Optimizing Financial Resources Allocation for Business Improvement

The financial performance of a business can be evaluated using ratio analysis, allowing for changes to be made and better future strategies to be formed. This is achieved by considering various tools and techniques outlined in the provided references, including books and journals on financial management, accounting, and economics.

UNIT 7003V1 – FINANCIAL MANAGEMENT

TABLE OF CONTENTS
Introduction......................................................................................................................................4
Task 1...............................................................................................................................................4
A.C.1.1:- .....................................................................................................................................4
A.C.1.4:- Review and question financial data: ...........................................................................5
Task 2...............................................................................................................................................6
A.C. 1.2 and 1.3:- ........................................................................................................................6
task 3..............................................................................................................................................11
A.C. 2.1:- ...................................................................................................................................11
Task 4.............................................................................................................................................12
A.C.2.2:- ....................................................................................................................................12
Task 5.............................................................................................................................................14
A.C.3.1:- ....................................................................................................................................14
3.2 Analysis of viability of project for expenditure...................................................................15
A.C. 3.3:- ...................................................................................................................................17
A.C.3.4:- ...................................................................................................................................18
References......................................................................................................................................19
Index of Tables
Table 1: Horizontal ratio analysis of Sainsbury.....................................................5
Table 2: Vertical ratio analysis of Tesco and Sainsbury..........................................7
Table 3: Net present value of investment proposal in Asian countries..............................16
Table 4: Net present value of investment proposal in European countries....................16
Table 5: Statement of cumulative inflow of project..................................................17
Table 6: Statement of cumulative inflow of project.......................................................17
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INTRODUCTION
As a senior manager of company, analysis of company performance will be done in order
to identify the areas of improvement. In order to analyze the financial position of company,
computation of ratios will be done by considering the financial information of Sainsbury.
Further, description will be provided regarding budgetary analysis and investment appraisal
techniques in order to assist the business in making better decisions. Critical evaluation of
financial tools and techniques will by considering both theoretical and practical aspects.
Company is performing in an effective manner as they were able to make increase of 1192
million in sales and 127 million in profits. Along with the supermarket industry, they are also
operating in sector of banking, phone network, online shopping services and fuel forecourts. In
terms of turnover company had shows continuous increasing trend. However, in 2005 they had
faced minor downfall due to restriction on operating activities. In most of the years, profit of the
organization is highly fluctuated but they are able to provide good return to the shareholders.
TASK 1
A.C.1.1:-
Financial data of Sainsbury can be collected through internal and external sources of
information of business. Description of internal sources is enumerated as below-
 Internal accounting systems and processes- It is an internal source of financial
information by which Sainsbury financial data can be derived.
◦ Availability: This information is easily available by the financial department of
Sainsbury.
◦ Reliability- This data is reliable because company is required to make regular
auditing for the authenticity of information (Ratnatunga and Balachandran, 2009).
However, still there is possibility of manipulation because data is managed by the
internal management.
◦ Validity: Thus, reliability of information can be assessed through report of external
auditor or by conducting the norms of surprise audits.
Description of External sources is enumerated as below-
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 Suppliers- Financial information of Sainsbury also attained by the suppliers of business
organizations. It is because, suppliers of entity are aware about the liquidity and solvency
position of business.
◦ Availability: Information can be derived if user has good relationship with the
supplier. It is because, Sainsbury will not disclose information of entity to all parties.
◦ Reliability and validity: However, this external source is not authentic because it is
supported by the assumptions and individual point of view of parties.
 Company house- All corporate entities are required to provide their financial
information to the Company house for the legislatory purposes.
◦ Reliability and validity: Information provided by Company house is completely
accurate but it is not accessible to all parties.
◦ Availability: Due to the legislatory aspect, all users are not able to access this
information.
A.C.1.4:- Review and question financial data:
It is very important to question financial data before using same for analysis purpose and
presenting before stakeholders. Many times ratios that are used for analysing the business firm
but its results does not give clear overview of the firm business performance. This is because
with passage of time inflation rate increase. If this really happened that cost of production also
enhanced which lower down firm profit. Ratio analysis will reveal that firm profitability decline
in comparison to previous year. However, reason behind same is elevation in inflation rate.
