Financial Management Report: Financial Decision Making at Tesco Plc

This report provides a comprehensive analysis of financial management practices at Tesco Plc, a major multinational retailer. The report begins by identifying how financial data, specifically derived from ratio analysis (profitability and liquidity), informs operational and strategic decisions. It then compares and contrasts three investment appraisal techniques: payback period and net present value (NPV), evaluating their effectiveness in maximizing return on investment. The report includes calculations for these techniques, demonstrating their application. The value of these techniques in informing financial decision-making is discussed, followed by an analysis of how financial decision-making supports long-term sustainability. Finally, the report offers recommendations for management accounting practices to improve financial sustainability at Tesco Plc. The conclusion summarizes the key findings, emphasizing the importance of financial planning, organizing, and controlling activities for effective financial management and long-term business success.

Financial Management

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Identify how the data obtained might help to inform operational and strategic decisions......1
2. Compare and contrast three investment appraisal techniques and effectiveness to maximise
return on investment....................................................................................................................3
Calculation of the payback period...............................................................................................3
3. The value of techniques in helping to inform financial decision making...............................4
4. Analyse how financial decision making supports long term sustainability............................5
5. Recommendation for management accounting used to improve financial sustainability.......5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Financial management is outlined as tackling with and determining money and
investments for an individual to supports a business making decisions. All the financial activities
mainly based on the accounting department (Adomako, Danso and Ofori Damoah, 2016). Most
of the business entities use various types of tool to manage financial transactions and take
effective decision in regard of business. To understand of this report selected organisation is
Tesco plc, which is a British multinational groceries and general merchandise retailer. This
report consist of operational & strategic decisions, investment appraisal techniques, values of
techniques, long term sustainability and provide appropriate recommendations.
MAIN BODY
1. Identify how the data obtained might help to inform operational and strategic decisions
To get success in future require to take effective decision that helps to a business and
apple effective strategic policies in Tesco Plc. T take effective decision in business require to
analysis daily basis activities in which focus on the all financial transactions to improve their
results. To obtain data require to prepare all financial statements in which record each transaction
of business and identify all income and expenditure easily. On the basis of these data a financial
manager of Tesco prepare effective strategies and policies in context of investment an dividend.
Eventually, these statements are mainly based on the ratio analysis techniques.
Ratio analysis techniques: It is a quantitative method in which analysis the liquidity
position, operational performance and profitability due to compare current year data with last
year. It supports to identify the reason of increase and decrease of ratio. There are calculating
ratio of Tesco in order to take right decision in regard of business effectively (Aebi, Sabato and
Schmid, 2012).
Particulars Formula
Profitability ratio analysis
2017-18 2018-19
Gross Profit 3350 4144
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Net profit 1206 1322
Sales revenue 57491 63911
Calculation Gross profit / sales *
100 3350/57491*100 4144/63911*100
GP ratio Gross profit / sales *
100 5.83% 6.48%
Calculation Net profit / sales *
100 1206/57491*100 1322/63911*100
NP ratio Net profit / sales *
100 2.10% 2.07%
From the above table analysis the profitability position of company according to that
invest amount in further activities. The gross profit ratio is 5083% in year of 2017-18 but it is
increasing in 2018-19 and reach on 6.48%. Similarity, Net profitability ratio was 2.105 in 2017-
18 but decrease by 0.03% and remain 2.07%. Both profitability ratio presents good position of
company that provide benefits to Tesco for long time.
Liquidity ratio analysis
2018 2019
Current assets 13726 12668
Current liabilities 19238 20680
Inventory 2263 2617
Prepaid expenses
Quick assets 11463 10051
Current ratio Current assets /
current liabilities 0.71 0.61
Quick ratio Current assets -
(stock + prepaid
0.6 0.49
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expenses)
The financial manager of Tesco calculated of liquidity ratio in order to analysis of
efficiency of business in particular financial year. For this require to calculate current and quick
ratio and get results. In the year of 2017-18, 0.71 of current ratio which was decreased and reach
on 0.61 in 2018-19. In both years are not meeting with ideal ratio of 2:1. Along with quick ratio
was calculated about 0.6 in 2017-18 and 0.9 in 2018-19 that not meet the criteria of 1:1.
2. Compare and contrast three investment appraisal techniques and effectiveness to maximise
return on investment
Investment appraisal techniques is defined as collection of techniques in which recognise
effectiveness of investment. The main reason of investment appraisal to analysis the viability of
project, portfolio decision and programme to analysis the value that have generated
(Dimitropoulos and Tsagkanos, 2012). There are discussed different techniques which is applied
by Tesco to invest into further activities such as:
Payback period: This tool helps to calculate time period to recover initial cost of an
investment. From this method get results in years that get back the initial investment made for
particular project.
Year
Project A –
Technologic
al Project (£)
Cumulati
ve
Discount
factor
(12%)
Present
value
Project B –
