Financial Analysis of Tesco Plc

The assignment content discusses the three main financial activities, namely operating, financing, and investing. It also provides a comparison of sole proprietorship, partnership, and company in terms of preparing financial statements. Additionally, it presents a scenario analysis of Tesco Plc's financial performance using various ratios, concluding that the company is in a stable financial position but needs to improve its dividend yield and earnings per share.

MANAGING FINANCIAL
RESOURCES

Table of Contents
Introduction .....................................................................................................................................3
TASK 1 ...........................................................................................................................................3
Task 2...............................................................................................................................................5
Task 3 ..............................................................................................................................................9
Task 4 ............................................................................................................................................17
Conclusion ....................................................................................................................................21
References......................................................................................................................................23

Introduction
Management of financial resources is very essential in the process of decision making. It is
required at all levels as finance is the major element to be imposed in the business. In the
following report, the different sources of finance available to the firm will be presented.
Discussion of ratio analysis will be presented to elaborate the financial records of the business.
TASK 1
Sources of finance available to business
Finance is the key element which is required for every kind of business that is irrespective of its
nature. It is essential at every level of operation. Considering the different types of business such
as new and old, large and small business entities for the purpose of new business set-up and
expansions, the sources of finance are available to them which are as follows: Retained earnings – For old business firms who are operating since a long period, the
best source of funding that is available to them is retained earnings. It is the amount
which is kept as reserve out from the profits and is accumulated every year in a particular
proportion (Fridson and Alvarez, 2002). This amount could be used for the purpose of
expansion or for setting up the new venture of similar business. Share capital – The other source of finance which is available to the newly establishing
firm is raising fund through share capital. Under this method, company allot shares in the
market to the public and accumulate funds from them. It is available to new as well as old
firms in the form of liabilities which they have to pay back to their shareholders after
certain period with dividend (Funke, 2007).
 Bank loan – It is the most common source of finance for new firms who are planning to
work at small level in the initial stage. Bank loan is the form of complete debts which
could be raised from the banks and other financial lending institutions (Helfert, 2004).
This source of finance could be raised even for the purpose of setting large business firms
after observing the repaying capacity of organization by financial lenders.

Implication of sources of finance with consideration of different factors
By adopting the sources of finance that are available to different types of business firms,
there are various benefits and disadvantages to business and legal aspects. Also, there are certain
costs which are available to them which companies have to bear. All the relative factors for
sources of finance are described as under: Retained earnings
Advantage - The fund raised through retained earnings is available in the form of assets.
Company does not have to pay any kind of debts to the third party (McMenamin, 2002).
Disadvantage – It eventually leads to reduction in the profitability of business which is to
be disclosed among stakeholders of the firm.
Cost – There may be chances of opportunity loss to the firm. This could directly impact
the working capital of organization (Neftci, 2004). Share capital
Advantage – By the means of raising share capital, company could raise huge amount of
fund through public.
Disadvantage – Liability of the firm increases which could negatively affect the financial
statements of company.
Cost – It includes payment to the shareholders in form of dividend which reduces the
profitability of organization (Beck, Levine and Loayza, 2000). Bank loan
Advantage – It is a very easy process of borrowing fund and raising capital which is
provided by all kinds of financial institutions.
Disadvantage – Loan taken for longer period leads to accumulation of interest which
increases the amount that is to be repaid by firm.

Cost – The capital raised from bank loan involves huge cost in the form of interest which
leads to reduction in the profitability of company (Bhowmik and Saha, 2013).
Evaluating the appropriate sources of finance for business projects
For every form of business, finance is required at the initial stage. There are different
sources of finance which are available to different types of business which are as follows:
 Small business start-up – Loan taken from bank is the best source of finance that is
available to small business firms while starting up the business. The advantage available
in obtaining loan is that they can easily obtain loan from financial institution by fulfilling
the required formalities (Brigham and Ehrhardt, 2011). The cost which is to be bear by
the firm includes payment of interest over principle amount which has been taken.
At the initial stage, company have opted for bank loan to initiate their business from the primary
level. When they were at the level of small business start up, company have raised amount
through bank loans.
 Large business expansions – For the purpose of expansion by large operating firm, the
best source of raising capital is generating through share capital. Company has an
advantage of their past business performance and goodwill. Hence, by disclosing their
plan to public, companies could easily raise funds. They have to pay dividend to
shareholders which will be treated as cost to company.
Considering the company which has adopted all the sources of finance in different phase of
business, SONY could be considered. As they grew bigger, SONY became able to collect
amount out of their own earnings. The amount accumulated through retained earning have been
utilized for the purpose of large business expansion.
 Acquiring medium sized company – When there are plans to acquire some other firms, the
ideal source of capital is retained earnings by individual person or organization
(Broadbent and Cullen, 2012). Although, it might affect the profitability of every firm,
but they will not get bounded under any kind of liabilities or debts.