Hence, before using data for analysis purpose it is necessary to question to accountants in respect
to financial data. It must be clarified whether they make any mistake due to which big change is
observed in the financial statement or due to any reason big increase or decrease happened in
specific variable value. Managers must review and question financial data because by using
window dressing methods some times better performance of the firm is revealed in the financial
statements. By using creative accounting methods it is showed that standards are followed for
preparing financial statements but in reality it does not happened. Hence, before finally
presenting financial statements before stakeholders it is necessary to question financial
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statements and it must be ensured that financial statements are prepared by following all rules
and regulations.
In the evaluation of financial ratios, various aspects are considered by the financial
manager in order to make viable decisions. It is because, it will make changes in the financial
figures and interpretation of data will vary accordingly (McLaney and Atrill, 2010). Thus, if
there is any change in the policies then financial managers are required to consider the impact
while decision making. Further, impact of window dressing and creative accounting techniques
should be completely avoided because it manipulates the value. If such practices occur in the
preparation of financial statement, then ratio analysis will not able to provide appropriate
findings (Magena and Kinman, 2007). Along with this, emergence factors such as change in
economic factors (interest rate and inflation) will also hamper the accuracy of data. As a
consequence, decision cannot be solely made by the manager by relying on financial data of
business. In addition to the financial data, accounting policies of company and changes in
environmental factors should also be considered by the financial manager in order to make better
decisions. Income statement and balance sheet are two statements that one require to make its
investment related decisions in the business. There are no limitation in availability of these
statements because same are available in the firm annual report which published annually and
uploaded by the firm on its website. However, in case of small sized firms it is very difficult to
obtain their financial statement. By establishing contact with CA of the firm one can easily
obtain financial statements. There are different organization structure in different firms. This
happened because size of business is different in case of firms and due to this reason whatever
structure suit to one firm cannot be proved suitable for other firm. In order to test validity of data
comparative income statement and balance sheet will be prepared. If usual percentage change is
observed in both statements then there is no problem. Contrary to this if it is identified that there
is big percentage change in specific item of balance sheet then annual report will be reviewed.
On review no such reason for big difference is identified then it can be assumed that data is not
valid.
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TASK 2
A.C. 1.2 and 1.3:-
With the applicability of this tool on financial data, performance of company can be monitored in
order to make various decisions. Computation of financial ratios will be supported by vertical
and horizontal analysis. With the vertical evaluation, performance of company can be determined
in the industry in comparison to their competitors (Financial ratio and Analysis, 2013). In
vertical analysis, comparison of ratios of Sainsbury will be done with the ratio of Tesco. For
vertical analysis, Tesco has been selected because they are tough and close competitor of
Sainsbury. For horizontal analysis, comparative evaluation of two years will be done to identify
improvement in the performance and efficiency of company. These ratios are computed
from annual report of Sainsbury and Tesco. Income statement and balance sheet of
these reports are considered for computing ratios.
Horizontal analysis of Sainsbury
Table 1: Horizontal ratio analysis of Sainsbury
Name of the Ratios Formula Year 2014 Year 2013
Profitability ratios
Gross profit 1387 1277
Net profit 716 614
Net Sales 22294 21102
Gross Profit Ratio
(Gross Profit/ Net Sales)
*100 6.22% 6.05%
Net Profit Ratio (Net Profit/ Net Sales) *100 3.21% 2.91%
Liquidity ratios
Current Assets 4362 1901
Current Liabilities 2396 1201
Closing Stock 1005 987
Current Ratio Current Assets / current 1.82 1.58
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Liabilities
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 1.4 0.76
Efficiency Ratios
Net Sales 22294 21102
Total Assets 16540 12695
Total Assets Turnover
Ratio Net Sales/ Total Assets 1.37 1.66
Gearing ratios
Debt 2384 2162
Equity 6005 5838
Debt Equity Ratio Debt/ Equity 0.39 0.37
 Profitability ratios- Profitability ratio of Sainsbury is showing increasing trend in the
performance of business. In comparison to the previous year, organization is able to make
increase in their profits. This aspect shows strength of the company (Annual report of
Sainsbury, 2014). However, weakness is, increase in sales and profits is not high. In order
to overcome this issue company should focus on increase in productivity and
implementing effective price strategies.
