Financial Principles and Techniques Report - Module Finance

This report provides a comprehensive analysis of financial principles and techniques, focusing on their application within an organization. It begins by examining the importance of costs in pricing strategies and the design of effective costing systems, including job costing and process costing. The report then delves into forecasting techniques for making cost and revenue decisions, exploring both qualitative and quantitative methods, as well as judgmental approaches. Budgetary planning and control are addressed, with a focus on setting targets, creating master budgets, and monitoring expenditures. The report also covers cost reduction strategies, including activity-based costing, and various financial appraisal methods for analyzing investment projects. Furthermore, it assesses the use of financial statements and ratios to evaluate financial viability and improve the quality of financial information. Finally, the report concludes with recommendations on strategic portfolio management for an organization, using Sainsbury as a case study.

Managing Financial
Principles and
Techniques

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Importance of costs in the pricing strategy of an organization:.............................................3
1.2 Design a costing system for use within an organization........................................................4
1.3 Improvements to the costing and pricing systems used by an organization..........................5
TASK 2............................................................................................................................................6
2.1 Forecasting Techniques in an Organization to make Cost and Revenue Decisions..............6
2.2 Sources of Finance.................................................................................................................8
TASK 3..........................................................................................................................................10
3.1 select appropriate budgetary targets for an organization: ...................................................10
3.2 Participate in the creation of a master budget for an organization......................................12
3.3 compare actual expenditure and income to the master budget of an organization..............13
3.4 evaluate budgetary monitoring processes in an organization..............................................13
TASK 4..........................................................................................................................................14
4.1 recommend processes that could manage cost reduction in an organization.......................14
4.2 Evaluate the potential for the use of activity-based costing:...............................................15
TASK 5..........................................................................................................................................16
5.1 Financial appraisal methods to analyze investment projects in public and private sector...16
5.2 Strategic investment decision for organization through using financial information..........18
5.3 Audit appraisal.....................................................................................................................18
TASK 6..........................................................................................................................................19
6.1 Financial statements to assess financial viability of Sainsbury...........................................19
6.2 Financial ratios to improve quality of financial information for organization's effectiveness
....................................................................................................................................................21
6.3 Recommendation on strategic portfolio of organization.....................................................23
CONCLUSION..............................................................................................................................23
REFERENCE.................................................................................................................................24

INTRODUCTION
Financial performance of any organization represents entity's profitability and earning
power to formulate and implement strategies. It is related with firm's effectiveness and enhancing
its efficiencies at high level. The present report is based on understanding different financial
reports and techniques to analyze economic structure as well improving quality services for
further implementation of Sainsbury. It is public retail sector large scale supermarket chain of
UK that provides groceries and food items. However, pricing strategies and costing systems are
to be described. Including this, different forecasting and decision making tools for implementing
further business operation can be determined. Moreover, budgetary planning system and costing
methods for strategic planning procedure and making decisions regarding business activities can
be recognized. In addition to this, various financial appraisal methods and technqiues for
adequate investment is to expressed through this assignment.
TASK 1
1.1 Importance of costs in the pricing strategy of an organisation:
Pricing Decisions: Ho much company spend to produce a unit of product is valuable
when figure out the sales price. If Sainsbury Company want to compete on price, than they have
to keep price of product as low as possible. But if product is sold at cost less then manufacturing
cost then they cant go for long in market. So while selling it is important to keep price not to
high and not too low and at this point of time different cost concept is used to fix adequate price
(Bakand, Hayes and Dechsakulthorn, 2012).
Preparing Financial Reporting: Adherence to more specific cost technique are require
under General acceptance Accounting Principles. For external financial reports purpose and
GAAP require all manufacturing cost that incurred in manufacturing goods. Costing system that
behave cost in this manner are called absorption technique, full cost costing, traditional system.
Helpful in Budgeting: Cost concept also help in budgeting and budgetary control. There
are various tools used in budgetary control. Fixed, Variable and Zero base budget (Bartram,
Brown and Waller, 2016). With this budgeting system financial requirement can be fulfilled
within limited resources and maximum utilisation of financial sources can be made possible and
from it, pricing of product that is ready for sale in market is optimised.

