Payback Period for Projects A and B

It can be interpreted that, the payback period of project B is shorter thus it would assist the firm in recovering the amount of initial investment within minimum time interval (Chand, 2015). Thus, this project can be selected by Sainsbury for investment purpose.

Finance for Strategic Managers
1

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
ACTIVITY 1....................................................................................................................................4
1. Assessing why financial information is needed in business....................................................4
2. Identification of the business risks related to financial decisions............................................5
3. Summary of financial information needed to make strategic business decisions....................5
ACTIVITY 2....................................................................................................................................6
1. Explanation of the purpose, structure and content of published accounts...............................6
2. Interpretation of the financial information in these accounts..................................................7
3. Calculation of financial ratios from the accounts and explanation of ways they support
strategic decision making.............................................................................................................7
ACTIVITY 3....................................................................................................................................9
1. Difference between long and short term financial requirements for businesses.....................9
2. Comparison of sources of long and short term finance for businesses....................................9
3. Cash flow management techniques and assessing why its management is important...........10
ACTIVITY 4 .................................................................................................................................10
1. Analysis of corporate governance, legal and regulatory requirements of different ownership
structure......................................................................................................................................10
2. Evaluating methods of appraising strategic capital or investment projects...........................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
2

Index of Tables
Table 1: Financial ratios of Sainsbury ............................................................................................7
Table 2: Proposal information ......................................................................................................11
Table 3: NPV of Project A.............................................................................................................11
Table 4: NPV of Project B.............................................................................................................11
Table 5: Pay back period of Project B...........................................................................................12
Table 6: Pay back period of Project A...........................................................................................12
3

INTRODUCTION
Finance is considered as the life blood of the business which plays an imperative role in
success of the organization to a greater extent. With the assistance of financial information
organization's manager can take appropriate decisions that can act as an aid in achievement of
organizational targets (Hershey, Austin and Gutierrez, 2015). For the present study, finance for
strategic manager would be discussed with reference to Sainsbury. The present study entails to
understand the reason due to which financial information is being gathered. Further, it explains
the purpose, structure and content of the published accounts. Lastly, the report involves
evaluation of the methods for appraising strategic capital.
ACTIVITY 1
1. Assessing why financial information is needed in business
It is important for each and every business to prepare financial statements with the aim to
offer useful information about financial status of the organization. In order to build and maintain
the faith of stakeholders within the organization, they are required to prepare as well as publish
financial statement of the organization (Cox, 2004). With the assistance of financial information,
decision making can be effectively done by the financial manager. Through this, proper
utilization of the fund is ensured which results in achievement of success by the firm. Financial
statement offers wide range of useful information to several users. This includes: Managers: The executive of Sainsbury needs financial information with an aim to
manage the affairs of organization. This can be done by assessing the financial position
as well as performance. Thus, it assists in taking important decisions by the business. Shareholders: They require financial statements to assess the risk and return on their
investment within the organization (Barton and Wiseman, 2014). On the basis of analysis
they take investment decisions. Customers: These users of information require financial information to assess whether
the supplier possess resources to ensure quick supply of the products in future course of
time. Customers of Sainsbury have greater needs of financial data with an aim to take
appropriate decisions.
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 Government: Financial information is required by the legal authority to assess the
correctness of tax amount that is declared in tax returns (Users of Financial Statements,
2015). Moreover, government also keeps track on economic progress by analyzing
financial statements.
2. Identification of the business risks related to financial decisions
Risk is considered as the major factor that affects activities of the organization like
productivity as well as performance. There are several types of business risks that are related to
financial decisions. This includes the risks such as: Strategic risk: Such type of business risk results from operating in any particular industry
at a point of time. For the firm like Sainsbury, this risk has greater impact on the financial
decision (Kroes and Manikas, 2014). With the emergence of new technology, the existing
product of the business becomes obsolete which affects performance of the organization
to a significant level. Compliance risk: Such risks are related to legislative or bureaucratic rule and regulation.
Further, it also includes risks which are associated with suitable practices for the purpose
of investment. Financial risk: This kind of risk includes the manner in which the business handles its
funds. It also considers the rate of interest in case of international trade (Valentin and
Mihaela–Andreea, 2015). Such business risk is associated with financial decision as it
affects decision making of the firm to a greater extent.
 Operational risk: This type of business risk leads to internal failure which includes
failure of internal processes, people or system within the organization. Operational risk
can take place from unforeseen external events that include breaking down of
transportation system as well as supplier failing to deliver goods. It is important for the
financial manager of the Sainsbury to consider all the risk factors as it impact the
profitability as well as productivity of the organization.
3. Summary of financial information needed to make strategic business decisions
Financial manager requires variety of information that includes analysis of the financial
statements by the business. Such offers suitable data to the organization about financial activities
5

