it increase in 2016, from 0.49, after that ratio of equity define, but it increases in
2018 and then in 2019, the value of equity measure of. 39. All these define changes financial
condition of the business (Yadav and Kapoor, 2018). As compared to its rival business
industries Marks & Spencer able to make an effective business position market. Even
though they face decline rate of performance. Following are the reason of decline perform of
Marks & Spencer.
Economic crises: Since 2015 UK suffer from a high rate of financial crises well as
economic crises. After Brexit agreement, most of European countries made strict rules regarding
trading thus it becomes really hard for it to run a business in an effective manner.
Mismanagement of financial resource: This is also a relevant factor of declining rate of
profits, organization does not formulate strategies for managing their cash flows thus
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it becomes the reason of declining sales rate. Marks & Spencer focus on spreading their market,
thus their management department not plan regarding managing their financial resources.
Employee turnover: With effect of Brexit agreement most of employee belongs from
European countries, thus rate of employee turnover these days will be higher. Due to lack of
skilled employee organization not able to maintain their financial performance.
Increment in marketing expenditure: Marks & Spencer to cover up market share focus
on researching and developing procedure, thus cost of marketing resource and development goes
high which become may result of decline business performance.
Use of technologies: By the uses of advance technologies and revolution of digital
marketing since 5 yeas, Marks & Spencer focus on providing training of their workforce so they
able to use or adopt the technique. This also becomes a reason of declining of financial
performance.
TASK 2
Brief description regarding investment appraisal of Marks & Spencer Group PLC
Investment appraisal: This consider as an essential technique of financial management,
which also knew capital budgeting. Investment appraisal is used to determine the profitability
rate of investment. In other words, by using the tools of the capital budgeting, management
department understands the rate of capital generating profits of project alternatives.
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This is helpful in taking a decision which is related to investment. These tools of financial
management help in providing qualitative as well as qualitative benefits (Mubashir, and Bin
Tariq, 2017).
By applying investment appraisal technique management department able to find out cash
flow value and problems arises during implementation of these investment alternatives. As well
as understand complications arise during use this investment apparel method. Business
organization by using tools of capital budgeting understand risk, return elements of applying and
investing theses alternatives. There will be various methods of analyzing investment appraisal.
Net present value and internal rate of return is one of them most popular and useful method
which help in providing accurate information regarding the organization.
Net present value Finance manager use this method to determine the rate of profitability
by analyzing variation arise between present value and initial investment. By using this method,
organization able to recognize and chose those business alternatives which give a higher rate of
present value as compared to their initial investment.
Particulars Amount Discount factor at 12%
Outflow 5000000 1 5000000
Inflows 725730 0.893 648076.89
Inflows 638830 0.797 509147.51
Inflows 1150000 0.711 817650
Inflows 900000 0.635 571500
Inflows 1067000 0.567 604989
Inflows 850000 0.506 430100
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Inflows 775000 0.452 350300
Inflows 950000 0.403 382850
Inflows 1050000 0.36 378000
Inflows 995000 0.321 319395
NPV 12008.4
Net present value = Sum of present value of cash inflow - Initial investment
Marks & Spencer able to intake decision regarding investment in 50 million of product
development. This investment useful in providing product and economic benefit to the
organization.
Advantage of net present value
Use time element: The main benefit of applying this mechanism for calculating
profitability is that an organization uses time factor in garnering profitability which help in
providing accurate business result. (Throsby, 2016).
Accuracy: Net present value use in providing best and reliable result useful in future
business policies.
Internet rate of return: This consider as modern methods of capital budgeting. Which
by analyzing the return rate of various discounting factors. This method helps to provide accurate
information or through which manager takes a decision in effect manner.
10% cumulative 13%
5000000 1 5000000 1 5000000
725730 0.909 659688.57 0.884 641545.32
638830 0.826 527673.58 0.783 500203.89
1150000 0.751 863650 0.693 796950
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900000 0.683 614700 0.613 551700
1067000 0.62 661540 0.542 578314
850000 0.564 479400 0.48 408000
775000 0.513 397575 0.425 329375
950000 0.466 442700 0.376 357200
1050000 0.424 445200 0.332 348600
995000 0.385 383075 0.294 292530
NPV 5475202.15 4804418.21
475202.15
This calculation showcase that Marks & Spencer needs to take 12. 8 % return for generating
profitability by investing in this alternate.
Benefits of internal rate of return:
Easy method: There are no complexities of using and implementing of this tool of capital
budgeting IRR help in providing accurate and fast result.
Use of Hurdle rate: In another method of investment appraisal hurled rate or cost of capital for
calculation purpose, however it doesn’t require in this method Manager able to recognize real
beneficial economic project alternate by using and calculating internal rate of return.
Marks & Spencer need to use the internal rate of return method for the purpose of investment
appraisal. As compared to the net present value method, it is more reliable and provide actual
business result which is beneficial for fulfilling an economically valuable for future business
investment. The manager chooses internal rate of return method for their investment appraisal
method as it will much more useful than comparable to the net present value method. By use in
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this technique for analysis, profitability rate manager considering essential elements which not
consider in profitably by using the net present value method (Schlegel, Frank, and Britzelmaier,
2016).
Internal rate of return method useful in sensitivity analyses through which manager adversely
effect of variation and change of profit value. This analysis determines the effect of input
variables Sensitive analysis as the tool of management provides suggestion regarding changes
arise in the outcomes which help in the decision making process. Manger of Marks & Spencer
need to formulate policies for divarication through product development. Investment in
his project, helping generate more future profit. They further see a sensitive
analysis which helps in determining the effect of each changeable outcomes during cash inflow
business activities. There will be many types of tools which association faces before taking a
decision regarding investment in a particular project.