 Liquidity ratios of the company has made changes in the allocation of resources in order
to enhance the liquidity position of business (De Franco and et.al., 2011). Current and
quick ratio shows strength of the company that they are having sufficient assets in order
to meet their current obligations and to fund their trading activities. Company is
recommended to maintain stability in this proportion of current asset and liability.
 Gearing ratios- Gearing ratios of company depicts that firm has made slight modification
in their capital structure by increasing and reducing debt. However, change done by
company is not sufficient because still higher part of capital structure is obtained by the
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equity portion (Financial ratio and Analysis, 2013). It shows financial weakness of the
company. Organization is recommended to enhance their equity portion in comparison to
debt in order to increase the retained earnings and for making reduction in the distribution
of profits.
 Efficiency ratios- Total asset turnover of Sainsbury is showing slight reduction. This
aspect shows that efficiency of company is reduced in the utilization of assets (Annual
report of Sainsbury, 2014). By considering this aspect, it can be said that management is
required to make change in their operational strategies in order to make better utilization
of available assets. For this aspect, they can make use of new techniques to increase the
productivity and profitability of business.
Conclusion
On the basis of interpretation of ratios it is identified that Sainsbury give good
performance in its business.
Interest of stakeholders
Each stakeholder whether it is shareholder or creditor have interest on this ratio because
there ROI depends on firm profitability.
 Shareholders: They intends to earn maximum return on investment which they made in the
firm.
 Creditors: They wants to ensure the debt will be paid on time. In order to do same they need
to compute debt equity and creditor turnover ratio.
 Employees: They are interested in ensuring that firm is performing well and will not curtail
its workforce.
Link of interest to conclusion
Its gross and net profit is increasing in comparison to previous year. By accessing
liquidity position prospective creditor identified that currently is able to pay to pay its short
term debt on time or not. On the basis of results of this ratio shareholder decide whether he
must make investment in the firm. It help him in taking credit related decisions. Its liquidity
position become stronger than previous year. Creditors have interest in this ratio because if
there is already higher amount of debt in then firm balance sheet then there is high probability
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that it may fail to pay same on time. Debt equity ratio of the firm increases but it is below one
and on this basis it can be said that firm capital structure is balanced. This ratio is important for
both creditors, shareholders and employees. This is because on the basis of value of ratio they
can determine whether firm will be able to fulfil their expectations. Value of total assets turnover
ratio reduced and it reflects that firm is not making best use of its assets. Hence, it is matter of
concern to some extent. Apart from this on all ratios firm give good performance in its business.
Vertical analysis of Tesco and Sainsbury
Table 2: Vertical ratio analysis of Tesco and Sainsbury
Ratios Formula Tesco Sainsbury
Profitability ratios
Gross profit 4010 1387
Net profit 970 716
Net Sales 63557 22294
Gross Profit Ratio (Gross Profit/ Net Sales) *100 6.31 6.22%
Net Profit Ratio (Net Profit/ Net Sales) *100 1.53 3.21%
Liquidity ratios
Current Assets 13085 4362
Current Liabilities 20206 2396
Closing Stock 3576 1005
Current Ratio
Current Assets / current
Liabilities 0.65
1.82
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.47 1.4
Efficiency Ratios
Net Sales 63557 22294
Total Assets 15572 16540
Total Assets Turnover Ratio Net Sales/ Total Assets 4.08 1.37
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Gearing ratios
Debt 9303 2384
Equity 14772 6005
Debt Equity Ratio Debt/ Equity 0.63 0.39
 Profitability ratios- By comparing profitability ratios of Tesco with Sainsbury, it can be
noticed that trading profits of company is low but they are able to earn higher net profits.
This aspect shows that management of Sainsbury is able to manage the overall expenses
of business (Davies and Crawford, 2011). For further improvement, company should
focus on making increase in their trading profits.
