Financial Account Management

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INTRODUCTION
Financial account management refers to the process of effective and efficient
management of funds for the purpose of meeting organizational objectives (Brigham and
Ehrhardt, 2013). This aspect is applied for effective management of long as well as short term
resources for successful operation of business. Present report is based on Tesco a British
multinational grocery and general merchandise retailer of UK. This corporation is second largest
retailer in world in accordance with revenue and third largest retailer on the basis of profit.
Furthermore, financial trends of company are identified which rationale of change as result of
internal and external environmental actions. In addition to this, financial ratios of company are
calculated and analyzed in relation to its ability to meet financial ambitions. Moreover,
recommendations have also been provided to prospective investors for business by focusing
upon its strength and weaknesses.
PART A OVERVIEW
Background to the company & why it was selected
The current report is based on Tesco, British multinational grocery retailer. It is grocery
market leader in UK with market share around 28.4%. This corporation was founded in 1919 by
Jack Cohen in the form of market stall. However, the first store of Tesco opened in 1929 in Burnt
Oak, Barnet which was expanded rapidly. During 1990s Tesco diversified itself into several
areas such as retailing, furniture, electronics and clothing as well as financial services. Along
with that, telecom, internet services, petrol and software are also included. This organization is
listed on London Stock Exchange and had market capitalization of £18.1 billion s of 22 April
2015. Tesco introduced loyalty card in 1995 for attracting more buyers and persuading them to
take quick purchase decision. It was considered as the most effective strategy of marketing for
retaining buyers for longer time span.
Furthermore, in 2013 Tesco purchased the restaurant and cafe china Giraffe for £48.6
million and then during 2014 it started to open restaurant in some of its stores. However, at
present corporation is facing issue because of low profitability. In current financial year shares of
Tesco were the biggest faller in the FTSE 100. Here, investors were threaten because of
uncertain and deflationary market where discounting stores are outtperforming. Owing to this,
company is cutting prices and also planning to sell of some of its other side businesses. It shows
that company is unable to manage its rate of return due to shifting of customers from one to

another brand. For this purpose, Tesco has been selected as there are variations in its financial
performance over recent years (http://www.ft.com/fastft/2016/04/13/tesco-hails-progress-as-uk-
business-returns-to-sales-growth/). Owing to this, Tesco has been selected for the current report
for assessing its financial performance over last years.
Identification of key announcements or events 300
According to Chairman, John Allan, year 2015 was the challenging year for Tesco,
however, company remain extremely positive and confident about the future. The company is
proved to be an iconic brand and an enormous employer, which has huge responsibilities towards
customers, business partners, employees and shareholders as well as suppliers. Tesco is focused
towards corporate governance as it has a solid governance framework which is extremely
transparent. In the last year, company continued with range of corporate renewal plans that have
provided great success to company. The corporate entity puts customers at the heart of business
and makes decisions based on their needs and wants. Recently, company has sold its Homeplus
business in Korea which was a difficult decision, but was important for company to reposition
the finances of the Group by generating £3.3bn of funds (Annual Report and Financial
Statements 2016). This decision taken by company enabled company to strengthen the balance
sheet of company. The decision taken for replacing the UK defined benefit pension scheme with
a defined contribution scheme seen as the most important step which is taken by company in
respect to be competitive and sustainable for business partners over in long run. Tesco got its
images back as an investment grade and paying dividends. The main focus of company is on
achieving business goals for the long-term success. The corporate entity is evident for
stable pricing, investing in lower, improving services as it has simplified every food ranges on
shop floor for improving customer service which directly affects financial position of business.
In the month of October 2015, Tesco was the first and sole retailer within the United
Kingdom to offer customers an immediate price along with brand guarantee. Through this,
company does not charge more in case competitors such Asda, Morrisons or Sainsbury’s are
offering it in less. Recently, business entity has launched a new fresh food brands which are
offered at great prices. This is the way, company attracts customers by providing them great
value for money and fresh food under a roof. The company has made improvements across
offers which has strengthened market, along with this, in Europe and Asia, Tesco has built strong

and positive sales momentum in the last year (Annual Report and Financial Statements. 2016).
In Thailand, the company has captured higher market share and transformation programme
in Europe has boosted business growth while reducing operating expense.
Changes in key financial trends 300
PART B FINANCIAL HEALTH
Computing and analyzing key financial ratios for the company
Financial ratios are very important for assessing financial position of an organization for
certain time span. It enables corporation in arranging appropriate sources of finance by providing
right information to all important stakeholders (Brigham and Ehrhardt, 2013). Also, important
information related to liquidity and operational performance of Tesco can be extracted with ratio
analysis. It includes several ratios such as liquidity, risk expectations, profitability and
price/earning ratio. These are explained below along with calculation-
1 Meeting liquidity needs (liquidity ratios)
Liquidity ratio is helpful to assess ability of corporation to pay off its short as well as
long term debt. In common parlance, higher liquidity ratio tends to enhance margin of safety for
corporation in order to cover short-term debts. Furthermore,
2 Meeting operational performance (Efficiency ratios)
Efficiency ratios are calculated to analyze how well a business entity uses its assets and
liabilities to generate sales. By calculating efficiency ratio, business can identify how profitable
a business is in using its assets. Here, table below represent the efficiency ratios for Tesco for the
year 2015 and 2016.
Table 1 Efficiency Ratios for Tesco
Efficiency Ratios Formula 2016 2015
Asset turnover ratio Net sales /Average total sales 3.7 4.8
Inventory turnover
ratio
Cost of Goods Sold/ Average
Inventories 21.2 20.0