Management department of Marks & Spencer also face the issue regarding sing investment
appraisal techniques.
Lack of skills: Organization need to their personals who have accurate knowledge dreading
using the technique.
Time consuming: This requires time during collection and representing data by using
investment appraisal tools
Work according GAAP rules: The aaccuracy of these do depend on accounted who apply these
tools to find out profitability rate. They need to fulfil all the relevant standard of GAAP. Only
then accurate and reliable result will be proved by the finance manager to company. Which
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useful in taking decisions regarding whatever to select or reject this decision (Mellichamp,
2017).
TASK 3
Brief description regarding potential acquisition mechanism use by Marks & Spencer Group
PLC
Marks & Spencer Group plc to enhance their business market apply diversification
strategy. For this purpose they focus on using potential acquisition strategy. It is a contractual
agreement to take share of another organization which is subsiding or rival company of the same
industry in which organization unit business activities. This business strategy useful for
organization to acquire as well as the company who become its subsidiaries. Both take beneficial
of in enhancing their financial resource capital as well as increase good will and investor with
organization. Marks & Spencer decide to choose Ocado for their potential accusation purpose.
They decide to use 50 % of market share of this organization for as a joint venture. Ocado is one
of the most famous leading online supermarket trading organizations. It deals with providing
effete supermarket product to their customer by using digital marking platform. This
organization doesn’t have any super chain of supermarket. To run business from online platform
and thus all the demand of the customer regarding retail market produces fulfil from its
warehouse.
Benefits of acquisition of Ocado: For by Marks & Spencer they get benefits after this deal
because they need to diversify their target market. It is really hard for by Marks & Spencer after
Brexit agreed to deal with an organization which is not related to Britain and belong from
European countries. Because after this agreement, managers will not able to deal with
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corporations which is belong from other countries. By dealing with Ocado, by Marks & Spencer
get future benefits in the following way.
Increase financial capital: With the acquisition, 50 % of the share of the organization is taken
by Marks & Spencer it will be beneficial for the organization as their financial capital raises.
Spread target market: Ocado is a brand name in British as well as other European country
market. Thus, it will help in spreading market share of by Marks & Spencer in the field where
they are not able to spread their market.
Increase goodwill: Ocado has a separate fan base, organization has been building a strong image
which is also beneficial for by Marks & Spencer.
Use of advance technology: The Company deal in digital platform they use advance
technologies Ocado by dealing with products of by Marks & Spencer also valuable for selling
through an online platform. With the offering best quality of materials.
Growth and development: Ocado‘s future is bright their working style and ability to chase
competitive and maintain positive in the market. Is use and beneficial for by Marks & Spencer as
there will be many opportunities for this organization (Ortea, 2016).
Thus, by Marks & Spencer choose this organization for potential acquisition purpose.
Manager of by Marks & Spencer proposed 50 million for dealing with this organization as they
acquire a share of this organization. By building strong financial strategies the can able to
acquire all the set as well as deb liabilities of Ocado. They use proper financial standard for
during the acquisition procedure and fulfil all the legal liabilities which useful for ethical
business agreement.
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Effect of acquisition on Marks & Spencer:
Reduce competitions: This helps for Marks & Spencer to reduce the rate of competition. As
chance of dealing in this sector reduce after this deal.
Market power: Marks & Spencer as well as Ocado both get the benefits of this agreement.
Marks & Spencer become one of the strongest supermarket ratio organization in the UK market
as well as Ocado‘s business market also increase after they get customer from Marks & Spencer.
New competencies: Marks & Spencer gain new skill and competence of Ocado, they also help
in defining new method and management technique polices of running the organization. Which
useful in overcoming threat or barrier’s.
Access to expert: Ocado famous for its working style, they have hired best employee. Thus the
potential acquisition agreement useful for Marks & Spencer as thy learns many strategies and use
technology of digital marketing platform which beneficial for understating norm of digital
marketing for the organization.
Challenges and risk acquisition
Culture clash: Diversification issue may become reason and probes organization face when they
acquire or deal with another company. Especially when they are connected with same industry.
Employee get is regarding cultural diversification change of perception.
Integration problem: It is really hard to integrate a system of acquisition for the organization.
As a member of subsidy or quire corporation not comfortable with changing policies and
scenario of an organization. They take time in adjusting to the environment (Song, 2017).
High cost: acquisition may seem like easy procedure, but it requires time for completing legal
responsibilities as well as high cost of bearing this strategy for the organization.
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Marks & Spencer decides to acquire with Ocado organization, even though their
corporation faces some problem regarding this deal, but financial statement of Ocado
is showing good financial results as compared Marks & Spencer. Which is plus point of this deal
as well as Ocado is dealing he same sector, exception Marks & Spencer provides retail product
to their customer via offline and online more and Ocado provides business retail facilities to their
customers though online platform. Both belong from the same industry, thus management
department of Marks & Spencer take decision to acquire Ocado in future
times. Acquiring association which shares same industry help in reducing the chances of
competition as well as gives benefits in many term.
CONCLUSION
From the above analysis, it has been concluded that taking the financial decision is really
essential for any business corporation as the success of a business entity totally depends on the
decision taken by managers regarding financial strategy manager needs to use financial ratios
which help in determining their financial performance in the market. They have also used capital
budgeting techniques through which they can able to understand or analyze the profitability
rate of giving alternative by using potential acquisition strategy organization able to maintain a
strong position in the market. By spreading their market shares in a particular time period.
It is really essential for multinational corporations use acquisition strategy for or enhancing their
market share as well as maintain sustainability for long term period.
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