Comprehensive Report: Managing Financial Resources at Sainsbury's

This report provides a comprehensive analysis of Sainsbury's financial resource management, examining various aspects of its financial operations. The report begins by identifying and evaluating different sources of funds available to Sainsbury, including internal and external sources such as retained earnings, bank loans, shares, and government grants. It explores the implications of each funding source, considering factors like cost and reliability. The report then delves into financial planning, emphasizing its importance for predicting financial needs, making financial policies, and ensuring effective fund management. It identifies the information needs of internal and external decision-makers, highlighting how financial information supports strategic decision-making. The report further analyzes the impact of finance on financial statements, including the balance sheet, income statement, and cash flow statement. It includes an analysis of a cash budget, unit cost calculations, and investment appraisal techniques to make appropriate business decisions. Finally, the report presents an overview of Sainsbury's key financial statements, discusses different formats for various business types, and analyzes financial ratios, interpreting their significance. The report concludes by summarizing key findings and insights into Sainsbury's financial strategies and performance.

Managing Financial
Resources and Decisions
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TABLE OF CONTENTS
Introduction......................................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of funds available for Sainsbury...............................................................................3
1.2 Implication of different sources of funds...............................................................................4
1.3 Evaluation of source of finance.............................................................................................4
2.1 The cost of different source of finance .................................................................................5
2.2 The importance of financial planning....................................................................................5
2.3 The information needs of various decision makers...............................................................6
2.4 Impact of finance on financial statements ............................................................................7
TASK 3............................................................................................................................................7
3.1 Analysis of budget to make appropriate business decision..................................................7
3.2 Calculation of Unit cost to make pricing decision................................................................8
3.3 Assessing the viability of project using investment appraisal techniques.............................9
TASK 4..........................................................................................................................................11
4.1 The main financial statements of Sainsbury........................................................................11
The Sainsbury is required to prepare three key financial statements to record each and
every financial transaction that took place during the accounting year. ...................................11
4.2 Different formats of financial statements for different type of business.............................11
4.3 Calculation and comparison of financial ratios and their interpretation .............................12
CONCLUSION..............................................................................................................................13
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INDEX OF TABLES
Table 1: Calculation of unit cost....................................................................................................10
Table 2: Calculation of profits and sales price...............................................................................10
Table 3: Information of proposed investment (in'000).................................................................11
Table 4: NPV of proposed project (in'000)...................................................................................11
Table 5: PAY back period of proposed project (in'000)................................................................11
Table 6: IRR (in'000).....................................................................................................................11
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INTRODUCTION
Financial resources play a significant role in the functioning of company as they are the
foundation of economic position of organization. Managing resources basically involves
managing assets, liabilities, cash outflow and profitability. It is important for the organization to
get maximum benefits from the available resources and to use them for accomplishing business
objectives (Rose and Hudgins, 2014). In the present research report, financial aspect of business
enterprise has been studied. Sainsbury has been selected in this report which is a retail store with
having chain of super markets and convenience stores across UK. The present research report
focuses on different sources of finance and their importance in organization. The report also
highlights implications of appraisal techniques used by the managers of Sainsbury in order to
make important future decisions.
TASK 1
1.1 Sources of funds available for Sainsbury
In order to carry out the business operations effectively and efficiently, it is important for
business organization to generate funds regularly from different sources. It is the responsibility
of financial manager of company to identify the key sources of funds. Sainsbury being the
leading retailer needs huge funds to conduct its operations effectively. Various sources of funds
available to business are as follows:
Internal Sources: The internal sources refer to those funds which are raised by the chief
financial manager within Sainsbury. The benefit of using internal sources is that they can be
raised at less cost and in less time. Other internal source of funds can be retained earning
which refers to the part of profit that is kept aside by business for the future use. The other
source can be sale of products which refers to amount generated after selling the range of
products of Sainsbury (Gregory and et.al., 2012). In addition to this aspect, chief financial
officer can use owner’s capital which refers to the amount of money invested by owner in
his business. It is an important source of income of Sainsbury so; managers should use it
effectively to run the business operations effectively.
