Financial Analysis of Sainsbury's

This assignment requires a financial analysis of Sainsbury's. It involves evaluating the company's financial performance, operational efficiency, and identifying key strengths and weaknesses. The analysis should be supported by relevant financial data and industry benchmarks. The report utilizes various financial ratios and tools to assess Sainsbury's current position and future prospects.

MFRD

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Identifying sources of finance available to business.............................................................1
1.2 Implications of sources of finance identified.........................................................................2
1.3 Appropriate source of finance for business project...............................................................2
2.2 Cost of each source of finance...............................................................................................3
2.2 Importance of financial planning...........................................................................................3
2.3 Information need of external and internal decision makers...................................................4
2.4 Impact of finance on financial statements.............................................................................4
3.1 Analyzing budget and making decisions...............................................................................5
3.2 Calculation of unit cost and making pricing decisions..........................................................6
3.3 Assessing viability of project using investment appraisal.....................................................6
PART B...........................................................................................................................................8
TASK 2............................................................................................................................................8
4.1 Main financial statements......................................................................................................8
4.2 Describe and compare format of different financial statements............................................8
4.3 Ratio analysis.........................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Managing financial resources plays the most crucial role in the organization as it is well
known fact that without finance, no business can survive in the market for longer period of time.
Further, business has to indulge into proper practices so that its long term aims can be
accomplished through financial planning. Moreover, while launching new business in the
market, it is necessary for management to manage all the range of financial resources as it can
bring favorable results for business (Carroll, 2007). Apart from this, different sources are present
which company can consider for satisfying its financial needs and it involves internal and
external one. For conducting the present study, entrepreneur is planning to launch new business
that can be both rewarding along with demanding. For successful implementation of the new
company, it is required for top officials to manage finance as a key resource in an effective
manner. Various tasks have been covered in the present study which involves sources of finance,
costs of different sources of finance, calculation of unit cost etc.
PART A
TASK 1
1.1 Identifying sources of finance available to business
Different sources of finance are available with new business which management can
undertake for satisfying its financial needs. Such sources are present both internally and
externally with the help of which it becomes easy for business to carry out its overall operations
in the market. Such sources are as follows:
 Bank loan: It is possible for new business to satisfy financial needs by taking loan from
financial institutions present in the market (Conesa and Martínez, 2004). By considering
this source, it is possible for business to enhance its liquidity position and can provide
long term benefits in near future.
 Issue of shares: Newly established venture can issue shares in the market and through
this, financial needs of the business can be satisfied by obtaining funds from investors.
This can be fruitful for business and can assist in long term expansion also (Types and
Sources of Financing for Start-up Businesses, 2015).
 Owner’s capital: This source of finance is also effective for new business where
entrepreneur can invest own capital for satisfying financial needs. It is considered as one
of the cheapest sources and overall operations of business can be carried out easily.
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 Reduction of working capital: For satisfying overall financial needs, it is necessary for
business to manage its working capital so that larger funds can be saved easily for
carrying out overall operations in the market (Daskalakis and et.al., 2013).
1.2 Implications of sources of finance identified
Each and every source of finance identified for satisfying financial needs of business has
direct implication of company which management has to consider so that all the operations can
be carried out smoothly and in an appropriate manner. Main implication of bank loan as a source
of finance is that business has to pay large amount to banks in the form of interest due to which
expenditure level rises. Further, it is required to repay amount on the monthly basis which has
also direct impact on company (Fakhfakh, Zouari and Zouari-Hadiji, 2012). Issue of shares is
also one of the sources identified for business through which financial needs can be easily
satisfied. Main implication of this source is that voting rights to investors are transferred and it is
required for business to distribute profits in the form of dividend which also increases
expenditure level of the company. Owner’s capital is also one of the sources identified for
business where its implications are declined in overall savings of the company which have
unfavorable impact on entrepreneur. Therefore, these are some major implications of the sources
of finance which business has to consider for conducting overall operations in an effective
manner.