They increased their scope of business and acquired a musical medium sized company and took
them into their name. For the purpose of performing acquisition, SONY have generated revenue
through share capital from public and increased their level of business.
Task 2
Raising finance for business
Finance for business can be raised by many sources as discussed earlier in the report.
Considering the different types of business such as new and old, large and small business entities
for the purpose of new business set-up and expansions, the sources of finance available are
internal and external sources. Internal sources includes retained earnings, personal savings, share
capital, selling of assets etc (Ittelson, 2009). Retained earnings are the part of last year revenue
which can be used for financing existing operations. Sale of assets is another option under which
they can sell old assets or assets which are available in spare (Siano, Kitchen and Confetto,
2010). Personal savings and funds from friends & relatives can also be poured into the new
business.
External sources of finance include debt, equity, bank loan, hire purchase etc. Debt
financing is related with issue of debenture capital in the market and let general public to invest
in business. It act as loan for the company. Equity financing is concerned with issue of equity
and preference share (Sources of finance. 2012). Bank loan can also be adopted for funding at
the confined rate of interest and after fulfillment of certain legal obligations. Hire purchasing is
another good option under which company can acquire the necessary asset at a particular time by
paying the price in installments.
Financial planning for new business
Starting of a new business requires lot of research and development activities to be
performed. It is also important to identify and evaluate the risk associated with every business
decision. The factors which are to be taken into consideration includes sources of funds,
resources, and location and legal aspects (Fridso and Alvarez, 2002). Financial planning helps in
eliminating the uncertainties related with the business. It helps in estimating the needed funds
and establishing the financial policies related with management of finances. It is needed to
perform budgeting activities and then objectives, programs, policies, budgets etc are placed.

Financial planning manages the cash outflow and cash inflow in order to achieve stability within
the business (McMenamin, 2002). It can identify appropriate sources of finance needed and the
ways to avail them. Company can effectively invest in profitable projects on the basis of use of
investment appraisal methods. Planning can tell about the distribution of funds to all the
resources within business.
Financial decision making
Financial department of an company generates lot of information which is helpful in
taking many decisions. Balance sheet, income statement and cash flow statement are the
documents which renders lot of data. These documents generates data related to expenses,
income, sales, costs, profits, dividend, assets, liabilities, capital etc (Neftci, 2004). These
information can be very useful to many people such as:
Customers – Customers need this information to know about the reputation & goodwill of the
company in them market.
Employees – Employees need this information to take decision about their survival and retention
within the organization. They can analyze whether they have a long career with the company or
not.
Government – Government needs this information to keep an eye on the business operations of
the firm (Beck Levin and Loayza, 2000). They want to make sure that it is following ethical
practices.
Suppliers – Suppliers checks the payment making ability of company on the basis of sales and
profits. They want to identify whether company is capable of making timely payments for goods
or not .
Shareholders – These people are interested in financial data because they want to check the
dividend paying ability of firm ( Bhowmik and Saha 2013). Obviously, shareholders
expects a high dividend on the shares which they purchased.
Sample of financial statements
Income statement
Revenue:

Gross Sales
Less : Sales Returns / Allowance
Net Sales
Cost of Goods Sold:
Purchases
Delivery Charges
Cost of goods sold
Gross sales profit (Loss)
Expenses:
Expenses 1
Expenses 2
Expenses 3
Total Expenses:
Net Operating Income
Other Income:
Income 1
Income 2
Income 3
Total Other Income:
Net Income (Loss):
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
Balance sheet
Liabilities Amount Assets Amount
Current Liabilities
Creditors
Bills Payable
Bank Overdraft
Fixed Liabilities
Bank Loan
Secured Loan
Other long term Loan
Capital and Net Profit
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
Current Assets
Cash in bank
Accounts receivable
Inventory
Prepaid Expenses
Other Current Assets
Total Current Assets
Fixed Assets
Machinery & Equipments
Furniture & Fixtures
Leasehold Improvements
Land & Buildings
Other Fixed Assets (Less
Accumulated
depreciation)
Total Fixed Assets
Other Assets
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX

