UNIT 7003V1 Financial Management Report

This report analyzes Sainsbury's financial performance using various financial tools and techniques. It begins by discussing sources of financial data, emphasizing the importance of reviewing and questioning data for accuracy. Ratio analysis, including horizontal and vertical analysis, is used to compare Sainsbury's performance to its competitor, Tesco, across profitability, liquidity, efficiency, and gearing ratios. The report then delves into budgetary analysis, outlining the process of budget preparation and analyzing a cash budget for Sainsbury's, identifying variances and suggesting alternative courses of action. Finally, investment appraisal techniques, specifically Net Present Value (NPV) and Payback Period, are applied to evaluate the viability of expansion projects in Asian and European countries, recommending the European expansion based on higher NPV and shorter payback period. The report concludes by highlighting the importance of optimal resource allocation and strategic decision-making in financial management.

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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