External Sources: The external source of finance refers to those funds which are generated
from outside the organization. The benefit of using these sources is that they help business
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in fulfilling its long term funding requirements. Such funds assist company in executing its
expansion plans. Various methods that can be used by Sainsbury to generate the funds from
its long terms sources such as loan from bank by going public and through issuing the shares
of company. Thereafter, Sainsbury can use debentures which are long term debt instruments
which assist company in borrowing money from public (Kuzniarek, 2013). Further,
organization can generate funds with the help of grants which are issued by government to
fulfill the fund requirements of company.
1.2 Implications of different sources of funds
It is an important responsibility of chief financial officer of Sainsbury to evaluate the
significance of different sources of funds. It further helps chief financial officer in knowing the
positive and negative impact of various sources of funds on overall functioning of business. It
has been identified that government grants are the most reliable external source of fund for
Sainsbury However, there are various legal formalities that business enterprise have to undergo
in order to generate acquire grants (Shahrokhi, 2008). The next best alternative for Sainsbury
can be retained earnings as they can easily be availed at less cost. However, they are not
dependable source as they may cut down the reserves and surplus of business.
Furthermore, Sainsbury can use bank loan to generate funds as many banks provide loan
on flexible interest rates and which can be repaid in easy installments. However, regular outflow
of interest may cause negative impact on the cash flow of company (Wilhite, 2012). Thereafter,
to fulfill its long term fund requirement, company can issue shares and debentures. For making
the utilization of resources, managers have to assure that they pay dividends at regular intervals
of time to keep their shareholders satisfied.
1.3 Evaluation of sources of finance
From the aforementioned resources, different alternative sources of funds that Sainsbury
can utilize to raise funds to ensure smooth functioning of business are as follows: Government Grants: They are the key external source of finance available to Sainsbury.
The company is operating in retail sector and enjoys good market position. Therefore, it
can easily get grants from government and European Union of UK (Moyer and et.al.,
2011).
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 Retained Earnings: They are the part of profits kept aside in reserves so that company
can utilize them in the future growth and in expansion activities. Sainsbury has higher
profitability so they must be having high retained earnings. Therefore, company can use
retained earnings to fulfill its need of fund. Bank Loan: Being a reputed company of UK, Sainsbury can easily get loan from any
reputed bank at flexible interest rate and on easy installments. Therefore, bank loan will
fulfill the long term fund requirement of business easily (DRURY, 2013). Shares: Sainsbury enjoys good reputation in market so; it can easily generate huge funds
by issuing the shares to public. Thereafter, company can use this fund in expansion and
growth activities.
 Debentures: The organization can use debentures to generate long term funds on the
basis of goodwill of Sainsbury in market. However, there are two types of debentures,
that is, secured and unsecured.
2.1 The cost of different source of finance
There are different costs which are involved in raising funds from different sources.
However, internal source of finance doesn't involve any direct cost of capital but it involves
opportunity cost (Brigham and Daves, 2012). In contrary to this, external source of finance
involves various costs such as cost of finance etc. Therefore, it is crucial for chief financial
manager of Sainsbury to determine the cost of respective source of finance. The different costs
are as follows:
 Bank Loan: It involves cost of interest which is charged by bank on the loan amount.
 Retained earnings: It involves no direct cost but it will reduce the reserve of company
which may result into the increase in financial risk.
 Shares and debentures: It involves cost in terms of dividends which is to be paid to
shareholders at regular interval of time.
 Grants: There are various cost involved in fulfilling the legal compliance associated with
grants.
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2.2 The importance of financial planning
Financial planning is process of fund management in order to achieve financial
objectives. It is important for Sainsbury as it involves prediction of financial requirements of
business, making financial policies and thereafter, taking financial decisions. Sainsbury use
financial planning to estimate the fund requirement to carry out business operations effectively.
Thereafter, it also assist in determining the sources which can be used to avail such funds.