Intangibles
Deposits
Goodwill
Other
Total assets
XXXX.XX
XXXX.XX
XXXX.XX
•Retained earnings – It will have an impact on profit & loss account. The retained surplus under
the balance sheet will decrease. The transaction will be recorded under the heading “cash flow
from operating activities” in the cash flow statement
•Share capital – It will increase the liability side under the balance sheet. The event will be
recorded under the “cash flow from financing activities: in the cash flow statement.
•Bank loan - It will increase the liability side under the balance sheet. The transaction will be
recorded under the “cash flow from financing activities: in the cash flow statement.
Task 3
Scenario 1
Analyzing sales budget and cash forecast.
Month Monthly
budget
Cumulative
Budget
Actual
Monthly
Actual
Cumulative
Variance
July 230,000 230,000 215,000 215,000 -15,000
August 230,000 460,000 220,000 435,000 -25,000
September 270,000 730,000 245,000 680,000 -50,000
October 265,000 995,000 235,000 915,000 -80,000
November 265,000 1,260,000 237,000 1,152,000 -108,000
December 300,000 1,560,000 270,000 1,422,000 -138,000
January 250,000 1,810,000
February 265,000 2,075,000
March 300,000 2,375,000
April 325,000 2,700,000
May 325,000 3,025,000

June 350,000 3,375,000
CASH FORECASTS
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Brought
Forward
40,000
Sales 200,000 300,000 300,000 300,000 250,000 260,000 300,000 260,000 300,000 325,000 265,000 265,000
Total Income 240,000 300,000 300,000 300,000 250,000 260,000 300,000 260,000 300,000 325,000 265,000 265,000
Purchases 150,000 140,000 135,000 135,000 140,000 130,000 135,000 145,000 140,000 140,000 145,000 145,000
Wages 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000
Rent &
Rates
56,000 56,000 56,000 56,000
Light &
Heat
55,000 55,000 55,000 55,000
Advertising 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
Insurances 55,000 52,000
Equipment 50,000 10,000 10,000 10,000
Vehicles 20,000
Directors'
Salaries
22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000
Motor
Expenses
11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000
Sundry
Expenses
11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000
Total
Expenditure
432,000 251,000 291,000 302,000 293,000 296,000 292,000 246,000 296,000 297,000 246,000 301,000
Monthly
Deficit /
Surplus
-
192,000
49,000 9,000 -2,000 -43,000 -36,000 8,000 14,000 4,000 28,000 19,000 -36,000
Accumulativ
e Deficit /
Surplus
-
192,000
-
143,000
-
134,000
-
136,000
-
179,000
-
215,000
-
207,000
-
193,000
-
189,000
-
161,000
-
142,000
-
178,000
Budget issues – The sales budget of Regal Construction Ltd is facing lots of issues as business is
facing a negative variance of 8-10% every month. There are two types of variances positive and
negative (Broadbent and Cullen, 2012). Positive variance is a good sign for the business while
negative variance is unfavorable. Company has not taken into consideration the budgeted sales

figure while preparing the cash flow forecasts. Accumulate deficit can be seen which shows that
they have incurred extra expenses which are required to be minimized.
Cause of the budget – There can be several reasons for these variances in budget. Market is
always surrounded with unpredictable shifts. Plans prepared for business may have reflected in
contrast from which was estimated. Poor planning and estimations can also be the cause for it.
Estimation of prices was not done correctly due to which sales aroused at different prices from
what was planned (Brigham and Ehrhardt, 2011). Failure of business strategies can also be the
cause for variances. Liquidity position of the company may be affected due to bad results in cash
flow forecasts. Further there can be an impact on its operational affairs.
Recommendations – Company need to focus on effective sales strategies which can increase
their sales. It also needs to follow an appropriate pricing strategy taking into consideration the
prices from competitors. A suitable budgeting technique is to be applied suitable to their business
operations. Further business can adopt an appropriate costing system. For company like Regal
Construction Ltd, process costing system can be more suitable. Deficits can be improved by
employing a skilled workforce, which has the potential to make hard efforts. All resources are to
be utilized effectively avoiding any kind of wastage. Further there is a need to do correct
estimation of expenses and income. For that purpose, analysis of marketing trends is very
essential.
Scenario 2
Performance of machine A
For machine A
Variable cost per unit=50.50+30.75+10.25
Variable cost per unit=£ 91.5
Unit CM=200 – 91.5 = 108.5
Unit CM = 108.5
Contribution per unit = 108.5 / 200 = 0.54

