EduQual Diploma in Business Management: Strategic Financial Management

This study focuses on strategic financial management for EduQual Diploma in Business Management, with Sainsbury as a case study. It covers evaluating key resource decisions, analyzing financial statements, and more.

EduQual Diploma in Business
Management (SCQF Level 11)
STRATEGIC FINANCIAL
MANAGEMENT
TABLE OF CONTENT

S
INTRODUCTION.................................................................................................................................1
TASK 1.................................................................................................................................................1
Background of company....................................................................................................................1
Evaluation of the impact of three key resource decisions assessing the internal as well as external
performance of an organisation and also evaluate its risks along with the tools and techniques........2
Analyze the financial statements of an organization to determine the financial viability...................4
Various strategies in monitoring and evaluating the organization’s intangible and tangible resources
of the organization...........................................................................................................................10
Importance of costs in pricing strategies and recommend improvements to Sainsbury’s existing
costing system. Explanation of various kinds of costing and selection of suitable costing system. 11
Task 2..................................................................................................................................................11
Evaluation of investment appraisal techniques and alternative source of finance available to
business...........................................................................................................................................11
Application of investment appraisal techniques...............................................................................13
Explanation of risk related to expansion in international market.....................................................16
CONCLUSION...................................................................................................................................18
REFERENCES....................................................................................................................................19

INTRODUCTION
The present study is bifurcated into two parts. The first part of the study is about the
evaluation of the monetary and non-monetary performance of the selected company for this
study. Sainsbury has been selected for this assignment, and its financial statements are
evaluated under this study to determine its overall performance. This study emphasizes on
various concepts such as examining different kinds of resources, assessing the financial
information from the financial statements, identifying tangible and intangible resource and
focusing on the costing system used by an entity. Further second part of the study is based on
an evaluation of investment appraisal techniques that can be used by the organisation while
making an investment in the international market. Along with this different technique for risk
recording, measuring and monitoring will be explained.
TASK 1
Background of company
Sainsbury is a public limited company which is listed under FTSE 100 index which is a
supermarket which provides all the grocery stuff along with all other stuff under a single roof.
The foundation of this company started in the year 1869 in the centre of the United Kingdom
is London. John James is a founder of this company as a single supermarket which now
transformed into a long chain of supermarkets. It is ranked as a second largest owner of a
supermarket in the UK after Tesco (Sainsbury, 2018). Tesco is the biggest competitor of this
company that provides quality oriented services n satisfying all its customers. The increasing
competition imposes by Tesco will increase the overall difficulty of Sainsbury in modifying
its business practices to steal the attention of most of its buyers.
This company is listed on the London stock exchange to enjoy the benefits of the external
market due to fluctuations takes places in the market volatility. Entities who maintain its
position in the highly fluctuating market will able to beat all its market rivals easily
(Asgharian, Christiansen and Hou, 2018). Increasing or decreasing changes takes places in
the market will reflect the position of an entity to guide its investors before investing in
Sainsbury when various competitive options available in the market that generates a higher
return to the investor.
1

Evaluation of the impact of three key resource decisions assessing the internal as well as the
external performance of an organisation and also evaluate its risks along with the tools and
techniques.
There are three kinds of resources required in an entity as these three resources act as a basic
pillar in bearing the load of the overall business. A business is a mixture of various elements
which includes the generation of the end products by processing all the raw materials feeds
into the system. Sainsbury is a supermarket retailer which provides both raw as well as
finished products under its single roof to satisfy all its customer’s visits in its supermarket
which require all these three resources such as human resources, financial resources, and the
information resources (Cooke, 2018). Human resources are one of the important types of
resources required by an entity so as by Sainsbury in presenting all its products in front of its
customers as meeting the needs of its customers is the basic motive of the Sainsbury as it
exists in a service industry.
Human resource management system is a separate concept which explains the selection of a
candidate as per the existing requirement of the firm. A human resource manager appointed
by every organization is to hire employees for an entity after judging the eligibility of a
candidate as according to the organization culture and its requirements (Cascio, 2018).
Human resource manager bridges the communication between employee and employer by
conveying all the information announced by an employer which is essential in retaining all
the personnel with the organization for a longer time (Ansong and et al., 2018). Just in the
case of the Sainsbury, various kinds of employees required by an entity such as store
supervisors for taking care about the products stored in warehouses, billing department for
handling the daily selling of the products in a supermarket by all the customers, customer
service cell deal with the queries and the suggestions of its existing or potential customers by
announcing new offers to attract the attention of its users towards the newly launched
products (Agnihotri and Agnihotri, 2018). All these kinds of employees are required by
Sainsbury for its business operation as an entity is not run by a single person as this requires
the support of all the users such as internal as well as the external users associated directly or
indirectly with the company in inducing the performance of the firm (Han, Chen and Li,
2018).
Finance is considered as the heart of the business without which the existence of the same is
not possible just like an individual can’t survive without its heart (Sull, Turconi, Sull and
2