 Liquidity ratios- Comparative analysis of liquidity ratios of both companies depicts that
Sainsbury has better liquidity than Tesco. It is because; current and quick ratios of the
organization are near to the ideal. They have allocated their resources in an effective way
for the management of operational activities (Annual report of Tesco, 2014). With this
strategy, they are able to maintain sufficient funds for the trading functions. As a
consequence, Sainsbury will be able to get better supply options than Tesco which will
provide them advantage of cost efficiency.
 Gearing ratios- By considering debt equity ratio of both the firms, it can be noticed that
capital structure of Tesco is better than Sainsbury. It is because, Sainsbury has high
proportion of equity due to which they have to distribute their profits among
shareholders. They are recommended to make increase in their debt portion for forming
the optimum capital structure (Financial ratio and Analysis, 2013). Company is earning
good profits, thus, in debt, it will be required to pay fixed payment and in equity form,
they have to pay higher cost with the increasing profitability.
 Efficiency ratio- Total asset turnover ratio of Tesco is higher than Sainsbury by 2.07.
This aspect shows that Tesco is making effective utilization of available resources in
comparison to Sainsbury (Ratnatunga and Balachandran, 2009). Management of
Sainsbury is recommended to make increment in their efficiency by making use of better
techniques or innovative approaches.
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However, ratio analysis is not completely reliable because it does not provide effect of
change in accounting policies, economic trends and creative accounting. Due to this aspect,
possibility of manipulation is increased. As a consequence, decision making capacity of business
will be adversely affected. In order to mitigate this factor, company is required to consider other
theoretical aspects such as analysis of market and economic trends for making better decision.
Conclusion
It is concluded on the basis of ratios that Sainsbury perform better than Tesco. Gross
profit ratio of the Tesco is high but net profit ratio declined. This reflects that firm does not have
control on its indirect expenses. Hence, its profit decline due to which shareholders receive less
return on investment and creditors receive late payment of debt amount from firm side. Here
Sainsbury perform better then Tesco. Liquidity position and capital structure of Sainsbury is
balanced then Tesco. However, in case of total asset turnover ratio Tesco perform better then
Sainsbury. Overall, it can be said that latter firm is giving good performance then former firm.
TASK 3
A.C. 2.1:-
Budgets are prepared on the predictions of management thus, financial department of
Sainsbury is required to consider various aspects while preparation of these statements.
Following process can be followed by Sainsbury for the preparation of budget-
 Objectives and assumptions - Initially, company is required to clarify the purpose for
which budget is prepared by business. By considering the objective of budget,
management will be able to attain reliable and relevant information and assumptions for
the formulation of budget (Datar and et.al., 2013). After this aspect, assumptions should
be set by financial departments by considering the external and internal environment of
business. These assumptions will be linked to the financial inflows and outflows.
 Assessment of availability and requirement of funding- Financial department of
Sainsbury is required to determine the availability of financial sources of business in
order to determine their capacity level (Ratnatunga and Balachandran, 2009). Along with
this, they are required to find that the extent to which resources will be required for the
operational activities in the future as per their proposed plans.
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 Prioritization of expenditure- After the assessment of funding, Sainsbury is required to
prioritize proposed expenses of the venture. With this step, they will be able to determine
mandatory and optional expenses (Barnes, 2006). This step will assist them in optimum
allocation of resources by eliminating the unwanted expenditures. By this aspect,
organization can make proper use of available key factors to make its best possible use.
 Forecasting of revenue- For the forecasting of revenue, information is required to be
obtained by the sales manager of sainsbury. By considering the information provided by
them, trend can be developed regarding the future sales of company.
 Budget model - After attainment of above described information, appropriate model
should be selected for the preparation of budget such as incremental budget and zero
based budget. Incremental budget is suitable for business in situation where financial
information of past years is considered to determine the future trend (Argouslidis, 2008).
On the other hand, zero based budgeting is suitable in situation where no information of
past is available or where there are drastic market changes due to which previous
information cannot be considered by business.