= 54%
Break even sales unit = Fixed cost / unit price – variable cost
= 150000 / 108.5
= 1382 units
Breakeven point in = 200 * 1382 = 276400
Margin of safety
Margin of Safety in sales value = Budgeted sales – Break even sales
= 7000 – 1382 = 5618
MOS per unit = 5618 / 7000 = 80%
Change in breakeven point
• A ₤10 increase in the selling price
Break even sales unit = Fixed cost / unit price – variable cost
= 150000 / 113.5
= 1321 units
• A ₤10,000 decrease in fixed costs
Break even sales unit = Fixed cost / unit price – variable cost
= 140000 / 108.5
= 1290units
• A ₤5 increase in material costs per unit
Break even sales unit = Fixed cost / unit price – variable cost
= 150000 / 200 – 96.5

= 1449 units
Scenario 3
Particulars Amount (in £)
Actual Sales 7000
Price per unit 200
Revenue 1400000
Additional demand 600
Price per unit 180
Additional revenue 108000
Total Revenue 1508000
Fixed Cost 150000
Variable cost 787600
Total Cost 907600
Profit/loss 43400

Payback period
For uneven cash flows,
Payback period=A+B/C
A = last year value with a negative cumulative cash flow
B = absolute value of cumulative cash flow at the end of the period A
C = total cash flow while the period after A
For option X = 3+ (800000-750000)/1100000
= 3.04 YEARS
For option Y = 3+ (800000-600000)/900000
= 3.2 YEARS
Accounting rate of return
ARR= (Average return during the period) / (Initial Investment)
Project A Project B
Cash flow (£) Cumulative value Cash flow (£) Cumulative
value
Initial Cost 800000 800000
1 200000 200000 150000 150000
2 250000 450000 200000 350000
3 300000 750000 250000 600000

For project X
ARR= 11, 00000 / 800000
ARR=1.375
For project Y
ARR= 900000 / 800000
ARR=1.125
Net present value
NPV for option X
Year Cash flow (£) P.V. factor@ 10% Present Value (£)
1 200000 0.94 188000
2 250000 0.89 222500
3 300000 0.84 252000
4 350000 0.79 276500
Total Present value 939000
Initial investment (800000)
Net Present value 139000
For option Y

Year Cash flow (£) P.V. factor@ 10% Present Value (£)
1 150000 0.94 141000
2 200000 0.89 178000
3 250000 0.84 210000
4 300000 0.79 237000
Total Present value 766000
Initial investment (800000)
Net Present value -34000
Internal Rate of Return
Table 1 : IRR for project A & B
Year Cash Flow -
project X
PV factor
@29%
PV @ 29% -
Project X
Cash Flow -
project Y
PV factor
@ 15%
PV @ 15% -
Project Y
1 200000 0.78 156000 150000 0.87 130500
2 250000 0.60 150000 200000 0.76 152000
3 300000 0.47 141000 250000 0.66 165000
4 350000 0.36 126000 300000 0.57 171000
Total PV 573000 618500
Majority of the investment appraisal techniques suggests that ABC Engineering Ltd must
select project X which is the introduction replacement of new machine. This project will prove to
be profitable and valuable for the company’s business. It will also result in significant increases
in output and substantial savings in production and maintenance costs.