Inventory turnover ratio
Inventory turnover is said as an important efficiency ratio on which basis the frequency
and number of time for which business sells and replaces its inventory. The ratio is calculated by
cost of goods sold by average inventory during an accounting period. The inventory turnover
ratio for Tesco for 2015 was 20 times which in increased to 21.2 times in 2016 representing that
the business is efficiently managing its inventories in current years but in in previous year it
faced some issues. Low ratio for the previous year indicating a slow demand or over-stocking of
inventories and poor inventories management which had lead to increase in inventory holding
costs. However, this year business has effectively used is inventory.
Asset turnover ratio
Through calculating asset turnover ratio business entity measures ability to generate sales
from an effective use of assets. This ratio indicates how efficiently a business is using its assets
to earn revenues (Brigham and Ehrhardt, 2013). The higher assets turnover ratio is more
favorable for the business. The asset turnover ratio for 2015 was 4.8 and for 2016 it decreases to
3.7. From the analysis, it can be seen that in previous years, the company has effectively uses its
assets to generate higher sales, hence, higher ratio is previous years was more favorable. In the
previous year, higher turnover ratio indicted that company has earned good revenues by using its
assets efficiently. This year company has faced some issues regarding management or production
problems that have affects its asset turnover ratio.
3. Meeting risk expectations (gearing ratios)
Liquidity Ratios
Cash ratio 0.2 0.1
Current ratio 0.7 0.6
Debt equity ratio 2.9 3.9
Net working capital -5122.0 -7986.0
Quick ratio 0.6 0.4
Return on net assets -0.5 1.8
ROCE -0.2 0.7
Current ratio
Current ratio is an important liquidity ratio which is also termed as working capital ratio
showing a proportion of current assets in relation to current liabilities (Healy and Palepu, 2012).

This ratio of business is used to measure of liquidity of a business for a certain time period. The
current ratio for business is 0.7 in 2016 which was found to be .6 in 2015. The analysis indicates
that the liquidity performance of company is improved as compared to previous years. It can
also be said that the company has used a more conservative approach to working capital
management as a result liquidity performance of company is improved.
Debt equity ratio
`Debt to equity ratio is a financial ratio used for finding out the liquidity of business and
compared total debt to total equity. This is all around percentage of business financing that arises
from creditors and investors (Brigham and Ehrhardt, 2013). The debt equity ratio for Tesco in
2015 was 3.9 which indicates that business in previous year company has used more creditor
financing or bank loans as compared to shareholders financing. The debt equity ratio for 2016 is
2.9 which indicates that now company is using more equity financing as compared to debt. The
financial position of business is improved as compared to previous year.
Quick ratio
`Quick ratio is also known as acid test ratio is a measurement of company’s l ability of a
company to pay its current liabilities with quick assets when liabilities are due. In other words, it
is a measurement of how company is able to pay short term liabilities with cash, cash
equivalents, short-term investments such as marketable securities, current accounts receivable
etc. The quick ratio for Tesco in 2015 was .4 which is improved to .6 in 2016. It can be said that
liquidity position of company is improved as compared to previous year. The higher quick ratio
is favorable for companies.
4 Meeting board expectations (Profitability ratios)
Table 2 Profitability ratios of Tesco
Profitability Ratios Formula 2016 2015
Gross profit ratio 5.2 -3.9
Net profit ratio 0.2 -9.9
Operating margin 1.9 -10.1
Return on equity 1.5 -80.1
Return on investment 0.9 -47.4

Gross profit ratio
Gross profit ratio is a measure of sales that surpass the cost of goods sold. The ratio is
used to measure, how the material and labour resources of business are used to produce and sell
products. The amount of money from product sales is left over excluding all direct costs related
to production. The ratio is used for shareholders to identify the profits from core business
activities while leaving behind the indirect costs. The gross profit ratio for Tesco is 5.2 which is
improved from last year as in last year, it was negative due to losses earned by company (Tesco
PLC – TSCO. Morning star. 2016).. In the previous years, the direct expenses of company were
too high. It can be said that there is a huge improvements in business from previous year and
now business has become profitable in core business activities.
Net profit Ratio
Net Profit Margin is a percentage of net profit which is earned by business in previous
years. This is a major key performance indicator of the profitability of a company. In 2015 the
Net profit margin of Tesco was -9.9 indicated a huge loss for business (Tesco PLC – TSCO.
Morning star. 2016).. However, for the current year the ratio is improved to 0.2, represents that
that indirect expenses have been declined. On the basis of net profit margin, company identifies
performance gaps that should be overcome so as to improve the profitability of Tesco. The
reason behind improved profitability of cited company is its declining, in-direct costs.
Operating profit ratio:
The operating profit ratio is significantly known as operating profit margin, through
which profitability is measured a profitability in terms of operating cost are paid in business
(Brigham and Ehrhardt, 2013). The operating ratio represents a portion of revenues available to
cover other cost such as interest expense etc. The ratio for 2015 was -10.1 which is significantly
improved in 2016 and reached to 1.9, as business has earned good revenues. This all due to huge
decrease in operating expenses of business in this year.
Return on equity
Return on equity ratio is also termed as ROE ratio used for measuring the ability of firm
to generate profits on the investments made by shareholders in the organization (Baležentis,
Baležentis and Misiunas, 2012). The amount of return on equity shows that how much a return
is to be paid on an equity invested by shareholders. The return on equity for 2016 was 1.5