 Accounting policies and legislatory aspects - Budgets are not the part of main financial
statements of business. Still, organizations are recommended to formulate these
statements by considering the norms of accounting policies and legislatory aspects. It is
because, budgets show financial forecasting and actual values of these forecasted figures
that will be shown in the financial statements of business. By considering the accounting
norms and policies, accurate budgets can be prepared by the management and there will
less scope of variances. By considering legislatory provisions, organization should not
manipulate figures of budgets. It should be prepared on the basis of material and logical
assumptions.
By considering the above described steps, effective budget can be prepared by the
management of Sainsbury. After preparation of budget, it will be implemented in the operational
activities. Further, variances will be identified by monitoring the performance of employees.
Variance shows difference between actual and forecasted figures of company (Altman, and
Smit, 2007). These values will be considered for the preparation of future budgets in order to do
better forecasting. In addition to the above described aspects, Sainsbury is also recommended to
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consider the legislatory aspects in preparation of budget. In this manner, they will not contradict
the statutory provisions.
TASK 4
A.C.2.2:-
Jan Feb March April May June
Receipts: £000 £000 £000 £000 £000 £000
Sales Receipts 2110 2156 2164 2219 2284 2444
Proceeds from Loan 4000
Total Receipts 6110 2156 2164 2219 2284 2444
Payments: £000 £000 £000 £000 £000 £000
Material Purchases 718 733 757 777 822 880
Wages 600 600 550 550 550 450
Fixed Costs 700 700 710 710 715 715
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Lease of New
Building 200 200 200 200 200
Advertising Fees 120 120 120 130
Corporation Tax 650
Capital Expenditure 2750
Loan Repayment 450 450 450
Total Payments 2018 2353 5087 2807 2867 3345
Net Cash Flow 4092 (197) (2923) (588) (583) (901)
Opening Bank
Balance 185 4277 4080 1157 569 (14)
Closing Bank
4277 4080 1157 569 (14) (915)
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Balance
Objectives of Sainsbury
 The main objective of Sainsbury is to increase cash inflow and to control cash
outflow.
 Further its target is to elevate expenditure in alignment to sales in specific
percentage so that cost does not cover substantial part of revenue.
 Third main objective of the firm is to expand its business overseas market at
rapid pace.
 Fourth main objective of firm is to curtail its expenditure so that economies of
scale can be generated in the business and competition can be given to rival
firms.
Table 3Compariosn of budget outcomes against the objectives
Budgeted Actual Variance
Total Receipts 17377 17000 377
Material Purchases 4687 4000 687
Wages 3300 3700 -400
Fixed Costs 4250 4250 0
Lease of New Building 1000 900 100
Advertising Fees 490 550 -60
Corporation Tax 650 600 50
Capital Expenditure 2750 3000 -250
Loan Repayment 1350 1500 -150
Total Payments 18477 18500 -23
On comparison of budgeted values against the budget outcome it is identified that there is a
negative variance. This happened because entire capital expenditure is made in single month and
is covered in 6 months. Moreover, actual capital expenditure is made by more amount then
indicated in the budget. Loan and wage payment is higher than projected value. Due to this
reason negative variance comes in existence between budget outcome and actual values.
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It can be said that by considering the cash budget of Sainsbury it there is continuous
reduction in the closing balance of cash. In June it has been reached to negative balance of £915
which shows decrease of £5192. However, this reduction is emerging due to capital transactions
of business as revenue items are not appropriately coordinated. This aspect can be noticed by
sudden inflow from loan proceedings i.e. £4000 and outflow for capital expenditure of £2750.
Revenue of the organization is not coordinated with this aspect. Company is able to make
continuous increase in sales and as a consequence, their purchase expenses are also increasing
(Weygandt and et.al., 2009). On this basis it can be said that performance is in
alignment to stated objectives. In addition to this, they are able to make reduction in the
labor expenses. Higher closing cash balance in initial month is due to receipt of bank loan and
continuous decrease in the last three years is due to capital expenses, increase in fixed cost and
corporation tax.
