Financial Performance Analysis of Sainsbury Plc: A Case Study

This assignment analyzes the financial performance of Sainsbury Plc, a retail company, from fiscal year 2015 to 2016. The analysis focuses on profitability ratios, liquidity ratio, and debt-to-equity ratio. The results show that Sainsbury Plc has improved its profitability, with gross income increasing from 5% to 6%, and net income rising from -1% to 2%. The company's current ratio also increased from 0.64:1 to 0.66:1, indicating a better ability to pay short-term debts. Additionally, the debt-to-equity ratio decreased from 0.42:1 to 0.32:1, suggesting that Sainsbury Plc is reducing its reliance on debt and increasing its use of equity financing.

MANAGING FINANCIAL
RESOURCES

INTRODUCTION
At the every business entity financial plays highly important and significant place
because without it the company not capable to make entry in the marketplace. Furthermore,
when there are financial resources are available in the firm then necessary to manage as well as
administer these all in the appropriate as optimum ways. The current is on the basis of samll
limited firm where different source of finance are to be shown and analysed for the respective
entity. At the second part it shows implications of fund on the firm in different ways and then
make the decisions. Moreover, it describes that how to make various financial decision in
business by considering several types of financial data as well as informations. At the end of
overall report, financial statements are to be evaluated of the Sainsbury Plc which operates in the
retail segment.
TASK 1
1.1 Sources of finance which are available for businesses
Sale of assets: sales of assets mean distribute and divide their own funds and assets to other
parties and they will become owner of those particular assets. Sales of assets refer to increase
number of sellers and provide them assets and fund in the effective manner. Those assets can be
tangible and intangible in nature. These types of transactions are typically private and business
involving assets(Bell,and Rasheed 2016).
 Bank loan: Bank loan is the facility provided by the banks to public. Its provide help in
financial term to customers. Bank loan is the most common and important term to public
and business firms also. Banks provide many kinds of loan to business and their
customers that may be medium and long term in the nature.
Equity shares: Equity share is refers to stock market of the country. It means stock market is the
secondary market, it’s a part of capital market in which risk value is high and profit chances is
low but in this market has all companies are listed and they have right to launch IPO in the
market. Equity share also known as the high risk market there are risk is uncertain(Fernandez, Le
Roy and Gnyawali 2014).
 Debentures: Debenture is the long term security in the financial term with fixed rate of
interest these are issued by the companies to public and also its provide the security
against their assets and fund.
1

1.2 Implication of above identified sources of finance
Financing sources Implications in form
of financial
Implications in form
of legal
Dilution of control
Sale of assets Sales of assets are
impacting may be
negative and in the
positive way in the
form of finance its
may be increase the
number of seller of the
company.
Sale of assets in the
market for has to be
follow some rules and
regulation of the
capital market if in
case sale of assets not
in the legal form so it
become illegal for that
particular country.
It can be control
through the follow all
rules and regulation
and also create some
effective policies in
that only can sale
assets and funds to
other customers.
Bank loan Bank loan firm in earn
banks high profits
because they provide
loan to customers and
business with high
interest rate.
Bank loan only
provide those persons
and company that are
able to pay loan
amount with interest
rate time to time.
Bank loans may be
control through create
some effective rules
and regulations in the
banking sectors.
Equity shares Equity market
impacting on the
financial form. In this
market have high risk
and fewer chances of
profits to earn.
Equity market has
some legal rules and
norms are made by the
government of the
country all share are
allot to clients in the
technical way.
There have transaction
should be in the
Witten and done all
activates without any
fraud.
Debentures Debenture is the long
term securities that
help to increase profits
and provide security
In the legal term has
all securities are
provided under the Act
and law of the
There is having to be
control and manage all
securities transaction
in the systematic
2