1.3 Appropriate source of finance for business project
All the sources identified for new business with the motive to satisfy financial needs are
appropriate, but after considering its implications, it is necessary to select the most appropriate
one. Bank loan is one of the most appropriate sources of finance where new venture can obtain
loan from bank at an agreed rate of interest (Gaskell and Ashton, 2008). Further, undertaking this
source can enhance liquidity position of the company and it will become easy to carry out all the
operation in an effective manner. Apart from this, considering owner’s capital as a source of
finance will also be appropriate for business where entrepreneur can utilize own savings for the
new venture. These two sources of finance are favorable for business after considering its
implications. Apart from this, undertaking advantage along with disadvantage of every source of
finance assist business to avoid unfavorable situation such as inadequacy of finance.
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2.2 Cost of each source of finance
Sources of finance considered by business contain some cost which organization has to
undertake with the motive to operate efficiently. Issue of shares as a source contains dividend
cost where it is required for business to provide return to its investors in the form of dividend.
Apart from this, it directly increases expenditure level of the business. Bank loan as a source of
finance contains interest cost where company has to pay interest on the amount obtained through
financial institutions (Grewal and et.al., 2011). Therefore, it is also regarded as costly for
business and such costs have to be considered in advance for the betterment of business. On the
other hand, owner’s capital as a source of finance is not regarded costly for the company as it is
the capital invested by entrepreneur for conducting overall operations. Along with this, it is one
of the most commonly adopted source of finance that is mostly used by all the firms operating in
the market. In short, by considering different sources of finance, company has to bear different
type of costs and it is required to determine the overall impact of cost in advance.
2.2 Importance of financial planning
In order to operate successfully in the market, it is required for new business to indulge
into practices of financial planning so that overall operations can be carried out in an effective
manner. By considering the present scenario, entrepreneur is planning to launch new project due
to which financial planning is necessary (Drake and Fabozzi, 2012). Through proper planning,
business can easily allocate all the key resources in an effective manner and it assists in the
accomplishment of long term aims and objectives. Further, it is possible to maximize
profitability level of the company and overcome situations such as inadequacy of funds can be
tackled easily which is one of the main motives of business. Apart from this, the present business
needs some amount which can be invested for conducting operations smoothly. Therefore, in
such case, financial planning can provide proper support to the new venture. Further, the overall
importance of this planning has been discussed below:
 It supports in ensuring reasonable balance between outflow and inflow of funds.
 Assists in reducing the uncertainty with regarding to changing market trend.
 Helps in maintaining proper balance between inflow and outflow of funds.
 Supports in ensuring that adequate funds are left for carrying out operations in the
market.
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So, these are some of the key importance of financial planning which provides large number of
benefits to the business and management of financial resources becomes much easier for
business which is one of the main objectives of company (Dyson, 2003). Apart from this, it can
provide base to the new business in efficient utilization of all the resources which are associated
with its growth.
2.3 Information need of external and internal decision makers
Individuals associated with the organization are interested in gaining different types of
information associated with the business and this allows them to take effective decisions which
satisfy their personal needs. Main decision makers of business are employees, customers,
shareholders, government etc. Internal decision makers of company are employees and
management (Götze, Northcott and Schuster, 2008). Staff members are interested in knowing the
overall financial performance of business as through this, it is possible for them to take decision
whether to work in the company for longer period of time or not. Further, management is
interested in gaining information regarding liquidity and profitability position of the company as
through this, expansion and other types of decisions can be taken easily. On the other hand,
external decision maker of firm is shareholders who are interested in knowing the profitability
position of enterprise. Further, investment decision of investors totally depends on the profits
earned by business and this assists shareholder in knowing whether to allocate funds by
purchasing shares of the company or not. Therefore, in this way, information need of external
and internal decision makers differs from each other and it is required for business to provide
them appropriate information with the help of financial statements such as balance sheet, profit
and loss account etc (Needles, 2010).