as well as utilization of funds. The success of the business depends on effective use of the funds.
With this, management of the company can take suitable decisions which can assist in gaining
competitive edge. The financial information taken into account by Sainsbury for the purpose of
making strategic decision has been enumerated below: Income statement: Income statement of the Sainsbury consists of information regarding
the income and expenses of the organization. The expenditure of the business involves
offices expenses, commission paid, salary and wages as well as advertising expenses
(Drury, 2009). In contrast to this, income is earned through interest and commission
received. With this, firm can take strategic decisions by reflecting on the areas in which
the firm needs to control its expenditures. It offers greater benefit to the company by
increasing profit. Cash flow statement: It offers information regarding cash inflow and outflow within the
firm. With this, firm can make investment and financial decision which are profitable for
the business (Minnis and Sutherland, 2014). It reflects the cash position of the
organization that assist the business in development of competent strategies for growth of
organization.
 Balance sheet: This reflects the financial health of the business. It demonstrates the
obligation that firm is required to bear within the accounting year. Apart from this, it also
provides ideas regarding liquidity and soundness of business performance.
ACTIVITY 2
1. Explanation of the purpose, structure and content of published accounts
The accounts are published for particular purpose that plays significant role in assisting
business to gain an insight to the financial status of the company. The main purpose of which
Sainsbury publishes its financial statements is to offer information with respect to financial
health as well as performance of the organization. With the assistance of this, it is able to get
faith and trust of the several stakeholders that includes customers, shareholders, government and
suppliers. In addition to this, financial statements provide greater help in attracting the potential
base of customers to a greater extent (Bull, 2007). Apart from this, its major purpose is to
enhance the image of the brand and publish the business information in an accurate manner.
6

