Financial decision making assignment : Tesco Plc

Financial Decision
Making

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
TASK 1............................................................................................................................................1
LO1 Explain Structure and terms which is used in financial statements.....................................1
LO2 Management accounting techniques for planning, control or decision making..................4
TASK 2............................................................................................................................................5
LO3 Calculate the Ratios.............................................................................................................5
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial decision making is the process which is taken by the top management people of
the organisation on behalf on their stakeholders (Agarwal and et.al., 2014). This process include
the different types of responsibility and liabilities related to the business to fulfil their financial
goals as well as build strategies to suffer from various risk. Basically it involves the 3 major
decision such as investment, dividend policy and financial decision. In this report Tesco Plc is
chosen for the better understanding of these concepts which is a UK based multinational
company. This company deals in Groceries & General merchandise items and founded in 1919
by John Cohlen.
This report covers various topics such as structure & terms used in financial statements,
apply management accounting techniques for the planning, control and decision making. In
addition, calculate the accounting ratios and explain their significance use.
MAIN BODY
TASK 1
LO1 Explain Structure and terms which is used in financial statements
Overview of organisation:
Tesco Plc is the UK based multinational company founded by John Cohlen and
established in 1919 which deals in general merchandise and groceries items with headquarter in
Welwyn Garden City, UK. Currently Tesco expand their business globally and have operations
with 11 other countries. Total number of employees are approx. 460,000 and annual turnover is £
1,208 million in 2018. In addition, current market share of the company is 27.4% (Tesco Plc,
2019).
There is a SWOT analysis of the organisation which complete the internal as well as
external analysis of the company and it is mentioned below:
Strength Weaknesses
 Tesco won various awards regarding
their excellence performance in product
quality, customer service & shopping
experience (Arnold, 2012).
 Some of the Tesco's operations not
performing well such as TESCO
finance impacted during the credit
crises.
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 Company have wide range of portfolio
which provide the financial stability.
 Use of latest technology in their
operations which is cost effective.
 Customer loyalty is the biggest strength
of the company (Baker and Ricciardi,
2014).
 Competitive pressure due to price range
of their competitors. Company need to
build price strategy for the less
disposable income people. Culture of
other countries need to be analyse
before expanding their business.
Opportunities
 Opportunities regarding strategies
alliances where other organisation offer
various product range to attract more
customers.
 In which country Tesco underperform,
it's become opportunity for the joint
venture.
 Market research and market
intelligence improve the functional area
of the organisation.
 Tesco can grow through private label
market.
 Various offers on their product which
attract foreign consumers as well as
include the western products in their
product line to increase the demand.
Threats
 Economic recession, financial crisis
and credit crunches affect the whole
market as well as profitability of the
company.
 Competition reduce the productivity
and profitability of the Tesco. So
organisation need to offer lower
product price which attract the more
customers.
 Need to develop innovative products
which make them leader of retail
market.
 Tesco need to set price according to the
disposable income of individual.
 Change in the price of raw material
become threat for the company.
 Government rules and political stability
also affect the whole organisation.
 Stakeholder pressure also impact the
Tesco regarding social &
environmental decision.
Importance of Finance and Accounting department:
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Accounting Department:
 Financial Accounting: It provide the various financial information which help the top
management to take important decision in order to increase their productivity as well as
profitability. In the Tesco company, accounts department record each transaction and
prepare a financial statement for the further use. Where manager take essential decision
which help the organisation to achieve their goals & objectives. These financial
accounting help the organisation to develop various statements which further help the
internal as well as external party to take their decision according to available information.
 Management Accounting: It is a managerial function of the organisation where it plays
a role of bridge between finance function or other department functions. Basically
management accounting helps the management to take decision in respect of the
organisation (Collier, 2015). Manager of Tesco, build various strategies in order to fulfil
task, achieve goals, assure the success of the company and increase profitability.
Basically, management accounting used for the strategic analysis, monitoring, balancing,
controlling product quality and improve on regular basis.
 Tax Function: It is important for the society as well as for the economy where public
contribute small part of their income in form of tax and it will be used to build schools,
hospitals, roads and spend on other things which improve the infrastructure. In the Tesco,
organisation annually pay the tax which is collected by the government and provide
various facilities to the general public to live comfortably. Collect tax amount from the
organisation is used for the economic as well as social development. It is important for
the organisation because it help the business to meet with their strategic goals rather than
compliances.