Furthermore, with the help of fiscal planning the mangers of company can frame financial policy
to ensure proper management and utilization of funds (Gregory and et.al., 2012). Thereafter, the
chief financial officer of Sainsbury can use financial planning to administrate cash inflow and
outflow. Furthermore, it also help manager in ensuring proper control on the income and
expenses of company. Thereafter, sound financial plan also assure better selection of investment
policy by critically evaluating different alternatives. However, financial planning can be used by
manager to build strong capital base (Pynes, 2008).
2.3 The information needs of various decision makers
In order to make effective and sound decision there are different information which is
required by decision makers. However, there are two kinds of decision makers which are as
follows:
 Internal decision makers: It refers to various individuals within the organization who
assist Sainsbury in attaining organizational goals. It involves, employees, management
and executives etc. They require business information to make justified decision for
organization. For example, top level executives of Sainsbury require information to frame
fiscal policies and strategies (De Boer, Enders and Schimank, 2007). Thereafter,
managers require information on employee to facilitate performance evaluation and
appraisal. Further, staff members of company require economic information for making
important decisions regarding their pay structure, career opportunities, their position in
company etc.
 External decision makers: It refers to individuals outside the organization but can affect
or can be affected with the overall functioning of business. It involves, shareholders,
government authorities, customers etc. For instance, shareholders require information to
determine their profitability position within company (Ingram and et.al., 2012)..
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Thereafter, government requires business information to assure that Sainsbury is
executing its operations ethically and in fair manner. Further, creditors will need
information to ensure the credit worthiness of company and to determine they will be
rapid on time or not.
2.4 Impact of finance on financial statements
Financial statements are those reports that records the financial activities of business
enterprise. The various sources of finance will have strong impact on the financial statements of
Sainsbury, the descriptor of which is as follows:
 Balance sheet: It reflects the assets, liabilities and owners fund at particular point of
time. Therefore, the issue of shares will impact the balance sheet of Sainsbury as it will
be charged under the liability head as share capital (Bodie, Merton and Cleeton, 2009).
Thereafter, if company generates funds through debentures, the liability of company will
increase along with the cash
 Income statements: It represents the income, expenses and revenue of Sainsbury at
particular point of time. The legal expenses incurred in availing grants will be affecting
income statements of Sainsbury. Thereafter, the interest charged on debt or bank loan and
dividend on equity will affect the income statement and thus reducing the revenue of
company.
 Cash flow statements: It represents the inflow and outflow of cash within the
organization. The issue of shares and debentures will affect the cash flow statement as the
cash will be generated within the business (Baron, 2008). Thereafter, the payment of
interest on bank loan will be affecting cash outflow.
TASK 3
3.1 Analysis of budget to make appropriate business decision
Table 1 Cash budget for Sainsbury
Particulars
June
(￡)
July
(￡)
August
(￡)
Sept
(￡)
Opening balance of cash
and cash equivalents 50000 26000 34500 30500
Cash received from
customers 120000 150000 156000 160000
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Total Revenue Received 170000 176000 190500 190500
Purchases Made In Cash 70000 75000 80000 74000
Payment made to creditors 30000 32000 26000 28000
Rent 15000 1500 15000 15000
Loan 9000 9000 9000 9000
Other expenses 20000 24000 30000 38000
Total Expenditure paid 144000 141500 160000 164000
Closing balance of cash
and cash equivalents 26000 34500 30500 26500
From the above cash budget it can be identified that, Sainsbury is enjoying positive
financial position at the end of every month. The company is generating revenues which ensures
future sustainability and productivity. Thereafter, it also reflects that company is having no
negative variance from June to September (Massoud, Tarhini and Nasr, 2009). Therefore, it
shows that chief financial officer is using funds and managing income and expenses
appropriately.