2.4 Impact of finance on financial statements
Finance has direct impact on financial statements and it directly depends on the range of
sources employed by business for satisfying its financial needs. In case, if business undertakes
source of share issue then amount of same is shown in the liability side of balance sheet and
dividend paid is highlighted in cash flow statement of the firm. Both statements such as balance
sheet and cash flow are affected when business considers this source of finance. Further, when
bank loan is undertaken as a source of finance then it is shown in the liability side of balance
sheet and interest expense are shown in the income statement of enterprise (Nickels, McHugh
and McHugh, 2011). Apart from this, when owner’s capital is used as a source of finance, then it
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has also direct impact on the balance sheet of business and it is also highlighted in the statement.
In short, finance has direct impact on the financial statements of business and it supports in
knowing the range of sources adopted by business for satisfying its financial needs. Every source
undertaken by business has impact on statements such as balance sheet, profit and loss account
etc. and due to this reason, it is the duty of management to determine well in advance whether
the source chosen will have positive or negative impact on the company.
3.1 Analyzing budget and making decisions
Budget is regarded as the process of determining profit and loss for a given period of
time. Further, it supports in the allocation of resources in an appropriate manner. The budget
shown below helps in knowing the forecasting of cash in time period of six months.
Particular Jan Fab March April May June July
Balance 3700 2290 3260 1960 -900 -260 780
Revenue 2300 1200 1200 3200 4100 4100
Total cash
inflow(A) 3700 4590 4460 3160 2300 3840 4880
Purchase 600 700 1300 2500 1100 1500 1400
Manufacturing
overheads 250 150 400 500 900 1100 1200
Other expenses 350 220 550 700 200 200 1000
Rent 90 150 140 220 250 100 100
Bank loan 120 110 110 140 110 160 150
Total cash
outflow 1410 1330 2500 4060 2560 3060 3850
Surplus/deficit 2290 3260 1960 -900 -260 780 1030
Above shown is the cash budget of enterprise which highlights that overall expenses of
the business are rising at faster pace such as manufacturing, rent, bank loan etc. On the basis of
this budget, it is required for business to take corrective actions so that overall expenditure level
can be reduced with the help of this. Further, revenue level of the company is also not stable due
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to which decisions have to be taken in relation with the ways through which income level of
business can be enhanced.
3.2 Calculation of unit cost and making pricing decisions
Particular
Per unit
cost Cost of 50 units
Variable cost 55 2750
Fixed cost 25 1250
Total cost per unit 80 4000
Mark up 24 1200
Selling price per unit 99 4950
Above shown is the calculation of unit cost of new venture. As per the information
provided, business has to produce 50 units of goods. Further, variable cost is 55 and fixed is 25.
For the production of single commodity, it becomes 80. Mark up price is 24 and for the single
commodity, overall selling price per unit will be 99. Therefore, in this way, unit cost is
calculated. On the other hand, costing is regarded as very important at the time when pricing
decisions are taken by the management as prices of any commodity are set by considering
different types of costs such as fixed, variable etc (Rasid and et.al, 2011). This supports business
in earning higher profits and all the major costs can be recovered easily which is beneficial for
company also. Apart from this, it is well known fact that to recover major costs is one of the
main motives of every business and same can be accomplished by setting appropriate prices for
the range of commodities offered to customers.
3.3 Assessing viability of project using investment appraisal
In order to allocate funds in a right proposal, it is necessary for business to undertake
investment appraisal techniques and it supports in knowing which project is feasible for business
in terms of profitability and amount can be recovered easily. Following are the investment
appraisal techniques which new business can undertake:
Payback period: This technique is considered to be most effective as it supports in knowing the
time period in which the invested amount can be recovered easily (Sherman, 2012).