 Auditing Function: With the help of this function, organisation can access the risk in
their department regarding any miss-statement. Any fraud related to the finance, material
and any other functions. Auditing is important for the internal as well as external purpose
where manager of Tesco identify the area where improvement required. With the help if
this, manger build a reliable financial report which have authentic information.
Finance Department:
 Investing Function: This function include the summary of average investment where the
amount invested in financial assets. It helps the management to take investment decision
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according to the requirement and for the further benefits. Manager of Tesco need to
analyse the area to invest their money on certain places which provide then higher returns
and low risk (Doumpos, Zopounidis and Pardalos, 2012). In the finance department,
manager invest the amount on which project which is more beneficial for the
organisation.
 Financing Function: In this functions, effective utilization of funds is important for the
organisation to operates their internal functions in well manner. In Tesco company,
finance department segregate the required money for all function and operations. It helps
the manager to complete their task in specified amount and also fix the budget for the
other departments so they run their business smoothly.
 Dividend Function: Dividend include the flow of cash where investors play important
role and give the reflation regarding company's value. Stocks with dividend are less
unsustainable rather than without dividend. Dividend provide the stable income due to
this reason Tesco company invest in various stocks, bonds or mutual funds. So manager
of the company takes effective decision regarding dividend which affect the cash flow of
the company positively.
 Working Capital Function: It is required by the organisation to fulfil their daily
requirement to run their business smoothly and achieve their business goals & objectives.
Every organisation need to maintain some adequate working capital which help the Tesco
company to fulfil their daily requirement of money and increase the capability of the
business to achieve their goals & objectives (Graham, Harvey and Puri, 2015).
LO2 Management accounting techniques for planning, control or decision making
There are various management accounting techniques which is used for the planning,
controlling and decision making process for the organisation and it will be discussed below:
Flexible budget: This budget used to adjust according to the changes in the volume or
activity they done in the organisation. It is the most sophisticated budget where manager of the
company can adjust budget amount cording to the requirement of their operations. Tesco
company can adopt this budget because it helps the manager to develop various plans, control the
internal situations and further helps in taking effective decision in respect of the organisation. To
achieve their organisational goal & objectives that further helps in increasing their profitability.
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Zero base Budget: This budgeting method include all the expenses which is started from
the zero base where manager identify each activity cost and then analyse it. There is no previous
estimation used for this budget. It is time taken as well as expensive method to prepare budget
because it required estimation of each cost. In the Tesco organisation, manager can follow this
budget process because it will provide the accurate amount regarding each expenses. Further it
helps in decision making process and developing various strategies to implement their plans.
Master budget: This budget includes the various combination of budget where each
department have their own budget such as marketing, HR, finance etc. It helps the business to
identify that which functional area is under-perform and which one is over-performer. Tesco can
follow this budget because it provides the accuracy of budget which department required the
most budget. On the basis of this information, manager can develop various strategies and take
important decision that further helps in achieving business goals & objectives (Kou, Peng and
Wang, 2014).
Tesco's manager adopts the flexible budgeting techniques for the planning, controlling
and decision making process. It is required according to the changes in the production and it
depends upon the productivity. By using this budgeted method, company can increase their
profitability margin which helps in achieving their business goals & objectives.
TASK 2
LO3 Calculate the Ratios
Ratios 2017 2018
Return On Capital
Employed (ROCE):
= (Operating Profit / Total
assets – Current Liability)
*100
= 375 / 1912.50 *100
= 19.60%
= 412 / 2925 * 100
= 14.10%
Net Profit Margin:
= Net Profit / Sale * 100
= 300/ 2400 * 100
= 12.5 %
= 262.50 / 3000 * 100
= 8.75 %
Current Ratio:
= Current Assets / Current
= 757.50 / 322.50
= 2.34
= 1035 / 1110
= 0.93
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Liability
Debtor Collection Period:
= Receivable / Sales *365
= 450 / 2400 * 365
= 68.43
= 68 Days
= 600 / 3000 * 365
= 73 Days
Creditor Collection Period:
= Payable / Purchase * 365
= 285 / 1350 * 365
= 77.05
= 77 Days
= 1050 / 2400 * 365
= 159.68
= 160 Days
Return on Capital Employed:
It is an accounting ratio which is used for the analysis of finance, valuation or accounting.