Task 4
Scenario 1
Books of primary entry
The journal entries are made on the basis of following three basic principles:
Real account ‘Debit’ what comes in & ‘credit’ what goes out
Nominal account ‘Debit’ all losses & expenses, ‘credit’ all incomes and gains
Personal account ‘Debit’ the receiver & ‘credit’ the giver
Ledger – It is regarded as the book of final entries where are financial transactions are recorded
in individual accounts.
Trial balance – It helps in checking the accuracy of the ledger accounts developed. The rule is
that debit side equals the credit side (Statement of Cash Flows, 2000).
Partnership – Here partnership individual accounts are prepared. Capital accounts of all partners
are also prepared
Limited companies – It is mandatory for a limited firm to prepare all financial statements
according to the rules and guidelines of IFRS and GAAP (Siano, Kitchen and Confetto, 2010).
Scenario 2
Format of financial statements

Income Statement
Revenue:
Gross Sales
Less : Sales Returns / Allowance
Net Sales
Cost of Goods Sold:
Purchases
Delivery Charges
Cost of goods sold
Gross sales profit (Loss)
Expenses:
Expenses 1
Expenses 2
Expenses 3
Total Expenses:
Net Operating Income
Other Income:
Income 1
Income 2
Income 3
Total Other Income:
Net Income (Loss):
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX

Balance sheet
Liabilities Amount Assets Amount
Current Liabilities
Creditors
Bills Payable
Bank Overdraft
Fixed Liabilities
Bank Loan
Secured Loan
Other long term Loan
Capital and Net Profit
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
Current Assets
Cash in bank
Accounts receivable
Inventory
Prepaid Expenses
Other Current Assets
Total Current Assets
Fixed Assets
Machinery & Equipments
Furniture & Fixtures
Leasehold Improvements
Land & Buildings
Other Fixed Assets (Less
Accumulated depreciation)
Total Fixed Assets
Other Assets
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX

Intangibles
Deposits
Goodwill
Other
Total assets
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
Differences in the statements
 Income statements – This statement records only profits and losses for the accounting
period. The purpose is to identify what amount of net profit and gross profit is made by
the business.
 Balance sheet – This statement lists all the assets and liabilities within the company. The
purpose is to display the liquidity position of the business.
 Cash flow statement – This statement records the cash flow from three types of activities
that is operating, financing and investing activities.
Comparison
 Sole proprietor – It is not essential for sole entrepreneur to prepare all the three financial
statements as it depends on their willingness.
 Partnership – In this business, owners have to prepare all the three statement. Along with
that the partners are required to prepare individual capital account.
 Company – It is mandatory for public limited firms to produce all the three statements.
Scenario 3
Tesco Plc

2014 2013
Profitability Ratios
Profit before interest and taxation 2631 2188
Total capital employed 28765 31144
Return on Capital Employed 9.15% 7.03%
Gross Profit 4744 4810
Net sales 63557 63406
Gross profit margin 7.46% 7.59%
Net Profit 970 24
Net sales 63557 63406
Net Profit Margin 1.53% 0.00%
Liquidity Ratios
Current assets 15572 13096
Current Liabilities 21399 18985
Current Ratio 0.73 0.69
Quick Assets 11996 9352
Current Liabilities 21339 18985
Quick Ratio 0.56 0.49
Gearing Ratios
Long term debt 14043 14483
Capital employed 28765 31144
Capital gearing ratio 48.82% 46.50%
Debt 35442 33468
Equity 14722 16661

Debt Equity Ratio 2.41 2.01
Investors Ratio
Earning after Tax and preference dividends 970 24
Shareholders’ Equity 14722 16661
Return on equity shareholders 6.59% 0.14%
Price to earning rations 27.02 23.02
Dividend yield 0.15 0.15
Earnings per share 0.36 0.05
From the above ratio calculation it can be computed that Tesco PLC is in stable financial
position in terms of all the aspects such as liquidity, efficiency, turnover etc. All they have to
work on improving their dividend yield and earnings per share (Project and Investment
Appraisal for Sustainable Value Creation. 2013).
Profitability ratios - The gross profit margin and net profit margin are not showing impressive
performance. There is a need to improve the operational performance.
Liquidity ratios – These ratios does not match with the average industry ratios. Company should
focus on paying the short term obligations of the business.
Gearing ratios – It can be said that debt to equity ratio is satisfying because Tesco is a big size
organization and has the capability to maintain such high debt to equity ratio
Conclusion
From the following report, it is concluded that finance is required at all levels of business.
The different sources of finance available to the firm have been presented. Discussion of ratio
analysis will be presented to describe the financial records of the business along with description
and study of financial statements.

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