and safety to their
business.
particular country manner.
1.3 Evaluating suitable financing source for business
There are many financial sources for business those are help to increase and develop their
existing business in the effective term like equity market, bank loan, IPOs ( initial public
offering), pubic loan through the public all these sources are help to collect fund and capital
through these sources(Greenbaum, Thakor and Boot 2015). According to the business status in
the financial term then select the sources and has to be able pay back loan amount with interest
on the decide time period y the business.
TASK 2
2.1 Cost of identified financing sources
In the bank loan the small limited firm has to interest amount according to the rate
available in the economy to the commercial banks as cost of the fund and finance. In terms of
sales of assets it is an internal source and due to this reason there are any cost is not imposes
(Fernandez, Le Roy and Gnyawali, 2014). Apart from this in context to the equity shares as well
as debentures the expense and cost is such as dividend amount as well as interest amount
respectively.
2.2 Importance of financial planning in business
Financial planning has the highly supportive along with the important role in the firm for
taking decisions for make the investment in different projects. It helps to the small limited
business entity in order to manage the risks which are associated with the firm as well as make
the plan for paying and providing amount of taxation to potential authority. By considering the
financial planning management of the firm can manage the cash and improve balance in form of
cash at the end of year (Kunreuther and et.al., 2013).
2.3 Information which are needed while make the financing decisions
When the external parties going to provide the financial services to the company then
they require different types of information and data where key element is relating to the profit.
While talking about the bank loan then it needs data of the business valuation because after
assessing whole value of the firm in market the commercial banks allow for the fund. In the case
3

of equity and debentures the stock market list the firm when it has the higher amount of yield
because from the yield and margin generated the firm able to give dividend amount to the
stockholders who purchased its shares (Lee and Lam, 2012).
2.4 Impact on financial statements of the financing
At the time of raising fund from various source the small company has to give and pay
cost of finance which lead to enhance as well as increase total expenses in the accounts of profit
and loss. Apart from this, the amount of capital increase at the workplace by which total assets as
well as total liabilities both improves in the financial statement of balance sheet. Hence, it can be
said that income statement and balance sheet affects in the negative and positive way
respectively (MacDonald, 2012).
TASK 3
3.1 Analysis of the budget for making appropriate decisions
There are several kinds of budgets which are available at the accounting as well as
financial world which helps to the entity in order to assess that at the future periods the company
will profitable up to which extent. At the current case for the small limited company there is cash
budget is to be made which is highly supportive for it for analyse that at the further condition
how much net cash will be available with it (Cash Budget, 2013). The budget for the cash
position is to be stated as below:
Particulars January February March April May June
Balance at the
beginning of year 5652 5856 10408 7609 10631 10792
Cash incomes
Sales or turnover 16523 19893 15697 20563 24133 26563
Cash debtors 3452 3942 4451 3764 3894 4625
Total cash incomes
(A) 25627 29691 30556 31936 38658 41980
4

Cash outcomes
Expense on raw
materials 2230 2456 1952 1562 8050 3562
Labour costs 3564 3952 2954 3400 1628 2950
Amount to creditors 2895 2652 3456 2542 1569 1780
Charges for
maintenance 2562 1689 2641 1689 3980 4620
Equipment charges 4500 5690 8500 7650 8400 9250
Premium on
insurance 1350 2260 2590 3050 3550 4595
Taxation amount 1060 584 854 1412 689 1145
Total cash
outcomes (B) 18161 19283 22947 21305 27866 27902
Net cash balance
(A-B) 7466 10408 7609 10631 10792 14078
The above stated budget statement of the cash position indicates that the small limited
company has liquid is worth of 7466 GBP at the end of month of the January. Further, due to
increasing the incomes level of the cash balance in the end of February enhance which is worth
of the 10408 GBP. Higher as well as the increasing net cash position over the every month lead
to make the business entity highly profitable and can attract the shareholders. Because higher the
cash balance and profit allow more amount of the dividend at the year ending to the potential
stockholders. Apart from this at the end of month of the May as well as June the amount of net
cash also enhances from the previous period which is such as 10792 GBP and 14078 GBP
respectively (Martins, 2014). On the basis of such value the management of small firm able to
5

make the business decisions that how much production needs to produce as well as up to which
level the incomes must be generate for the future.
3.2 Explanation of cost and price per unit along with example
While selling the products as well services which are manufactured in the business
process then it is compulsory to assess that at which amount specific product will be sold in the
market to the customers. For this condition there are mainly cost and expense which associate
with product is to be consider which are such as variable as well as fixed expenditures. Further,
assessment of cost and price level is stated using example as below:
By considering the above analysis it has been said that the cost of every unit is
determined which is worth of 30 GBP where total cost and production unit are such as 120000
and 4000 respectively. Apart from this for determine price of each unit cost plus pricing strategy
is adopted and calculated which is such as 42 GBP where in the expense of one unit 40% is
agreed by the firm.
3.3 Assessing project's viability using investment appraisal methods
For determine that which one project will be more profitable there are different kinds of
financial tools or investment appraisal techniques are adopted by the managers of small limited.
6