Firm like Sainsbury includes content in the published accounts which is being
demonstrated on large level. This includes analysis of the income statement, cash flow statement,
segmental reporting, non-recruiting profit and loss as well as balance sheet. Further, it also
includes new and discounted operations of the firm. The structure of the published accounts is
categorized into two. This provides annual report of the firm which starts with overview of
chairman of Sainsbury that states strategies and policies of the organization. Along with this, it
also presents goals and objectives that have been attained by the business (Ville, 2014). Further,
the published accounts of Sainsbury also represents facts and figures with the assistance of pie
chart as they portrait better understanding. Annual report of the company also includes summary
of balance sheet, cash flow as well as income statement which provides better knowledge
regarding liquidity position of the organization.
2. Interpretation of the financial information in these accounts
Annual report of Sainsbury offers useful information to the organization as well as its
shareholders. It acts as an aid for the organization in developing suitable strategies and policies
that result in achievement of pre-defined organizational goals and targets. Apart from this, it also
helps the business in gaining competitive edge. It can be determined that, income statement
provides information in relation to income and expenses of the business. In contrast to this, cash
flow statement of the organization provides sufficient knowledge in relation to liquidity position
of the business (Portz and Lere, 2010). With this, Sainsbury can make essential decision such as
investment and dividend. This in-turn results in increasing the productivity of the firm. The
balance sheet of Sainsbury reflects sound position of the business. Balance sheet includes assets
and liabilities of the company on a particular date. It is effective in offering greater knowledge to
the shareholders, government as well as suppliers regarding carrying out financial operations
within the firm. It has been gained that, financial as well as liquidity position of Sainsbury is
sound thus it is able to attract investors as this would result in increasing the revenue of the
organization to a greater extent.
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3. Calculation of financial ratios from the accounts and explanation of ways they support
strategic decision making
Table 1: Financial ratios of Sainsbury
Ratios Formula 2014 2013 2012
Profitability ratios
Gross profit 1377 1277 1211
Operating profit 1009 887 874
Net Sales 23949 23303 22294
Gross Profit Ratio (Gross Profit/ Net Sales) *100 5.75 5.48 5.43
Operating Profit Ratio
(Operating Profit/ Net Sales)
*100 4.21 3.81 3.92
Liquidity ratios
Current Assets 4362 1901 2032
Current Liabilities 12171 3115 3136
Closing Stock 1005 987 938
Current Ratio
Current Assets / current
Liabilities 0.36 0.61 0.65
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.28 0.29 0.35
Efficiency Ratios
Net Sales 23949 23303 22294
Total Assets 16540 12695 12340
Total Assets Turnover
Ratio Net Sales/ Total Assets 1.45 1.84 1.81
Cost of goods sold 22562 22026 21083
Inventory 1005 987 938
Inventory Turnover ratio COGS/Inventory 22.45 22.32 22.48
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Gearing ratios
Debt 2250 2617 2617
Equity 6005 5733 5629
Debt Equity Ratio Debt/ Equity 0.37 0.46 0.46
Net credit sales 23949 23303 22294
Net receivables 433 306 286
Accounts receivable
turnover Net credit sales/Net receivable 55.31 76.15 77.95
Financial ratio provides help in supporting the strategic decision making within the
organization. By making analysis of the profitability ratio, it has gained the position of sound
business in satisfying its long and short term obligations in an appropriate way. In 2014 the net
profit as well as gross profit of the company is maximum. This presents that, the company is
competent enough in making sound strategic decisions that can assist in long run course of time.
Further, the liquidity position of the firm is sound enough in assisting its full obligation in an
effective manner (Broadbent and Cullen, 2012). With this, firm can keep a track on its business
activities which can enable it in developing sound strategic decisions. On the contrary, the
efficiency of the organization is moderate as it offers the company with adequate amount of
resources with the aim to meet long term contingencies.
ACTIVITY 3
1. Difference between long and short term financial requirements for businesses
Both long term and short term financial requirement plays essential role in assisting
business to meet its pre defined targets in an effective manner. There is difference between long
and short term financial requirements for the businesses. Short term financial needs can be
fulfilled in an easier manner (Liao, 2013). Further, such requirement arises for the business that
operates on smaller as well as larger scale. In contrast to this, long term financial requirements
are more difficult and riskier to be obtained. Along with this, need for long term finances arises
9

among firms which are performing on larger scale and possess strong collateral so as to gain
long term loans.
Another major difference among both the requirements is that short term needs are for
shorter term. Moreover, it is obtained to relief temporary financial requirement. On the other
hand, long term financing is utilized for larger investments which requires huge amount of funds.
For the purpose of expanding the business operations, Sainsbury would have long term financial
requirement (Siano, Kitchen and Confetto, 2010). But for the purpose of meeting needs of the
business short term financial requirement plays crucial role. Long term financial requirements of
the business can be fulfilled through equity issued, corporate bonds as well as capital. On the
contrary, short term needs can be met by asset based loans, letter of credit, commercial papers
and promissory notes etc.
2. Comparison of sources of long and short term finance for businesses
Firm like Sainsbury can take benefit from wide range of short term financial sources.
Financial institutions offer loan for shorter term. Further, the business can also avail the overdraft
facility. In contrast to this, long term financial sources are scarce as it is important for lender to
keep cash reserve to sustain loan. Short term sources provides credit for shorter term that can be
for 12 months or lesser. On the other hand, long term bank loan taken by business includes the
repayment terms of 10 to 20 years. The sources of long term finance include bank loan, issue of
shares and debentures etc. With this, the company can attain its long term targets which ensure
its survival for longer term (Beaver, 2005). Short term sources of finance include bank overdraft,
bank loan, installment credit and trade credit facilities etc. With the assistance of this,
organization can meet its daily requirement. Thus this assists in carrying out business activities
in an effective manner. It has been determined that, both short and long term sources of finance
facilitates firm in meeting their needs for finance. Further, this would help the business in
carrying out its business activities in a smooth manner.
3. Cash flow management techniques and assessing why its management is important
There is existence of several cash flow techniques which can be used by the firm like
Sainsbury in order to manage its cash flow.. It is important for the business to lay emphasis on
cash flow management and not on profits. The inflow and outflow of cash is needed to be
10