Yoder, 2018). The heart is considered as the main component behind the life of a person just
like in the case of a business where an enterprise requires initial capital to start its own
business as operating of an entity requires funds to meet the expenses incurred in the business
lifecycle. Current business is run on credit which requires working capital to meet the routine
daily expenses of a business concern which requires the fund to meet the uncertain
difficulties takes places in an enterprise (Banerjee, Sing, Chowdhury and Anwar, 2018).
There are three kinds of financial resources used by an individual in meeting its monetary
requirements such as short term, medium term, and long-term financial resources. Sainsbury
can use variety of financial resources according to its requirements as they can take bank loan
in which they have to pay principal along with specific percentage of interest for the finance
taken from the lenders Disadvantage of the bank loan is that an individual has to give
collateral security before taking loan and also to pay higher amount of interest on the loan
taken by an entity. For the new start-up entity, existing investors provide venture capital in
the form of seed capital to start the business by an entrepreneur on its own by utilizing its
skills and knowledge. Sainsbury can issue equity shares and can take the help of debentures
for meeting the long-term requirement of an entity. Several benefits of equity shares and the
debentures will guide Sainsbury to consider the most desirable approach which meets all its
needs and the expectations (Aviso and et al., 2018). Debenture can use by an entity to raise
the fund where an entity needs to pay the principal amount taken by a business from its
lenders along with the coupon interest rate attached with the debentures issued by a business
as this will reflect as a liability in the financial statements of the company. On another hand,
equity shares raised by the company will show as equity in its financial statements as the
equity shareholders will become the owners of the company and also possess a share in the
firm by getting voting rights in accordance with the amount share held in an entity.
The last type of resource which also plays a significant role in an entity is the information
resources which an entity required before crafting any strategy for generating fruitful results
for an entity. An entity requires information about it existing performance by assessing its
overall financial performance with the help of the preparation of the financial statements and
all the financial ratios (Su and Hildreth, 2018). Important information used by the firm about
the existing or the potential market competition which helps in forming a novel and unique
strategies to curb the current competition and also to attract the customers towards its
products (Ghobakhloo and Azar, 2018). Sainsbury tries to search the information about its
competitors such as Tesco and Adi about its existing product’s prices and then create its
3

product catalogue to bring the attention of loss of its buyers. A marketing manager of
Sainsbury will seek information about the population of the area in which the firm has
located its supermarket to know the interest about the customers to offer quality oriented
services to all the users.
As a retailer, Sainsbury will use budgeting method for the planning and the resource
allocation of all these resources mentioned above. Identifying and selecting of the resource in
an entity is not enough as allocation on the same play a significant role as this helps on
accomplishing all the goals and the objectives of an entity within a short span of time. An
entity prepares the budget to keep track of all its resources used in a business. The expenses
and the income earned by Sainsbury can track by preparing budgets to know the ability of an
enterprise in producing the overall results (Thanuskodi and Kalyani, 2018). Different kinds of
budgets prepared by an entity such as sales, purchases, expenses, master budget, cash budget
in fulfilling various needs and the expectations of its business. The results of the budgets are
compared with the standard criteria’s develops by the firm to make the corrective action
when the actual result is less than the standard returns and also to know about the deficiency
incurred in a business.
It is essential to know the consequences of meeting the strategic objectives of business due to
inadequate resources available with an enterprise. When Sainsbury requires human resources
for the vacant post in the firm will affect the firm badly as the strategic aims, and the
objectives of the firm will not get achieved with on a stipulated deadline as the firm did not
find the suitable candidate according to the current requirement (Kuroki, Hirose and
Motokawa, 2018). Due to inadequate resources identified by the firm will show its inability
in searching for different candidates as their motive is to select the best suitable candidate for
the current enterprise (Gupta and et al., 2018). This action will bring down the image of
Sainsbury in the external market as investors will not invest in an enterprise that is not able to
meet its goals as compared to all its rivals existing in a similar line of business.
Analyze the financial statements of an organization to determine the financial viability
Assessing of the financial information will help in determining the actual picture of
Sainsbury by presenting the financial position of an entity as against to its competitors in the
retail industry. It is essential to know the position of an entity in the UK retail industry before
adopting any opportunity by testing the calibre of the firm to know its overall importance. A
researcher will find different sources of collecting monetary information reflecting the
4