Alternative course of actions
Due to corporation tax, there is high increase in negative cash flow of business in
comparison to the last year (Ratnatunga and Balachandran, 2009). Company can make use
following described approaches to resolve the issue of negative cash flow and to manage their
cash and cash equivalent in an effective manner-
Preparation and implementation of cost control strategy
Merely preparation of budget is not sufficient firm needs to prepare cost control strategy.
By implementing cost control strategy expenses can be controlled from starting day. In this way
better results can be obtained by the firm in its business.
Balance of fixed cost and variable cost
Initially, company is required to maintain balance between fixed and variable expenses of
business. It is because, fixed cost is comprising of high part of expenditure. In addition to this, it
is the increasing expenses of business and as a consequence, outflow has been reduced. For this
aspect, company is recommended to make changes in their operational strategies (Vickman,
Larsson and Olsson, 2012). They can also make use of new techniques in order to reduce the
expenditure and to enhance the productivity of business. In this manner, they will be able to
make reduction in the fixed cost of business.
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Payments in installments
Organization should make payment of their capital expenses in installments in order to
enhance the stability in cash generation capacity of business. With the implementation of this
strategy, they will be able to avoid heavy cash outflows.
Source of additional income
In order to manage increased cash flow of business, company is recommended to enhance
their sources of inflow. For this aspect, they can expand their business by providing additional
services to the customers (Singh, Mittal and Purwar, 2014). Along with this, they can provide
accessibility of utilization of organizational assets to other firms in order to make increase in
their inflow.
In this manner, organization will be able to manage their negative cash flow and can
generate cash from the operating activities. In accordance with the interpretation of cash budget,
it can be noticed that company is recommended to work on the capital items because revenue
items are well managed. With the implementation of above described solutions, they will be able
to reduce the fluctuation in cash budget.
Task 5
A.C.3.1:-
Boards of directors are planning for expansion by opening new branches of stores either
in Asian or European countries. Information of the investment proposals in both the countries is
as follows-
Table 3 : Information of proposed investment proposals
Inflow Asian countries European countries
1 £20,000.00 £24,750.00
2 £18,500.00 £24,750.00
3 £26,000.00 £24,750.00
4 £32,500.00 £24,750.00
Initial investment £50,000.00
Proposed investment projects will be evaluated by considering the following criteria-
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 Profitability- Main criteria for selection of project will be the profitability that is provided
by the investment proposal. Profitability of projects will be assessed by their comparative
evaluation of inflow and outflow. Company will be recommended to make investment in
the project with high profit to reduce the risk in strategy of expansion (Neftci, 2004).
 Time period- Time period of investment will be considered by the management to assure
that initial amount of investment is recovered prior to the completion of project. In order
to enhance the future profitability of scope, company is required to select the project high
post payback period or less payback period.
 Time value of money- Inflow and outflow of proposed investment does not show
complete picture of the profit. Due to this aspect, cost of capital will be considered in
order to bring inflow and outflow at similar point of time (McMenamin, 2002).
 Recovery of initial investment- At the time of evaluation of project, capacity of proposal
will also be considered in providing recovery of initial expenditure that is incurred by
Sainsbury. If all the other factors are covered, a project is said to be comparatively
beneficial if it provides early recovery of invested amount.
 Cost incurred- Cost or expenditure is the most crucial criteria to be considered for the
evaluation of proposal because it directly affects the financial viability of project. As a
consequence, company is required to make investment in the project if it is affordable to
them as per their financial sources.
 Non-financial factors- In addition to the financial factors, company is also required to
consider non-financial factors such as market trend, demand, legislatory impact etc. By
considering these non financial variables, organization will be able to make better
strategies for the investment proposal for reduction of future uncertainties (Helfert,
2004).
3.2 Analysis of viability of project for expenditure
 Net present value- This is the most efficient tool among investment appraisal techniques
in order to analyze the financial viability of project. It is because, net present value
considers all the aspects of project such as time, present value, initial investment,
profitability and inflow over the years. An investment proposal is said to be profitable if
it provides positive net present value. In situation where both the projects provide
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positive NPV, Sainsbury is recommended to make investment in the project with higher
NPV.