managed in an accurate manner as such this would assist the organization in sustaining within
the market for longer term (Nobes, 2014). Further, in order to manage the cash flow the
organization is required to maintain certain cash reserves. It is essential for the purpose of
meeting shortfalls which can affect the performance of the firm to a greater extent.
It is significant Sainsbury to focus on cash flow management. This is because it assists
the organization in expanding its operations in future course of time. Along with this, the cash
flow management is important as it offers greater flexibility to the firm in responding towards
emerging dilemmas. This assists in ensuring sound decision making which results in achieving
organizational targets. Cash flow management assists the business in improving its promotional
activities that can result in attaining business goals to a significant level.
ACTIVITY 4
1. Analysis of corporate governance, legal and regulatory requirements of different ownership
structure
There is several types’ corporate governance, legal and regulatory requirements for
public as well as private firms. In order to start up new venture private companies needs share
capital of £1. In contrast to this, public limited business requires share capital for £50000 with
the aim to form share capital for starting up new business. In addition to this, public limited is
required to denominate shares of the firm in home currency. But such kind of legal requirement
is not essential is case of private limited organizations (Palepu and Healy, 2007). Apart from this,
in order start up new business it is important for both public and private firms to reflect on the
memorandum and article of association in an effective manner so as to register the business in an
effective manner. Further, in order to start up new firm it is essential for the enterprise to comply
with procedures which have been presented by the government of UK.
2. Evaluating methods of appraising strategic capital or investment projects
Investment appraisal techniques are regarded as the process that can be used to assess
whether or not the investment proposal is worth of being carried out (Cottrell, 2011). The
techniques of capital budgeting includes net present value as well as payback period.
11

Table 2: Proposal information
Year Proposal A (£) Proposal B (£)
1 17500 23750
2 25000 23750
3 20000 23750
4 32500 23750
Initial investment 50000 50000
Net present value
Table 3: NPV of Project A
Year Cash flow
of A (£)
P.V factor
@ 10%
Present Value
(£)
1 17500 0.909 15907.5
2 25000 0.826 20650
3 20000 0.751 15020
4 32500 0.683 22198
Total present
value (£)
73775.5
Initial
investment (£)
50000
Net present value
(£)
23775.5
Table 4: NPV of Project B
Year Cash
flow of A
(£)
P.V factor @
10%
Present
Value (£)
1 23750 0.909 21589
2 23750 0.826 19618
3 23750 0.751 17836
4 23750 0.683 16221
Total present value
(£)
75264
Initial investment (£) 50000
Net present value (£) 25264
Interpretation: It can be interpreted from the calculation carried above that both the project has
positive NPV. After making comparison among the two it can be assessed that, Project B has
higher NPV as compared with Project A. Thus this presents that; it would be beneficial for
Sainsbury to invest in this project. This is because it would yield maximum return to the business
12

(Mao, 2012). Therefore, this investment proposal should be accepted while another one needs to
be rejected by the organization.
Payback period
Table 5: Payback period of Project B
Payback period Project B
0 -50000
1 23750
2 23750
3 23750
4 23750
Payback period for Project B would be 2.1 years
Table 6: Payback period of Project A
Payback period Project A Cumulative inflow
0 -50000 -50000
1 17500 -32500
2 25000 -7500
3 20000 12500
4 32500 45000
Payback period for Project A would be 2.37 years
Interpretation: It can be interpreted from the above calculation that, payback period of project B
is shorter thus it would assist the firm in recovering the amount of initial investment within
minimum time interval (Chand, 2015). Thus, this project can be selected by Sainsbury for
investment purpose.
CONCLUSION
It can be concluded from the study that, the need for financial information arises for the
purpose of decision making. Further, it has been gained from the calculation of the ratios that
Sainsbury possess sound financial position which has assisted in surviving within the market for
long span of time.
13

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