In this there are net present value, payback period as well as internal rate of return these three
tools are implemented which are shown along with calculation as below:
NPV
Years
Cash flow
of project
one (in
GBP)
Cost of
capital
@ 11.5%
Present
value of
project
one
Cash flow
of project
two
Cost of
capital
@
11.5%
Present
value of
project two
(in GBP)
Investment at initial 320000 320000
1 46000 0.897 41256 52000 0.897 46637
2 88500 0.804 71186 76500 0.804 61534
3 115000 0.721 82961 125600 0.721 90608
4 156500 0.647 101255 189000 0.647 122282
5 165600 0.580 96092 200500 0.580 116343
6 204560 0.520 106456 214400 0.520 111577
Total of present value 499205 548980
Investment at initial 320000 320000
NPV
179205
GBP
228980
GBP
Payback Period
Number of years
Cash flow of
project one (in
GBP)
Cumulative cash
flow of project
one
Cash flow of
project two (in
GBP)
Cumulative cash
flow of project
two
7

Investment at initial -320000 -320000
1 46000 46000 52000 52000
2 88500 134500 76500 128500
3 115000 249500 125600 254100
4 156500 406000 189000 443100
5 165600 571600 200500 643600
6 204560 776160 214400 858000
Payback period 3.6 years 3.5 years
IRR
Number of years Cash flow of project one (in GBP) Cash flow of project two (in GBP)
Investment at initial -320000 -320000
1 46000 52000
2 88500 76500
3 115000 125600
4 156500 189000
5 165600 200500
6 204560 214400
IRR 25.46% 28.52%
Interpretation
8

The aforementioned table indicates that in the net present value there are project one
gives lower return compare to two which is such as 179205 GBP and 228980 GBP respectively.
When talking about the payback period which shows that the amount of potential investment will
be recover within how many period of time then also project two is profitable (Bell and Rasheed,
2016). Amount and sum of money which is invested at the initial time such 320000 GBP is
recovered within 3.6 year and 3.5 years for the one and two respectively. At the last the financial
tool used is like as IRR under which project one provide 25.46% and two give 28.52% return to
the firm. Hence, it can be said that project two is better as well as the management of small
limited needs to invest and undertake project two.
TASK 4
4.1 Discussion about main elements of financial statements
Income statement- One of the key statement of financial is income under which the
management of small business can know that level of profitability in the industry is at the which
extent. There are different kinds of adjustments are done at over here which lead to provide final
information in form of the net profit. Main elements and headings which comes under the
income statement are like as revenue or turnover, incomes or profits and expenditures associated
in the production or other process (Sala and et.al., 2017).
Statement of financial position (SOFP)- Other kind of statement or account is of the
financial position which shows that company is up to which level able to manage and pay all the
debts. By considering the respective kind of statement the management of small limited can
know that it has how much amount which is convertible into the cash. There are mainly two
types of headings are come under this statement which are like as assets and the liabilities.
Furthermore, in the liabilities section there are shareholder's equity capital is also adjusted along
with the retained earnings and profit generated.
Statement of cash flow (SOCF)- While talking about the current kind of statement then
it shows position of the company in terms of the cash flow which is available with the small
limited company at the end of every year (Greenbaum, Thakor and Boot, 2015). For analysing
and determining performance of the firm using SOCF then there is operating cash cycle is to be
calculated. Apart from this key elements of such account are identified as below:
 Cash flow generated from financing activities.
9