efficiency or deficiency of the firm (Miller, 2018). The standard set of financial statements
prepared by every entity an also by Sainsbury includes an income statement, statement of
financial position, cash flow statement and changes in equity statement. All these statements
play an integral role in showcasing the increasing or declining performance of Sainsbury due
to both internal as well as the external stakeholders affecting the performance of the firm
(Sani, Amboningtyas and Yulianeu, 2018).
Income statement depicts the overall profitability earned by an entity within a particular time
period includes three criteria’s such as gross profit, operating profit and finally the net profit
earned by a firm. Gross profit shows the raw profit earned by Sainsbury by just excluding the
amount of cost of goods sold to know the burden of cost on the earning capacity of the
business or not (Al-Malkawi and Pillai, 2018). Operating profit emphasizes on all the
operating costs such as wages, salary, and rent of the premises payable by an entity whose
effect is shown on the entire earnings. Net profit is a profit determined after deducting all the
expenses and most important deducting the taxation to analyze its burden on it (Laitinen,
2018).
Balance sheet specifies the assets and the liabilities which need to be balanced at the end of
the year to maintain the financial stability in business as fluctuating balance will result into
the excessive burden of costs on an entity.
Cash flow statement includes the cash inflow in the business and outflow from the business
to know the performance of Sainsbury to meet its financial difficulties within a short span of
time or not.
Particulars Formula 2016 2017
Sales 23506 26224
GP 1634 1855
GP ratio GP/Net sales*100 6.95% 7.07%
Operating Profit 707 642
Operating profit ratio Operating Profit/Net sales*100 3.01% 2.45%
Net Profit 471 377
NP ratio Net profit/Net sales*100 2.00% 1.44%
Liquidity Ratios
5

Current assets 4444 6312
Current liabilities 6724 8573
Current ratio Current assets/Current liabilities 0.66 0.74
Total assets 16973 19737
Asset Turnover Sales/Total assets 1.38 1.33
Debt 2053 625
Equity 6375 6872
Debt to equity ratio Debt/equity 0.32 0.09
(Data Source: Sainsbury PLC, 2017)
2016 2017
6.88%
6.90%
6.92%
6.94%
6.96%
6.98%
7.00%
7.02%
7.04%
7.06%
7.08%
GP ratio
GP ratio
Interpretations
Gross profit shows the imposition of the cost of goods sold in an entity when the sale amount
is not sufficient to meet the overall cost incurred by an entity. In the above column chart, the
performance of Sainsbury is increasing from 2016 to 2017 as in comparison with the costs of
goods sold; the sales and the revenue earned by an entity are higher to meet all the existing
costs incurred.
It is recommended to Sainsbury firm to maintain this position by creating a tracking system
of inventories to keep a record all the inventories purchases by an entity as per the
requirement by using just in time inventory system to purchase inventory only when it's
required.
6

2016 2017
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
Operating Profit ratio
Operating Profit ratio
Interpretations
Declining position is reflected in the above chart depicts the deficiency lies in Sainsbury as
its operating costs are higher than its earnings. This position occurs when the operating costs
exceed the operating profits.
It is suggested to an entity to adopt expenses regulation system to pass transaction above the
limit of some amount need to enclose the initials of the higher authority.
2016 2017
0%
1%
2%
Net Profit
Net Profit
Interpretations
7

Decreasing amount of net profit shows the overall burden of taxation imposed on Sainsbury
will get decreased by taking tax deductions.
Sainsbury is suggested to take taxation advice from the tax consultants to reduce its tax
amount.
2016
2017
0.62 0.64 0.66 0.68 0.7 0.72 0.74
Current Ratio
Current Ratio
Interpretations
Current ratio tests the liquidity of the business and also to test the short-term solvency of
Sainsbury from one period to another. The firm’s liquidity has increased from 2016 to 2017
due to higher current assets held by an entity as compared to the overall amount of current
liability.
It is recommended to Sainsbury to invest the increasing amount of cash in various investment
schemes to generate returns on it rather than savings the same in the business entity.
8