Many business decision requires a firm knowledge of several cost concept. Different
type of cost having different characteristics. Consequentially when reviewing a business case to
determine which way to choose it is important to understand following cost concept to choose.
Fixed, Variable and Mixed cost: A fixed cost such as rent, does not changes in with level
of activity. In opposite to it variable cost such as direct material is changeable with level of
activity. Those few cost which changes somewhat with activity are included in mixed cost
(Battiston and et.al., 2016). It is important to understand the differences, since the decision to
alteration in level of activity may or may not alter cost. For ex, shutting down a facility may not
terminate associated building lease payment which are fixed since duration it was leased.
Marginal cost: It is total of variable cost i.e., prime cost plus variable overhead. It is bsed
on difference between fixed and variable cost. Fixed cost are ignored variable cost are
considered for determining cost of production, work in progress and value of finished goods
(Caspin and et.al., 2013).
Out Of pocket Cost: It involves payment to outsiders such as increase in cash expenditure as
proportionate to cost of depreciation, which does not concluded any cash expenditure. Such cost
are used in price fixation at time of recession or when make or buy alternative option of decision
is made.
1.2 Design a costing system for use within an organisation
A costing system is designed to monitor the cost incurred by the business. Whole business
system is connected to sat of forms, process, control and reports that are designed to aggregate
and report to management revenues, cost and profitability. Areas included in can be any part of
the company, including Customers, Department, Facilities, Process, Product and services,
Research and development, Sales etc.
There are two main type of costing system. A business can circulate information based on either
one of these or mixed that is called hydride system that mix match system to meets its need.
Job costing System: Material, labour, and overhead are compiled from individual unit or job.
This approach best for unique purpose such as custom design machine or consulting projects. It
is highly detailed and labour intensive (Cheng, Ioannou and Serafeim, 2014).
Process costing System: Material, Labour and overhead are totalled for an entire production
process and then are allocated to individual production unit, processing of milk, Petroleum

products, Cell phone manufacturing are part of process costing where production done at large
level. Cost accumulated is highly efficient and divided in no. of units per batch is possibly be
automated.
 Differential Cost: Change in cost due to change in level of activity,pattern, technology,
process or method of production is known as differential cost. If any changes proposed or
happened in existing level or method of activity of production, the increase or decrease in
total cost because of decision is known as differential cost (Chhokar and et.al., 2013). If
changes increase in cost, it is called incremental cost and if there is decrease in cost
results from decrease in output the result is known as decremental cost.
 Sunk Cost: Sunk cost is irrevocable cost and is caused by complete abandonment or
shutting down of plant of business. It is written down value of abandoned plant less its
salvage value. Such cost are historical cost which are incurred in past and are not relevant
for decision making and are not affected by increase or decrease of volume of output.
Thus expenditure which has taken place is irrecoverable in a situation is treated as sunk
cost. Such cost included depreciation of fixed assets (Clark, Gilbert and Ca, 2014).
 Opportunity cost: It is maximum possibility alternatives earnings that might have been
earned if productivity capacity or service had been put to some alternative use. In simple
words it is advantage in measured term gone due to not using other alternatives that could
have generated more profit then current cost. For example, If owned building is proposed
to be used for projects then rent on building is considered to be an opportunity cost while
taken into consideration the evaluation of the profitability of projects. PASS
1.3 Improvements to the costing and pricing systems used by an organisation
Improvement in costing to good financial management: Ability to identify, interpret and present
cost as they are related to organisational economic flow of goods and services, both historical
and forward looking context, is necessary for an informed understanding of the organisational
driver of profit and value (Midrigan and Xu, 2014).
Material cost effectiveness: The designed, implementation, and continuous improvement of
costing method, improvement in data collection and system should reflect a balance between the

required level of accuracy and the cost of measurement (cost benefits tradesoff) depends on
competitive situation of the organisation.
Time and Consistency: Cost information should be collected and analysed in systematic manner
so as to ensure comparability over time, whether in routine information system, or for specific
application and or purpose (Park and Park, 2014).
Transparency and auditability: Definition and source of data, the operational and other non
financial data and method of calculating cost needs to be transparent to customers and recorded
and capable of review, risk analysis and assurance.
 Replacement cost: It is cost at which there is purchase of assets or material exactly
replica that would have been replaced or re-evaluate. It is cost of replacement at current
market value.
 Avoidable and unavoidable cost: Those cost which are avoided if particular product or
department with which they are directly related is discontinued. For ex, salary salary of
clerk belongs to department employed is eliminated if that department is discontinued.
Unavoidable cost is opposite to avoidable cost which is not been avoided even with
discontinuation of projects or department (Park and Park, 2014). For ex, Salary of factory
manger, factory rent etc.
TASK 2
2.1 Forecasting Techniques in an Organization to make Cost and Revenue Decisions
Forecasting means predicting about the future on the basis of past and present data and
the trends followed by the organisation.
Types of Forecasts :-
 Economic Forecasts
 Technological Forecasts
 Demand Forecasts
Categories of Forecasting Methods :-
A. Qualitative v/s Quantitative Method – Qualitative Method is a technique based on
opinions, judgements, intuitions, emotions, or personal experiences, and also is subjective in
nature. Whereas, Quantitative Method of forecasting is based on mathematical(quantitative)