Table 2 Sales budget for Sainsbury
Particulars
June
(￡)
July
(￡)
August
(￡)
Sept
(￡)
Sales price 15 15 20 20
Units to be sold 1000 1500 1200 1500
Sales value 15000 22500 24000 30000
Less: discount 1500 2250 2400 3000
Net sales 13500 20250 21600 27000
From the above cash budget it stated that even after reduction in production company is
able to sell its products (Pynes, 2008). Thereafter, the increase in net sales shows that Sainsbury
has adopted appropriate pricing strategies which enables company in maintaining various
expenses and further ensuring the sales of its market offerings.
3.2 Calculation of Unit cost to make pricing decision
It is important for every organization to determine the unit cost of its product. Unit cost
involves the amount of fixed and variable cost incurred by Sainsbury to manufacture a unit of
product. It further help various big or small business enterprise in determining the price of
product. The profit margin is added in the unit cost to derive the appropriate price of product.
Further, unit cost is generally calculated by the business enterprises manufacturing large no of
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products. However, to compute unit cost all the cost related to the production of product and the
cost associated with the selling and merchandising of product is added (Brigham and Ehrhardt, ,
2013). Moreover, the different cost enclosed in unit cost computation are cost of raw material,
labor, other manufacturing overheads and selling and merchandising cost etc.
Furthermore, to determine the price of the product various factors are evaluated such as,
demand, supply of offering in existing market, competitors pricing policy, government policy
like tax or legal policy, accessibility of substitute products etc.
Table 1: Calculation of unit cost
Cost of material £40,0000.00
Cost of labour £10,0000.00
Prime cost £50,0000.00
Factory overhead £10,0000.00
Total cost of production £60,0000.00
Administration cost £20,0000.00
Cost of good sold £800,000.00
No. of units produced 100000
800000/100000
Cost per unit £8
Table 2: Calculation of profits and sales price
Total Cost £800,000.00
Profit percentage (20% On Cost) £160,000.00
Sales price £960,000.00
Sales value Per Unit £9.6
Profit earned in this strategy £160,000.00
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From the above description it can be said that by computing the unit cost of product
which is £8 company can set its selling price at £9.6. Therefore, Sainsbury can adopt this
strategy to earn profit of £160,000.
3.3 Assessing the viability of project using investment appraisal techniques
Investment appraisal techniques are used to find the financial feasibility of project.
Sainsbury use this technique to determine it should invest in particular project or not. It also
assist in allocating funds on the project which provide maximum return (Bodie, Merton and
Cleeton, 2009). The financial manager of Sainsbury can use NPV, ARR and payback method to
determine the financial feasibility of project. The company is planning for expansion so the
following project has been proposed:
Table 3: Information of proposed investment (in'000)
Initial investment -50000
Year 1 £35,000.00
Year 2 £15,000.00
Year 3 £18,000.00
Year 4 £20,000.00
Cost of capital 10.00%
NPV: The net present value represents the difference between current cash inflow and outflow. It
helps in determining the profitability of project. The NPV of proposed project is calculated
below:
Table 4: NPV of proposed project (in'000)
Project
Inflow PV factor Net inflow
Year 1 £35,000.00 0.9090909091 £31,818.18
Year 2 £15,000.00 0.826446281 £12,396.69
Year 3 £18,000.00 0.7513148009 £13,523.67
Year 4 £20,000.00 0.6830134554 £13,660.27
Total inflow £71,398.81
Less initial investment -£50,000.00
NPV £21,398.81
Pay Back Period: It represent the time period which will be required to recover the cost of
proposed project.
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Table 5: PAY back period of proposed project (in'000)
Project A Cumulative inflow
-50000 -50000
£35,000.00 -£15,000.00
£15,000.00 £0.00
£18,000.00 £18,000.00
£20,000.00 £38,000.00
IRR:The internal rate of return is used by the financial manager of company to compare and
calculate the profitability of the proposed project.
Table 6: IRR (in'000)
0 -50000
Year 1 £35,000.00
Year 2 £15,000.00
Year 3 £18,000.00
Year 4 £20,000.00
31.35%
Hence, it can be concluded from above calculation that the proposed project is financially
feasible for Sainsbury. The NPV of project is positive which means project is profitable one.