Year Project A Project B Cumulative
cash flow of
Cumulative cash
flow of Project B
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Project A
0 -15000 -20000 -15000 -20000
1 4000 5000 -11000 -15000
2 4500 4500 -6500 -10500
3 3500 8000 -3000 -2500
4 7000 5000 4000 2500
5 5000 6000 9000 8500
Payback period of project A = 3+3000/ 7000 = 3.42 years
Payback period of project B = 3+ 2500/ 5000 = 3.5 years
Net present value
Year Project A Project B
Discounting
factor @ 10%
P.V of
project A
P.V of
project B
1 4000 5000 0.909 3636 4545
2 4500 4500 0.826 3717 3717
3 3500 8000 0.751 2628.5 6008
4 7000 5000 0.683 4781 3415
5 5000 6000 0.621 3105 3726
Total
present
value 17867.5 21411
Initial
investmen
t 15000 20000
Net
present
value 2867.5 1411
Net present value of project A is 2867.5 and of project B is 1411.
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Therefore, after applying net present value along with payback period technique, it has
been found that project A must be selected by business rather than project B. Allocation of funds
in this project will be beneficial for business.
PART B
TASK 2
4.1 Main financial statements
Employees of Sainsbury plc. prepare different types of financial statements on the basis
of which it becomes easy to know whether all the financial resources are utilized in an
appropriate manner or not. Income statement is being prepared by company through which it is
possible to know that all the activities which are acting as income for business and other
expenses can be known easily. Further, it is possible for business to take corrective actions in
case if expenses are increasing (Mumford, Schultz and Osburn, 2001). Apart from this, cash flow
statement is also prepared which highlights operating, investing and financing activities. All
these activities lead to inflow and outflow of cash for Sainsbury plc. In addition to this, balance
sheet is also prepared by company which supports in knowing the assets and liabilities of
business. These are the three main financial statements being prepared by business and
information in the same are accessed by different parties who are associated with the business
and it assists in knowing the overall performance of company in the market.
4.2 Describe and compare format of different financial statements
Financial statements are prepared by different types of businesses and they have been
discussed below:
 Partnership: It is considered as the agreement between two or more parties who share
profit and loss in predetermined ratio. Main financial statements prepared by partnership
firms are partner’s capital account, P&L app account etc. Through this, it becomes easy
for business to assess its overall performance (Murphy, 2001).
 Sole trader: This type of business carries out operations at very small level. Further, it is
not required for sole traders to prepare any financial statement but usually they prepare
profit and loss account for knowing overall performance of business in the market.
 Limited liability firm: Limited companies comply with the standards such as GAAP and
IFRS. Further, all the statements are prepared as per the guidelines issued. Firms who are
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public limited prepare profit and loss account, balance sheet, cash flow statement etc
(Drake and Fabozzi, 2012).
4.3 Ratio analysis
For knowing overall performance of Sainsbury plc. in the market different ratios have
been calculated
Ratios Formula 2014 2013 2012
Profitability ratios
Gross profit 1377 1277 1211
Operating profit 1009 887 874
Net profit 716 614 598
Net Sales 23949 23303 22294
Gross Profit Ratio (Gross Profit/ Net Sales) *100 5.75 5.48 5.43
Operating Profit Ratio
(Operating Profit/ Net Sales)
*100 4.21 3.81 3.92
Net Profit Ratio (Net Profit/ Net Sales) *100 2.99 2.63 2.68
Liquidity ratios
Current Assets 4362 1901 2032
Current Liabilities 12171 3115 3136
Closing Stock 1005 987 938
Current Ratio
Current Assets / current
Liabilities 0.36 0.61 0.65
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.28 0.29 0.35
Effciency Ratios
Net Sales 23949 23303 22294
Total Assets 16540 12695 12340
Total Assets Turnover
Ratio Net Sales/ Total Assets 1.45 1.84 1.81
Cost of goods sold 22562 22026 21083
Inventory 1005 987 938
Inventory Turnover ratio COGS/Inventory 22.45 22.32 22.48
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Gearing ratios
Debt 2250 2617 2617
Equity 6005 5733 5629
Debt Equity Ratio Debt/ Equity 0.37 0.46 0.46
Net income 716 614 598
Annual Interest Expense 159 142 138
Times Interest Ratio Net Income/ Interest expense 4.50 4.32 4.33
 Profitability ratio: Gross, operating and net profit of Sainsbury have increased from the
year 2012 to 2014. Overall profitability of the business is rising at faster pace and it is
representing growth of business in the market.