however, it was negative in 2015 a -80.1. The ratio represents how much of profits are to be
attained by stakeholders on investment. In the last years, the company was paying negative
return to the stakeholders, however, the returns have been improved in this years that grabs the
attention of shareholders in business. It can be said that, in the present years the business has
earned good returns on equity as it found efficiently to generate profits.
Return on investment
Profitability ratio includes return on investment which is the measure of firm’s profits on
investment as a portion of original cost. The ratio measures how business is effectively making
money on the investment. The return on investment ratio for Tesco in 2015 was -47.4, which
was unfavorable. Business got such ratio due to declining earning and negative profits.
However, in the previous year, the company has ROI of .9 which is improved as compared to
previous year, just due to increased profits and sales (Tesco PLC – TSCO. Morning star. 2016).
This is to be witnessed that the improved ROI ratio is effective in attracting investors as it will
provides good return ion their investments. The investments of company are effective to earn
good amount in each dollar invested in a project, hence, produces good profits.
5. Meeting shareholder expectations (Price/earnings ratio, dividend yield)
(Price/earnings ratio, dividend yield)
2016 :25.55
2015:

PART C
Financial strengths and weaknesses 500
Conclusions and recommendations 600
REFERENCES
Annual Report and Financial Statements 2016. [Online]. Available through: <
https://www.tescoplc.com/media/264194/annual-report-2016.pdf> [Accessed on 17th June,
2016].
Tesco PLC – TSCO. Morning star. 2016. [Online]. Available through: <
http://financials.morningstar.com/ratios/r.html?t=TSCDY&region=usa&culture=en-US>
[Accessed on 17th June, 2016].
Healy, P. and Palepu, K., 2012. Business Analysis Valuation: Using Financial Statements.
Cengage Learning.
Baležentis, A., Baležentis, T. and Misiunas, A., 2012. An integrated assessment of Lithuanian
economic sectors based on financial ratios and fuzzy MCDM methods. Technological and
Economic Development of Economy, 18(1), pp.34-53.
Brigham, E. and Ehrhardt, M., 2013. Financial management: Theory & practice. Cengage
Learning.
http://financials.morningstar.com/ratios/r.html?t=TSCDY&region=usa&culture=en-US
http://tools.morningstar.co.uk/uk/stockreport/default.aspx?SecurityToken=0P00007OYV
%5D3%5D0%5DE0WWE$$ALL
https://www.tescoplc.com/media/264194/annual-report-2016.pdf

https://ycharts.com/companies/TESO/pe_ratio
http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?
fourWayKey=GB00088https://ycharts.com/companies/TESO/pe_ratio47096GBGBXSET0
http://financials.morningstar.com/ratios/r.html?t=TSCDY&region=usa&culture=en-US
Appendix
Table 3Financials of Tesco Plc.
Income Statement 2016 2015
Revenue 54433 56925
Net Income 129 -5,664
Gross profit 2,854 -2,203
Operating Income 1,046 -5,750
Cost of goods sold 51,579 59,128
Dividend Paid 0 0
Balance Sheet
Cash and cash equivalents 3,082 2,165
Current Assets 14,592 11,819
Current Liabilities 19,714 19,805
Fixed Asset 4886 4843
Inventory 2430 2957
Minority Interest 0 0
Receivables 0 0
Stockholder Equity 8616 7071
Total Assets 14,828 11,958
Total Liabilities 24600 27657
Ratio calculation of Tesco Plc.
2016 2015
Brand Valuation
Enterprise Value 21518.0 25492.0

Profitability Ratios
Gross profit ratio 5.2 -3.9
Net profit ratio 0.2 -9.9
Operating margin 1.9 -10.1
Return on equity 1.5 -80.1
Return on investment 0.9 -47.4
Liquidity Ratios
Cash ratio 0.2 0.1
Current ratio 0.7 0.6
Debt equity ratio 2.9 3.9
Net working capital -5122.0 -7986.0
Quick ratio 0.6 0.4
Return on net assets -0.5 1.8
ROCE -0.2 0.7
Efficiency Ratios
Asset turnover ratio 3.7 4.8
Inventory turnover 21.2 20.0