 Cash flow generated from investing activities.
 Cash flow generated from operating activities.
4.2 Comparing formats of different financial statements
Basis of difference Sole trader Limited company
Meaning The entity which established and
operated in the market by only one
owner along with the all business
liability is known as sole trader
company.
The firm which operates in the
industry in legal manner after
following different legal rules and
regulations along with having
interference of government is
identified as limited entity (Ko and
Lee, 2015).
Treatment of
taxation amount
At this kind of firm while preparing
the income statement there is not
need to make the accounting
treatment of the amount and sum of
money regarding taxation.
In this case at the time of framing
profit and loss account the
management must require to make
the accounting treatment in legal way
of the taxation charges imposes by
authority body.
Adjustments of
capital accounts
For the sole traders capital amount
is to be adjusted in only one capital
account in the balance sheet.
Further, profit is not shared with any
other because of having one owner.
In the limited company there are two
or more partners come up with their
capital and fund and in accordance to
that number of capital accounts are
prepared. Apart from this, the profit
or loss whatever comes under
consideration is divided in all the
partners (Kumar and Rao, 2016).
Accounting laws
and rules
For these firms at the time of
making financial statements not
require to follow any kind of legal
For the limited kind of entities when
it going to prepare financial accounts
then necessary to follow all the
10

rules and accounting standards. framed legal rules like as IFRS,
GAAP theory and other standards
etc.
Audit requirements Not necessary to check out the
financial statement using the
auditing process.
For such firms compulsory to check
out the financial accounts with the
help of auditors like as chartered
accountants etc.
Publications Not require to publish the financial
accounts.
Must require for limited entities to
publish the financial accounts as well
as statements along with the
disclosure at the end of every
accounting period.
4.3 Making interpretation of the financial accounts and statements
There are different kinds of techniques available in the accounting process which helps to
determine financial position of the firm by analysing different books of accounts of the
financials. Among available all kinds of the techniques and methods the best tool is like as
financial ratios which is taken into account in the current case study. In this present task
Sainsbury Plc business entity is to be selected and its financial statements are analysed at over
here. Further, the chosen entity is of the retail sector in the UK and having market presence at the
global level (Wu and et.al., 2016). In this profitability, solvency or gearing as well as liquidity
ratios are to be calculated and then interpreted as below:
11

Interpretation
From the above all the profitability ratios the company and management can know that it
is up to which level able to generate profit within every financial or accounting year. Higher the
amount of profit lead to increase ratios of profitability which attract higher number of investors
and shareholders. At the present case, gross income ratio increase from the 5% to 6% at the end
of 2016 which indicate that Sainsbury Plc is more able to control on expenditures of goods sold
compare to previous periods. Furthermore, the improving net income ratio which is from -1% to
2% indicates that Sainsbury entity has different strategies for controlling the operating as well as
various number of indirect costs. By considering this it can be clearly analysed that it performs
well in the retail industry and enhance brand image in the overall sector.
12

Interpretation
The ratio which analyse about the position of the firm in terms of having liquid for fulfil
various kinds of obligations which are taken for the short time. Such ratios are calculated using
those values which are having nature of the cash convertible such as current assets as well as
liabilities. At the current scenario the current ratio (CR) of Sainsbury enhances from the value
0.64:1 to 0.66:1 which indicate that it having more capability for paying the short term debt
amount to those financing source from where it takes fund (Weaver, 2014). On the basis of
standard ratio such as 2:1 level of the performance of Sainsbury Plc is lower in the retail
industry.
Interpretation
The ratio by which proportion of two terms of the capital structure are to be identified
such as debt as well as capital raised by the equity. In the case of Sainsbury Plc there are ratio of
dent to equity which considers as gearing ratio is reduces from 0.42:1 to value up to 0.32:1 from
the fiscal year 2015 to FY 2016 which is profitable for it. Lower the value of debt equity ratio is
better for each and every company and compare to ideal value such as 0.5:1 also the company
performing well in the segment of operating. It has been analysed that it by improving capability
to pay the debt amount its total loan amount reduces and start to raise fund using the equity
source of finance (Kunreuther and et.al., 2013).
13

Hence, by analysing the overall mentioned financial ratios of the Sainsbury Plc it has
been ascertained that respective company having improving or increasing performance in the
industry of retail segment from FY 2015 to the FY 2016.
CONCLUSION
From the current report of managing financial resources it can be articulated that for the
small limited company there are debentures, bank loan, sale of assets as well as equity shares are
better for raising fund. Such kinds of costs lead to affects the company's financial statements in
form of different ways like as positive and negative. In addition to this, it has been assessed that
to take financial decisions at the firm cost per unit, investment appraisal tools as well as budget
are considered. It can be concluded from the last part that Sainsbury Plc able to generate higher
amount and performing well at the fiscal year ending FY 2016 while comparing with FY 2015.
14

15