2016 2017
1.3
1.31
1.32
1.33
1.34
1.35
1.36
1.37
1.38
Asset Turnover
Asset Turnover
Interpretations
Asset turnover shows the utilization of all the assets in generating sales and the revenue in an
entity. Above figure shown in the chart is worst as the performance of an entity is decreasing.
It is suggested to Sainsbury to keep track of all the assets of an entity to utilize the same in an
entity in generating higher results for the business.
2016
2017
0 0.05 0.1 0.15 0.2 0.25 0.3 0.35
Debt to equity
Debt to equity
Interpretations
9

This chart shows the burden of debt on an entity as compared to the equity component held in
a business whose result is clearly visible in the growth of an entity from one period to
another.
It is suggested to an entity to decrease the amount of debt held by a firm by increasing the
income sources to generate cash to eliminate the excessive debt in the capital structure of a
business.
Various strategies in monitoring and evaluating the organization’s intangible and tangible
resources of the organization
Sainsbury has both tangible as well as intangible assets held in its business and also this
information is shown in the balance sheet of an entity which reflects the overall financial
position of an entity within a specific period of time (Wang, Hong, Kafouros and Wright,
2018). Tangible resources are the resources which can be seen and touched, and on another
hand, intangible resources cannot be seen and touch as its presence can be felt by an
individual.
Sainsbury’s tangible resources include land ad plant, equipment, and property which held for
the long-term period in an entity on which an entity charges depreciation according to the
diminution of the value of the plant, property, and machines from one period to another.
Intangible resources of the firm include goodwill which shows the image of the business in
the external market as various rational actors play an integral role in inducing or suppressing
the overall performance of an entity (Liu and Liu, 2018). Another kind of intangible assets
included in the business of Sainsbury includes intellectual property resources which are
important in safeguarding it from all other competitor’s of the business in the current market.
It includes copyright and trademark rights taken by Sainsbury for its business and logo and
all other products launched by the firm to protect it from imitating by its users.
For monitoring of these resources used in the Sainsbury, it is essential to use an appropriate
measure to tests the capability of an entity. Benchmarking technique will use by Sainsbury to
improve its overall performance from one period to another. By using this technique,
Sainsbury can judge its actual performance by comparing it with the best practices of the
10

overall industry say for example comparing the performance of Tesco as they capture the
overall market by getting the first position on the market.
Importance of costs in pricing strategies and recommend improvements to Sainsbury’s
existing costing system. Explanation of various kinds of costing and selection of suitable
costing system
Cost plays an integral role in an entity as it is important to know the number of overall costs
incurred by an entity to include the same in the pricing strategies created by a firm. There are
two kinds of costs such as fixed as well as a variable cost which will include in the product’s
prices (Gonçalves, Gaio and Silva, 2018). Fixed costs remain the same without getting
affected by the production of the business. On another hand, variable costs are directly
proportionate to the volume of production as with zero level of production there is no
variable cost.
Sainsbury follows cost-plus pricing and competitive pricing strategies for all of its products
to earn a profit and at the same time attract a crowd of customers towards its quality oriented
services as compared to their rivals (Jorgensen, Lee and Oh, 2018). It is suggested to
Sainsbury to reduce their margin in the peak season to capture the market of their rivals.
Two kinds of costing available out of which an entity will consider the best suitable mode
such as absorption costing as well as the marginal costing. Absorption costing is also known
as full costing in which both the fixed as well as variable costing is consider while
crafting the pricing strategies to cover the overall cost complexities of an entity. Marginal
costing only considers the variable costing by ignoring the fixed costs which are an
incomplete method of costing (Gonçalves, Gaio and Silva, 2018). It is recommended to
Sainsbury to select Absorption costing method which will include all the costs incurred by an
entity to craft the pricing strategies.
TASK 2
Evaluation of investment appraisal techniques and alternative source of finance available to
business
Investment appraisal techniques
11