Mechanical
Project (£)
Cumulati
ve
Discount
factor
(12%)
Present
value
0 (£40000) (£40000) (£60000) (£60000)
1 8000 (32000) 0.893 7144 10000 (50000) 0.893 8930
2 12000 (20000) 0.797 9564 20000 (30000) 0.797 15940
3 16000 (4000) 0.712 11392 25000 (5000) 0.712 17800
4 20000 16000 0.636 12720 30000 25000 0.636 19080
5 30000 40000 0.567 17010 40000 65000 0.567 22680
Total 57830 Total 84430
£20000- £2000 £30000- £5000
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£18000 £25000
Calculation of the payback period
For Project A
Payback period = 3 years + (4000/20000 * 12) Months
= 3 Years + 2 Months
As the most appropriate and closest value for initial investment will be in 3rd year.
For Project B
Payback period = 3 Years + (5000/30000 * 12) Months
= 3 Years + 3 Months
As the most appropriate and closest value for initial investment will be in 3rd year.
Net Present Value method: This method differentiate in between the present value of
cash inflows as well as outflows in order to analysis in certain period of time. The net present
value method is mainly utilised under capital budgeting method that helps to get effective results
to Tesco in regard of investment planning to determine the profitability of particular project
(Gloede and Menkhoff, 2014).
Calculation of NPV
For Project A
NPV = (£ 40000) + 7144 +9564 + 11392 + 12720 + 17010
= 40000 – 57830
= (17830)
For Project B
NPV = (60000) + 8930+ 15940+ 17800+ 18080+ 22680
= 60000 – 84430
= 24430
3. The value of techniques in helping to inform financial decision making
These techniques are important for Tesco to take effective financial decision in regard of
business properly. For this require to analysis techniques such as: Help in identifying in profit: The financial management techniques valuable for business
because it helps to analysis the actual position of business in clear way. Through these
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tool analysis how much profit gain by Tesco in particular period of time. After that they
are taking decision in regard of business productivity. Analysis long term goal: With the help of financial techniques analysis long term goals
that company wants to acquire in future. The financial manager of Tesco prepare
financial plan in which focus on the profitability of business. Moreover focus on the
financial ratios in which compare present result with last year result. According to that
apply appropriate modification in business. Examine capital structure: Most of the decision are based on the capital structure which
are developed by Tesco to analysis accurate cost structure as well as capital structure.
Along with these techniques utilised to analysing the actual position of business.
 Manage all the financial services: The cash flow statements presents all the inflows and
outflows to recognise net amount of cash. These transactions are categorised into three
activities such s operational, financing and operating activities. The manager of Tesco use
various management accounting tools in order to identify financial problem then sort out
with help of management accounting system (Henager and Cude, 2016).
4. Analyse how financial decision making supports long term sustainability
Financial decision taking procedure can supports to a business to maintain long term
sustainability for future growth. The effective skills of a manager impact on the investment
portfolio that supports to business achieve future success & growth. On the basis of decision
compare plan their strategies and take further steps to conduct all the business activities. These
decision based on the capital, dividend, investment and many other factors. The larger retail
companies face problem of corporate sustainability experts who provide right suggestion on
time. According to that they are preparing their budget in effective manner.
5. Recommendation for management accounting used to improve financial sustainability
As per the overall analysis it has been recommended that the financial manager of Tesco
effectively analysis all the techniques and compare with other organisation to maintain financial
sustainability. Along with apply effective strategies and policies to maintain profitability of
business. It is suggested that maintain stock level to supply on time on the demand of customer
as well as apply different system of management accounting like inventory management system,
price optimization system and many others (Tevel, Katz and Brock, 2015).
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CONCLUSION
As per the above report it has been analysed that to manage all the financial activities
require to proper planning, organizing and controlling all the activities. To analysis the financial
position and get results require to calculate of financial ratio that presents actual position of
business. The ratio analysis that good performance of business. Along with apply pay back
period and net present value to invest amount in further activities. The financial decision helps to
maintain long term sustainability and maintaining decision making procedure.
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REFERENCES
Books and Journal
Adomako, S., Danso, A. and Ofori Damoah, J., 2016. The moderating influence of financial
literacy on the relationship between access to finance and firm growth in
Ghana. Venture Capital. 18(1). pp.43-61.
Aebi, V., Sabato, G. and Schmid, M., 2012. Risk management, corporate governance, and bank
performance in the financial crisis. Journal of Banking & Finance. 36(12). pp.3213-
3226.
Dimitropoulos, P. E. and Tsagkanos, A., 2012. Financial Performance and Corporate
Governance in the European Football Industry. International Journal of Sport Finance.
7(4).
Gloede, O. and Menkhoff, L., 2014. Financial professionals' overconfidence: is it experience,
function, or attitude?. European Financial Management. 20(2). pp.236-269.
Henager, R. and Cude, B. J., 2016. Financial Literacy and Long-and Short-Term Financial
Behavior in Different Age Groups. Journal of Financial Counseling and Planning.
27(1). pp.3-19.
Tevel, E., Katz, H. and Brock, D. M., 2015. Nonprofit financial vulnerability: Testing competing
models, recommended improvements, and implications. Voluntas: International
Journal of Voluntary and Nonprofit Organizations. 26(6). pp.2500-2516.
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