Thereafter, by considering the payback period it can be concluded that the cost of project can be
recovered in 2 years and still company will have 3 years for earning profit. IRR is also positive
and good which indicates that proposed project is appropriate for Sainsbury future sustainability
and profitability (Brigham and Ehrhardt, 2013).
TASK 4
4.1 The main financial statements of Sainsbury
The Sainsbury is required to prepare three key financial statements to record each and
every financial transaction that took place during the accounting year.
 Balance sheet: It is statement which involves the overview of assets, liabilities and
ownership equity of Sainsbury at the completion of fiscal year (Bodie, Merton and
Cleeton, 2009). It reflects the true financial position of company.
 Income statements: This statement records all the revenues, cost and expenditures
within the organization for a particular point of time (Ingram and et.al., 2012). This is
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statement help stakeholders in determining the profitability of business. It also helps
shareholders in determining their earning per share.
 Cash flow statement: This statement reflects all the cash inflow and outflow in business
during the particular point of time (De Boer, Enders and Schimank, 2007). The main
reason of preparing cash flow statement is that to determine the gross amount of cash
generated from various business operation during a specific period.
4.2 Different formats of financial statements for different type of business
 Sole Trader- It is kind of business own and operated by single individual. It
prepare income statement to determine the profit from business activity.
Thereafter, sole trader can prepare cash flow statement to know the cash inflows
and outflows during particular point of time (Shapiro, 2008).
 Partnership- The partnership firms prepares partners’ capital account, income
statements and balance sheet as they share profit and losses as per the capital
invested (Segismundo and Augusto Cauchick Miguel, 2008).
 Company- It is important for Sainsbury to adhere the norms of IASB and IFRS
while preparing the financial statements. However, it is required for company to
prepare all the three financial statements as per the international accounting
standards (Kaplan and Atkinson, 2015).
4.3 Calculation and comparison of financial ratios and their interpretation
Ratios Formula 2014 2013
Profitability ratios
Gross profit 1387 1277
Net profit 716 614
Net Sales 23949 23303
Gross Profit Ratio
(Gross Profit/
Net Sales) *100 5.79 5.48
Net Profit Ratio
(Net Profit/ Net
Sales) *100 2.99 2.63
Liquidity ratios
Current Assets 4362 1901
Current Liabilities 6765 3115
Cl stock 1005 987
Current Ratio Current Assets /
current
0.64 0.61
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Liabilities
Quick ratio
(Cu. Assets - Cl.
Stock)/Cu.
Liabilities 0.50 0.29
Gearing ratios
Debt 2089 2478
Equity 6003 5733
Debt Equity Ratio Debt/ Equity 0.35 0.43
Investment Ratio
Return on equity 12.2 10.81
Return on invested capital 9.3 8.27
Interpretation:
Profitability ratios
By considering profitability ratio it can be noticed that there is positive change in ratio; there is
increase in profitability. Therefore, it can be said that efficiency of Sainsbury has increased
Chandra, P., 2011).
Liquidity ratios
However, by considering the liquidity ratio it can be seen that the current ratio of both the two
years is less than ideal ratio; 2:1 (Voss, Sirdeshmukh and Voss, 2008). Therefore, it is important
for company to increase its current assets and decrease its current liabilities. Likewise, the quick
assets should also be increased within the company.
Gearing ratios
The company is required to increased its debt equity ratio which is too much low than the ideal
ratio; 2:1.
Investment Ratio
Return on equity in 2014 is more than 2013 which means in 2014 company had more
profitability and company was able to distribute more dividends (Rose and Hudgins, 2014).
Likewise, return on dividend was more in 2014 which indicates that efficiency of Sainsbury has
increased.
CONCLUSION
From the above report it can be concluded that it is crucial for company to manage its
financial resources and decisions. It is also important for company to identify different sources of
fund and select the appropriate one to fulfil its financing needs. The ratio analysis gives an
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overview of financial performance of Sainsbury to its stakeholders. Further, with the help of
investment appraisal techniques financial managers can select the suitable investment project.
This further help in attaining future profitability and sustainability.
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