Investment appraisals aim to assess the project viability, portfolio or procedure decisions and
the generated value. In terms of business, the main aim of investment appraisals is to have
value upon benefits for justifying the costs. It is significant to assess the investment benefits
in financial context (Gotze, Northcott and Schuster, 2016). The major investment appraisals
techniques that can be used by ABC Company are accounting rate of return, net present value
and payback period.
Accounting rate of return: This type of investment appraisals makes comparisons of profits
that the company is expecting to earn from an investment to the invested among. It is
generally gauged as the net annual profit companies expects on the working life of the
investment project, made comparison of the same with the net invested capital amount.
Further, this capital investment technique makes a comparison of the profits which can be
gained by a proposed project to the initial investment capital amount that would be needed
for the cited project (Götze, Northcott and Schuster, 2015). Projects having the capacity to
earn higher return rate are given more priority over the lower return rate. ARR is said to be a
non-discounted type of investment appraisals, and it does not consider the engaged time value
of money.
Net Present Value: NPV capital investment appraisal evaluates the cash inflows, if or if not
extra or less, after the satisfaction of general financial commitments (Baum and Crosby,
2014). All the capital investment appraisals are having the same goal of driving towards an
affirmative NPV, it is a calculation based on mathematics engaged with net cash flow at a
specified period of time at discounted rate simultaneously that is initial capital outflows
(Žižlavský, 2014). Therefore, there is an opposite relative relationship among discounted rate
and net present value. Moreover, a higher discounted rate can make a reduction in NPV of
capital, while a higher interest rate can make increment in the discounted rates over time and
most of the capital investment appraisals are aware of the same increment.
Payback period: This technique of capital investment appraisals is an easy technique to assess
an investment by the time period in terms of length which will be required to repay the same.
It is generally a non-payment technique for small-scale business and gives more
consideration of cash flow rather than profits. This technique is based on the time that would
be considered to obtain the initial investment by the company. Payback period is considered
12

as the easiest means, projects having short-term payback are generally favoured for
investment while compared to those with long-term payback period.
Sources of finance
Long-term source of finance
Equity finance is the renowned financial source for a company to meet its long-term needs, as
the capital is raised by business on an internal basis. By this, the company is able to save the
cost of interests, with the careful planning for equity finance; the company can ensure
business growth and expansion. This source of finance can be obtained easily, leading to
higher potential growth while a continuous flow of interest of equity financers (Barton and
Wiseman, 2014). The major sources for equity financing are initial public offering, venture
capital, institutional investors, corporate investors and retained earnings.
Another option for long-term financing is debt financing, in this financial source business
lends money from lenders at an interest which is fixed for a fixed period of time. Major
sources of debt financing are trade credit, loans, instalment purchase, bonds, insurance
companies and lenders based on assets (Huang, Ritter and Zhang, 2016). In this financial
source, ownership is free of dilution, while the business is offered a leverage benefit. The
borrowed funds costs are also low, as it is a deductible expenditure.
Short term source of finance
ABC Company can make use of bank overdraft and credit from suppliers as Short-term
source of finance, and the same are enumerated as below:
Bank overdraft: A bank overdraft is a credit extension from a borrowing institution occurred
when the account is reached at nil position. Overdraft refers to that bank facility which allows
business to lend a fixed amount of money (McGuinness and Hogan, 2016). An overdraft
financing is offered when firms do transactions from their current account of business
surpassing the accessible cash balance. This facility of over drafting allows businesses to
acquire short-term financing. Bank overdraft is a common means to finance small as well as
medium scale entities, and are sound financial sources for business having financial
requirements on the fluctuated basis (Lee, Sameen and Cowling, 2015).
13