Table 4: Net present value of investment proposal in Asian countries
Year Inflow PV factor Net inflow
1 £20,000.00 0.9090909091 £18,181.82
2 £18,500.00 0.826446281 £15,289.26
3 £26,000.00 0.7513148009 £19,534.18
4 £32,500.00 0.6830134554 £22,197.94
Total inflow £75,203.20
Less initial investment -£50,000.00
NPV £25,203.20
Table 5: Net present value of investment proposal in European countries
Year Inflow PV factor Net inflow
1 £24,750.00 0.9090909091 £22,500.00
2 £24,750.00 0.826446281 £20,454.55
3 £24,750.00 0.7513148009 £18,595.04
4 £24,750.00 0.6830134554 £16,904.58
Total inflow £78,454.17
Less initial investment -£50,000.00
NPV £28,454.17
 Payback period- In this method of investment appraisal technique, period is determined
in which proposed project will provide recovery of amount of initial investment. An
investment proposal is said to be beneficial if it is able to provide recovery of initial
expenditure that is prior to the completion of project. In addition to this, in comparative
evaluation, if all options have similar investment then, project with the earliest payback
period is recommended to be selected by company.
Payback period= year of last negative inflow (A) +(amount of last negative inflow (B) / inflow
of next year (C))
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Payback period of investment proposal in Asian countries
= 2 + (11500/26000)
=2.44 years
Working note
Table 6: Statement of cumulative inflow of project
Year Inflow Cumulative inflow
0 -£50,000.00 -£50,000.00
1 £20,000.00 -£30,000.00
2 (A) £18,500.00 (B)-£11,500.00
3 £26,000.00 (C) £14,500.00
4 £32,500.00 £47,000.00
Payback period of investment proposal in European countries
= 2+ (500/24750)
= 2.02 years
Table 7: Statement of cumulative inflow of project
Inflow Cumulative inflow
0 -£50,000.00 -£50,000.00
1 £24,750.00 -£25,250.00
2 (A) £24,750.00 (B) -£500.00
3 £24,750.00 (C) £24,250.00
4 £24,750.00 £49,000.00
A.C. 3.3:-
By considering the assessment of investment appraisal of both the investment proposals,
it can be noticed that expansion in European countries for Sainsbury is beneficial. It is because;
this project is able to provide higher net present value in comparison to expansion project in the
Asian countries. In addition to this, Sainsbury will be able to make early recovery of initial
expenditure by the selection of expansion option in European countries. Other strength of this
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project is its constant inflow which will provide stability to the business. However, this aspect
will also work as a weakness of the project as there is no future opportunity to earn high benefits.
By comparative the evaluation of post payback period of both the projects, it can be noticed that
Asian countries are providing high revenue due to increase in sales. On the other hand, revenue
of European store is constant throughout the project life of proposal although, this aspect will be
compensated with higher net present value of the project (Project and Investment Appraisal for
Sustainable Value Creation, 2013). It is because, Sainsbury will be able to earn higher profits by
making expansion in European countries as in initial years, it has high inflow in comparison to
the proposed proposal in Asian countries. By considering the above described aspects, it can be
said that Sainsbury should expand their store chain in European countries instead of Asian
countries in order to earn high profits along with the minimum scope of risk.
A.C.3.4:-
With expansion strategy in European countries, management of Sainsbury will be able to
serve customers in a proper manner by providing them convenience of place. It is because stores
will be open at the place where there are fewer retail stores. In addition to this, they can provide
high variety of products to the customers in accordance with their expectations. However, there
will be issue of excessive stores which can make reduction in overall sales. It is because
company is already at third position in retail sector. This aspect will be compensated by cost
advantage and same will be delivered to their customers in terms of charging less price or by
providing complimentary offers (Weygandt and et.al., 2009). Further, opportunity of
employment will be provided to youth and growth opportunities will be provided to the existing
employees of company. Above described aspect suggests that proposed project will assist
company in the completion of strategic objectives in an effective manner.
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CONCLUSION:
The financial resources are the most crucial aspect of business. Management of entities are
required to make optimum allocation of these resources. Financial performance of business can
be evaluated by the tool of ratio analysis. By considering this information, changes can be made
in order to improve their position and to form better future strategies.
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