 Liquidity ratio: Current along with quick ratio of business have declined which is
representing that business is not having enough cash for carrying overall operations.
 Efficiency ratio: Asset along with inventory turnover ratio of Sainsbury are up to the
mark and they are highlighting that business is capable enough in utilizing its assets
 Gearing ratio: Debt equity ratio of firm has declined which represents that business
highly depends on debt. Further, time interest ratio of company has increased which
states that it is easy for business to pay interest to its creditors easily.
CONCLUSION
From the above study, it has become easy to understand the significance of managing
financial resources. Further, for new business, the recommended sources of finance such as bank
loan and owner’s capital are appropriate through which financial needs can be satisfied easily.
Moreover, the invested appraisal techniques undertaken have supported business to invest funds
in a right project. Apart from this, ratio analysis has assisted in knowing that overall financial
position of Sainsbury is up to the mark and business is operating efficiently.
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REFERENCES
Books and journals
Carroll, N. V., 2007. Financial Management for Pharmacists: A Decision-making Approach.
Lippincott Williams & Wilkins.
Conesa, I. M. and Martínez, E. O., 2004. International financial analysis and the handicap of
accounting diversity. European Business Review. 16 (3). pp.272 – 291.
Daskalakis, N. and et.al., 2013. Financing practices and preferences for micro and small firms.
Journal of Small Business and Enterprise Development. 20(1). pp. 80–101.
Drake,P. and Fabozzi,F.J., 2012. Analysis of Financial Statements. John Wiley & Sons.
Dyson, J. R., 2003. Accounting for Non-Accounting Learners. Pitman.
Fakhfakh, H., Zouari, G. and Zouari-Hadiji, R., 2012. Internal capital markets and investment
decisions. Corporate Governance.12 (2). pp. 179 – 198.
Gaskell, J. and Ashton, J., 2008. Developing a financial services planning profession in the UK:
An examination of past and present developments. Journal of Financial Regulation and
Compliance. 16(2). pp.159 – 172.
Götze, U., Northcott, D. and Schuster, P., 2008. Investment appraisal. Methods and Models,
Berlin. Heidelberg.
Grewal, D. and et.al., 2011. Evolving pricing practices: the role of new business models. Journal
of Product & Brand Management. 20(7). pp. 510–513.
Mumford, D. M. Schultz, A. R. and Osburn, K. H., 2001. Planning in organizations: Performance
as a multi-level phenomenon. Emerald group publishing. 12(2). pp.5–64.
Murphy, K. J., 2001. Performance Standards in Incentive Contracts. Journal of Accounting and
Economics. (30). pp. 244-275.
Needles, B., 2010. Financial and Managerial Accounting. Cengage Learning.
Nickels, W. G., McHugh, J. and McHugh, S., 2011. Understanding Business 9th ed. Irwin,
McGraw-Hill New York.
Rasid,A. and et.al, 2011. Management accounting and risk management in Malaysian financial
institutions: An exploratory study. Managerial Auditing Journal. 26 (7). pp.566 – 585.
Online
Sherman, F., 2012. Importance of investment appraisal. [Online]. Accessed through
<http://budgeting.thenest.com/importance-investment-appraisal-25058.html>. [Accessed
on 5th February 2016].
Types and Sources of Financing for Start-up Businesses, 2015. [Online]. Accessed through <
https://www.extension.iastate.edu/agdm/wholefarm/html/c5-92.html>. [Accessed on 5th
February 2016].
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