Credit from suppliers: Trade credit is a significant external financial source to raise working
capital. It is said to be the short-term credit expanded by good and services suppliers in a
regular business source, to the business for improving their sales metrics and targets (Detzer
and et al., 2017). Trade credit takes place when the supplier of products and services enables
the business to make payment of purchased products and services at the later basis. Trade
credit is one of the simplest and significant financial sources to fund short-term financial
objective of business. It is a short-term financial source that is comparatively easy to arrange
and set-up (Foley and Manova, 2015).
Application of investment appraisal techniques
Net present value
Statement showing Cash Flows of the concern if the investment is made in the US
(In
GBP)
Particulars Year 0 Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Avg Spot Rate 2.1 2.1 2.2 2.3 2.1 2.25 2.5
Expected Revenue (In
USD) 0 70000
0.00
70000
0.00
70000
0.00
70000
0.00
70000
0.00
70000
0.00
Expected Revenue (In
GBP) 0 33333
3.33
31818
1.82
30434
7.83
33333
3.33
31111
1.11
28000
0.00
Estimated running
Expenses (In GBP) 0 21000
0.00
21000
0.00
21000
0.00
21000
0.00
21000
0.00
21000
0.00
Cash Flow before
deducting Approval Fee 0 12333
3.33
10818
1.82
94347
.83
12333
3.33
10111
1.11
70000
.00
Discounting Factor @
10% 1 0.909 0.826 0.751 0.683 0.621 0.564
Present Value of Cash
Flows 0 11211
0.00
89358
.18
70855
.22
84236
.67
62790
.00
39480
.00
Advance Approval Fee (In
GBP)
22000.
00
22000
.00
22000
.00
22000
.00
22000
.00
22000
.00 0.00
Discounting Factor @
10% 1 0.909 0.826 0.751 0.683 0.621 0
Present Value of Approval
Fees 22000 19998
.00
18172
.00
16522
.00
15026
.00
13662
.00 0.00
Net Present Value if
Investment is done in US -22000 92112
.00
71186
.18
54333
.22
69210
.67
49128
.00
39480
.00
14

Total Net Present Value 353450.07
Particulars Year
0
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Avg Spot Rate 1.80 1.8 1.9 2 2.1 1.95 1.9
Expected Revenue (In Euro) 0.00 45000
0.00
45000
0.00
45000
0.00
45000
0.00
45000
0.00
45000
0.00
Expected Revenue (In GBP) 0.00 25000
0.00
23684
2.11
22500
0.00
21428
5.71
23076
9.23
23684
2.11
Estimated running Expenses
(In GBP) 0.00 19000
0.00
19000
0.00
19000
0.00
19000
0.00
19000
0.00
19000
0.00
Cash Flow before deducting
Approval Fee 0.00 60000
.00
46842
.11
35000
.00
24285
.71
40769
.23
46842
.11
Discounting Factor @ 10% 1.00 0.909 0.826 0.751 0.683 0.621 0.564
Present Value of Cash Flows 0.00 54540
.00
38691
.58
26285
.00
16587
.14
25317
.69
26418
.95
Advance Approval Fee (In
GBP)
2500
0.00
25000
.00
25000
.00
25000
.00
25000
.00
25000
.00 0.00
Discounting Factor @ 10% 1.00 0.909 0.826 0.751 0.683 0.621 0
Present Value of Approval
Fees
2500
0.00 22725 20650 18775 17075 15525 0
Present Value if Investment
is done in France
-
2500
0.00
31815
.00
18041
.58
7510.
00
-
487.8
6
9792.
69
26418
.95
Total Net Present Value 68090.36
Royalty Fee Payment 25000.00
Net Present Value if
Investment is done in France 43090.36
Statement showing Cash Flows of the concern if the investment is made in
Switzerland
(In
GBP)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Avg Spot Rate 10 12 14 12 13 14
Expected Revenue (In CHF) 380000.
00
380000.
00
380000.
00
380000.
00
380000.
00
380000.
00
Expected Revenue (In GBP) 38000.0 31666.6 27142.8 31666.6 29230.7 27142.8
15