It helps the organisation to measure their returns or profitability while using capital as well as it
helps in identifying company's efficiency. Higher return on capital indicate the effective use of
capital and along with this, it measure the companies’ debt & liability.
ROCE is one of the Profitability ratio which indicate the company's performance in term
of how effectively company use their capital to enhance their profit margin. Organisation use this
ratio to measure their efficiency and profitability of the company and further develop various
strategies to improve this.
ROCE of the ALPHA Ltd in the year 2017 is 19.60% and in 2018 is 14.10% which
reduce about 5%. As per above mention calculation, it is concluded that higher ROCE provide
high efficiency which indicated in the 2017. In the 2018, ROCE reduced by approx. 5% which is
about 14.10% and it is indicate the low efficiency of capital used. Basically, in the 2018, ALPHA
Ltd not proper used their capital which is less profitable in comparison to 2017.
Decrees in operating profit and increase in capital employed affect ROCE which is
calculated through operating profit divided by Capital employed which resulted after deducting
current liability from total assets. Organisation need to ensure that, operating profit will be
increased in same proportion of capital employed which positively affect the organisation
(Lerner, Li and Weber, 2013).
Company need to reduce cost of their products, increase the number of sale, restructure
their finance and pay-off their debts. After following all these steps company can improve their
return on capital employed (ROCE).
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Net Profit Margin Ratio:
This ratio will be calculated by using net income or sale of the company which help the
manager to identify their organisational profitability in respect of their sale. Higher net profit
indicates that, company is able to recover or control their cost in order to achieve higher profit
margin.
Higher net profit indicate that company have ability or efficiency to reduce their cost or
increase their profit margin. In result, it represents the efficient management of the resources in
the organisation. Which further help the business to improve their sale or increase their profit
margin.
In the 2017, company have 12.50% net profit which is reduced in the year 2018 and it
remain only 8.75 %. Huge changes in the net profit ratio which affect the whole organisation. So
manager need to build effective strategies to increase their net profit margin. Because higher net
profit is more beneficial for the organisation.
Net profit of the ALPHA Ltd in the 2017 is £300 and in 2018 was £262.50 which reduce
due to change in operating expenses as well as fixed cost. Sale of goods incarnated but expenses
also in higher proportion which reduce the net profit of the company (Lerner and et.al., 2015).
Organisation need to reduce their fixed as well as variable cost to improve their net profit
which reduce the cost of product or increase the profit margin. Along with this, management
need to build various strategies in their operation to improve their net profit.
Current Ratio:
It is a liquidity ratio which measure that organisation have sufficient resources in term of
money to meet their obligations. Basically, company should have to maintain enough current
assets to pay off their current liability. Current ratio indicate the liquidity of the firm and ideal
ratio is 1:1.
Current ratio indicates the liquidity of the organisation and identify that weather company
have potential to meet their obligation or not. In the 2017, company have 2.34:1 current ratio
which is higher then it's ideal. It means company have stored inventory in their warehouses
which is not beneficial for the organisation. In the 2018, current ration of the company is 0.93:1
which is nearly to the ideal ration and perfect for the ALPHA Ltd because they have potential to
pay off their obligation by using their current assets (Zopounidis and Doumpos, 2013).
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As per above calculation, current ratio of 2017 was good enough because it is the nearest
amount where current assets almost equal to the current liability. Ideal ratio is 1:1 which is suits
in the 2018 but in the 2018 it is too high about 2.34:1. organisation need to maintain their current
ration through change in their current assets & liability. Current assets of the company increase
in the 2018 but current liability increase 3 times in comparison to 2017.
Current, current ratio is better for the ALPHA Ltd because it is nearly to the ideal ration
where, organisation have capability to meet their obligation. Higher the gap between current
assets and liability provide the higher ratio (Lucko, 2013).
ALPHA Ltd need to control their overhead expenses, reduce useless assets from the
company and shift from short term debt to long term debt. Organisation need to reduce their
inventory level because most of the time business show higher current assets but most of the part
it includes the inventory which is not easily converted into cash.