models, and is also objective in nature. This method of forecasting heavily relies on
mathematical computations (Pasquariello, 2014).
B. Time Series Method – Time series method uses the historical data as basis for
forecasting future outcomes. It's objective is to draw a pattern in the past values of the data. This
method is useful only when historical data is present and there is no change in the pattern of
historical data. This method of forecasting thus cannot evaluate any kind of change in the future
outcome if there is any kind of change in the value of the variable.
Kinds of Time Series Methods :-
 Moving Average
 Weighted Moving Average
 Kalman Filtering
 Exponential Smoothing
 Trend Estimation
 Linear Prediction
 Extrapolation
C. Judgmental Methods :- Judgmental forecasting method comprises of opinions,
subjective probability estimates and also intuitive judgement (Segal, Shaliastovich and Yaron,
2015). This method of forecasting is used in a newly formed organisation or in an organisation
where there is lack of historical data which cannot be used for forecasting.
Judgmental Method Includes :-
 Composits Forecasts
 Cooke's Method
 Delphi Method – It developes forecasting through group consensus.
 Forecast by Analogy; Is a method assumes that two different kind of phenomena shares
same model of behavior. For ex one way to predict the sales of new product is to choose
an existing product which looks like same product in term of expected demand pattern of
sales product. Like launch of Samsung galaxy s8 plus predicted to launch of Samsung
galaxy s7 exactly same in look and feel but with software optimization.
 Scenario Building – It is the process of considering alternative outcomes in process of
analyzing future events. For ex.

 Market Surveys – Market surveys comprises of use of questionnaire to be filled by the
market elements to identify their testes of new products and services. FMCG product are
launched on basis of market survey to identify customer taste and preference. On this
basis new product are launched.
D. Naive Approach :- The Naive approach of forecasting is the most cost effective
forecasting model. This approach provides a benchmark against which comparison between
different models is been done. The Naive forecasting approach is most suitable for time series
data.
E. Other Methods :- Their are certain different methods of forecasting in an organisation
which can be used for the betterment of the organization's functioning and growth of the
organization:
 Simulation: It can be define as process of creating model of existing or proposed system.
Like business, a mine, a watersheds, forest, fisheries etc. in order to identify . those
factors which control system and to predict future behavior of system. For ex. Fisheries
biologist dynamically simulate salmon population in river in order to predict changes in
population of salmon fish for possible actions, like fishing loss of habitat to ensure that
they do not go in extinct in some point in future
 Prediction Market
 Probabilistic Forecasting, and
 Ensemble Forecasting.
Above mentioned forecasting methods are useful for preparing planning and making
decisions for further business activities. According to analysis of current business performance,
different ideas are provided for implementing strategies effectively. In this regard, forecasting for
next years is provided by recognizing financial data including balance sheet, income statement,
ratio analysis and so on. Thereby, tools and techniques are applied for predicting data related to
future operations systematically. In addition to this, according to ratio analysis, it is analyzed that
in 2015, company's financial position was not so good due to improper production and
supplement of goods. While, in 2016, through implementing strategies, there is recovery in bad
quality services of organization is created by which further implementation and Sainsbury's
growth can be achieved at efficiently. Thus, applying forecasting techniques is quite effective for

organization regarding predictions and overall development of entity systematically that affects
further targets including sales, profit and so o to improve efficiencies of organization effectively.
2.2 Sources of Finance
Finance is the most essential requirement for an organisation's growth, it's expansion and
also it's development. Finance is the core element in an organisation's working. Finance can be
made available for an organisation from sources such bas internal as well as external sources. It's
organisation's choice from where to get the funds as it is crucial to select the most appropriate
source as different sources carry different costs (Senge, 2014). Sources of finance can be
classified as Internal or external, long term borrowing's and short term borrowing's, debt, equity,
etc.
As per the given case scenario, it is analyzed that Sainsbury is trying to establish its 20
new branches across UK by 2017-18. Therefore, accomplishing this project, sources for
allocating funds are recognized to get adequate money for implementing set strategies. In this
regard, following sources are identified to allocate fund as:-
Internal Sources of Finance:
Internal sources of finance are the funds which are available with the organisation ie.. the self
generated funds within the organisation.
 Retained Earnings/Profits - It is the internal source of finance as it is the profit kept
with the organisation after paying the dividends to the shareholder's and drawings. It is
also termed as Ploughing back of profis.
 Sale of Assets - It is an another internal source of finance as whenever organisation is in
a need of funds and an asset is abandoned it can be sold and cash can be generated for the
projects. It also reflects as long term and short term finance (Stevens and Whittle, 2016).
Suppose when a car is sold it reflects short term finance and when a land, building or a
machinery is sold it ensures the long term borrowing for the organisation.
External Sources of Finance:
External sources of Finance are the funds which are been arranged from outside the business. It
generally includes long term sources and short term sources.
A. Long term sources:

 Equity share capital – It is the most important source of finance for a company. It is
raised through the organisation's shareholders. It is called as permanent capital but the
shreholders receive a share in profits in the form of dividends. The most important key
feature of equity share capital is sharing of ownership right, which dilutes the right of
current shareholders to some extent (Subrahmanyam and Titman, 2013). There are 2
different types of shares :- Ordinary shares and Preference shares.
1. Ordinary shares - Ordinary shares are the most common shares as been hold by the
ordinary shareholders whether in any company or organisation. In these kind of shares dividend
depends on the profit earned by the organisation. But holders of ordinary shareholders carry
voting rights.
2. Preference shares – Preference shares carry a less risk than the ordinary shares as they
are not the owner's of the company or been an organisation. Though they are offered a fixed rate
of return which may be less than that of ordinary shareholder's.
 Long term Debt – One of the major sources of long term financing is long term debts.
These debts are generally been taken for a period more than a year. An advantage of
these kind of loan is that the can be repayed over the period of time.
 Debentures – Some lind of loans are are secured by a fixed or floating charge against the
organisation's assets, such kind of loans are called Debenture loans. Debenture holder's
receive their interest before any dividend paid to the share holder's and in case debenture
holder's are not paid they will be treated as the preferential creditors (Valackiene, 2015).
B. Short term sources:
 Bank Loans – These kind of laons require a rigid agreement between the bank and the
bowwower. The amount should be paid within a certain period of time as specified in the
agreement.
 Bank Overdraft – Businesses now-a-days require cash on a daily basis because of a
certain gap between it's collection and payment. Thus Bank overdraft is the easiest mode
of short term financing in an organization.
 Retained earning – It is accumulated as net income of corporation that is retained by
corporation at particular point of time, such as at the end of reporting period. retained

earning prefers to percentage of net earning not paid as dividend but retained by company
to reinvest in its core business or to pay debts. Re= Beginning re+ net income-dividends.
 Sales of assets – Company can make or raise money from sales of assets, like sale of
premises, building, plant or machinery
Above mentioned all sources are analyzed to allocate fund for expansion of Sainsbury by
establishing new branches. However, for setting up 20 new branch requires high level of fund
therefore critical evaluation on each source is needed. In accordance to this, by taking advantage
of loan from financial institute as bank and using reserved cash as retained earning for getting
sources to implement plans to establish new branches. However, by allocating funds through this
sources will be able for financial management related to achieving high level of fund for
effectiveness of Sainsbury.
TASK 3
3.1 select appropriate budgetary targets for an organization:
Budgetary control is the process of determining various actual results with budgeted feature for
enterprises for future period and standard set then comparing the budget with actual performance
for calculating variance (Clark and Gilbert, Ca, 2014). Budgetary control is system of cost
controlling which include preparation of budget, coordinating and controlling department and
establishing responsibilities, comparing actual performance with budgeted one and acting onto it
to achieve maximise profitability. In short planning in advance so as whole system can be
controlled.
Some few budget are Fixed,Variable and zero based budgeting.
 Fixed budget is budget which is designed to remain unchanged irrespectively with the
level of activity. It is based on single level of activity. This budget's performance report
compare data from actual operation with single level of activity reflected in budget. It is
based on assumption that company will work on some level of activity and specified
production can be achieved
 Flexible budget is defined as a budget which recognise the difference between fixed,
semi-fixed and variable cost is change as per change in level of activity. It is also known
by other name like variable, dynamic etc (Pasquariello, 2014).

Flexible budget would be the best for Salisbury as it is considered all cost related to
manufacturing goods and services like Fixed cost variable cost and semi variable cost. So
company can use it meeting the production need and requirement of the company.
 Zero based budgeting is method of budgeting in all expenses are clarified for each new
period. It starts with zero base and all function in an organization are analyzed for
demand and cost.
The above budget is Financial budget which meet the requirement of the Sainsbury and
budget is prepared as per the financial performance of the company.
Target Setting: To set the target the company financial budget has been made so that
Sainsbury can meet the financial need and plan production process as their objective of achieving
high profit and selling Products.
Particulars Budget
Opening 1242
sales 25857
Other income 15000
Total 27099
Cost of sales 24564
Sales, general and administration expense 1034
Other overheads 1000
Total 26598
Net cash (deficit/Surplus) 501
So budget for Sainsbury company Sales was 23507 and increased to 10%. Other income remains
at 15000 and total is 27099. Sales and Admin. exp is fixed at 1034 other overhead is budgeted at
26509. So net cash is 501.
3.2 Participate in the creation of a master budget for an organisation
Master budget is comprehension projection or interconnected budget of sales, production
cost, purchase and income etc. and also include financial statement. A budget is future financial
transaction planning. Master budget serves as a planning and controlling tool to the management
since they can plan the business activity during the period on the basis of master budget. At the
end of each period actual budget can be compared with master budget (Segal, Shaliastovich and
Yaron, 2015).