0 7 6 7 7 6
Estimated running Expenses
(In GBP)
200000.
00
200000.
00
200000.
00
200000.
00
200000.
00
200000.
00
Licensing Fee 30000.0
0
30000.0
0
30000.0
0
30000.0
0
30000.0
0
30000.0
0
Inspection Cost 0.00 0.00 70000.0
0 0.00 0.00 70000.0
0
Net Cash Flows
-
192000.
00
-
198333.
33
-
272857.
14
-
198333.
33
-
200769.
23
-
272857.
14
Discounting Factor @ 10% 0.909 0.826 0.751 0.683 0.621 0.564
Present Value of Cash Flows
-
174528.
00
-
163823.
33
-
204915.
71
-
135461.
67
-
124677.
69
-
153891.
43
Total Net Present Value -957297.84
Decision table
Statement showing NPV's in Different Countries
Sr. No. Particulars Amount in GBP
1 US 353450.07
2 France 43090.36
3 Switzerland -957297.84
International expansion should be done in the USA as this project is expected to provide
highest net present value to be a company1.
Explanation of risk related to expansion in the international market
In a situation where a firm makes decisions to get involved in global financing activities, it
bears further risks as well as opportunities. These major risks are related with the business
involved in international finance inclusive of political risks and foreign exchange risk.
Sometimes, these risks might form complexity to manage ongoing and relevant revenue.
Further, the organization involved in international finance operations can have a higher
tendency of uncertainty within their revenues. With unstable and unforeseeable revenue
stream, it will be difficult to conduct business operations smoothly (Titman, Keown and
Martin, 2017). Apart from the negative factors, international business can capture
opportunities for low costs for resources and higher lucrative market.
1 ARR and payback period cannot be computed as initial investment is not given
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A business plan for risk management is engaged in identification, assessment and
development of business strategies to effectively manage risks. It is considered as an integral
element for any type of business plan; this will help the business in preparing and addressing
certain risk exposures related to economic recession (Burtonshaw-Gunn, 2017). Methods and
ways are present by which a firm can cope with these risks exposures, the distinct techniques
for monitoring and recording risks are presented as below:
Risk management based on capital: For maintaining an offset among risk exposures and
returns while ensuring the effectiveness of business from an entire perspective, ABC is
required to use the risk management method based on capital. In this technique, risk capital is
measured by the company on the value at risk basis, as an ideal measure of operational risk,
market risk and credit risk, while considering the related characteristics as well as the
business operations of ABC Company (Com and II, 2016). Further, the company is required
to assign capital in an appropriate manner to every unit to take the entire exposure to several
risks present in the range of resources that is capital. In terms of market risk and credit risk,
the company must establish maximal limits of risks capital, which can make an indication on
the maximal risks that might be considered at that time period, along with the stress level set
in the business plan. Moreover, for operational risk, the company must assign risk capital as a
whole, while setting entire assignments of risk capital in the capital structure (Chan and
Wong, 2015). Further, the limits of risk capital are categorized into plans or guidelines for
every business inclusive of loss limits. Hence, by observing carefully the loss limits and other
related factors, ABC must manage the operations of the business as a large.
Stress testing: By considering the volatility in a business environment, the use of stress
testing is a very important technique to analyze and gauge the adverse impacts of situations
like economic downturn and market instability on the financial conditions and business
operations of financial institutions in immensely important (McNeil, Frey and Embrechts,
2015). While creating a management plan as per the requirement, ABC is required to form
certain scenarios like global economic slowdown and perform a stress testing in order to
assess the expected financial influence on the business, so that action and plans can be
prepared to address stressful situations. Furthermore, ABC must put a system that allows
flexible and dynamic control over operation during a sudden change in the business
environment.
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ABC must also conduct frequent meetings with the business, reliable departments and risk
management units for the aim to reach the common goals and understanding of changing the
environment, with proper discussions on stress situation creating a direct impact on business
activities. Along with this, the company must perform a regular review and get responses
during the emergence of stress situations. The implementation process of stress testing is
categorized into two procedures; scenario establishment and assessment and analyses of
financial effects (Bromiley and et al., 2015). By considering the economic environment and
international trends at the present time, largely potential scenarios on the indicators of macro
economy inclusive of the foreign exchange rate, GDP, interest rate and price are established.
Based on the macroeconomic effect of every scenario been established on several distinct
financial aspects, ABC must analyse and assess the effect of financial aspects on common
equity.
CONCLUSION
The present study shows that it is essential for corporate entities to conduct financial planning
for ensuring availability of funds at the time of requirements while considering effective
strategies to employ funds in a viable manner. It will help in ensuring that the arrangements
of funds are made in an appropriate capital framework. It is summarized from the above
assignment that Sainsbury chooses absorption costing method costing in crafting its pricing
strategies as this is the most suitable technique as compared to all other technique. The
financial performance of Sainsbury is clearly visible in this report as its profitability is
declining from one period to another which depicts its lack of efforts in improving its
performance. Except for current ratio of the Sainsbury, its asset turnover is also declining
which is fruitful for an entity which requires improvement. Further, companies are required
to apply appropriate investment appraisal techniques to make viable financial decisions. For
international expansion company is required to consider risk mitigation strategies to be
proactive for future contingencies.
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