Debtor Collection Period:
This accounting ratio indicate the average time taken by the company to collect their debt
from their debtors. Low period of collection indicate the higher efficiency and higher collection
period shows that less efficiency. Lower collection period is beneficiary for the organisation to
reinvest that amount on their business.
Lower collection period of their debt gives higher efficiency which help the organisation
to re-invest their collected amount in their operations. Which further help the business to
smoothly run their operational activities.
In the 2017, collection period is 68 days which is lower than 2018 collection period that
is 73 days. Lower the period more effective and it will change due to increase in the receivable
amount. Sale of the company increase as well as traders also increase and in result collection
period of 2017 is better than 2018.
Receivable balance increase faster than sale of the company due to this reason collection
period of 2017 is better than 2018. Because in 2017 company have 68 days’ period to collect
debt which increase in 2018 about 73 days (Masini and Menichetti, 2012).
ALPHA Ltd can improve their collection period to maintain their receivable balance in
comparison to the sale. Company need to reduce their debtors because higher debtors amount
will take time to recover.
Creditor Collection Period:
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In this collection period, business calculate their remaining time to pay off their
liabilities. It is important that debtor collection period is lower than creditors collection period
which help the business to pay off their debt after successful collection from their debtors.
Company's performance depends upon the collection period because payment of their
debt after receiving debtors amount. Low payment period will reduce the obligation of liability
same as higher payment period will provide time to firstly recover their debt from debtors.
In the 2017, creditors collection period is 77 days and 160 days in 2018 where lower
payment period indicates that short time between the purchase of goods and payment of it.
Purchase increase in from 2017 to 2018 same as trade payable also increase from 285 to 1050.
Creditors collection period increase 77 days to 160 days due to increase in credit
purchase which increase the collection of from 2017 to 2018 (Starcke and Brand, 2012).
ALPHA Ltd need to reduce their credit purchase because it will increase payment period
as mentioned in the table where in 2017 collection period was 77 days. In 2018, collection period
is 160 days which increase because of creditors.
CONCLUSION
From the above discussion, it has been concluded that financial statement helps the
organisation to identify their requirement of the business. Accounts & finance department help
the business to maintain their activities with the help of various management accounting
techniques. It helps the business to develop various plans, control operations and take effective
decision in term of achieving their goals & objectives. In addition, ratio analysis important for
the organisation two identify the financial performance of the business.
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REFERENCES
Books & Journals
Agarwal, S., and et.al., 2014. Financial decision making when buying and owning a
home. Available at SSRN 2498111.
Arnold, G., 2012. Corporate financial management. Pearson Education.
Baker, H. K. and Ricciardi, V., 2014. Investor behavior: The psychology of financial planning
and investing. John Wiley & Sons.
Collier, P. M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Doumpos, M., Zopounidis, C. and Pardalos, P. M. eds., 2012. Financial decision making using
computational intelligence(Vol. 70). Springer Science & Business Media.
Graham, J. R., Harvey, C. R. and Puri, M., 2015. Capital allocation and delegation of decision-
making authority within firms. Journal of Financial Economics. 115(3). pp.449-470.
Kou, G., Peng, Y. and Wang, G., 2014. Evaluation of clustering algorithms for financial risk
analysis using MCDM methods. Information Sciences. 275. pp.1-12.
Lerner, J. S., Li, Y. and Weber, E. U., 2013. The financial costs of sadness. Psychological
science. 24(1). pp.72-79.
Lerner, J. S., and et.al., 2015. Emotion and decision making. Annual review of psychology. 66.
pp.799-823.
Lucko, G., 2013. Supporting financial decision-making based on time value of money with
singularity functions in cash flow models. Construction Management and Economics.
31(3). pp.238-253.
Masini, A. and Menichetti, E., 2012. The impact of behavioural factors in the renewable energy
investment decision making process: Conceptual framework and empirical
findings. Energy Policy. 40. pp.28-38.
Starcke, K. and Brand, M., 2012. Decision making under stress: a selective review. Neuroscience
& Biobehavioral Reviews. 36(4). pp.1228-1248.
Zopounidis, C. and Doumpos, M., 2013. Multicriteria decision systems for financial
problems. Top. 21(2). pp.241-261.
Online
Tesco Plc. 2019. [Online]. Available Through:
<https://www.tesco.com/>
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