Strategic Financial Management Report: Financial Analysis of Sainsbury

This report provides a comprehensive analysis of strategic financial management, focusing on the case of Sainsbury, a major UK supermarket chain. It begins by evaluating the risks associated with inadequate financial resources and explores various planning tools like budgeting and capital budgeting to mitigate these risks. The report then delves into an analysis of Sainsbury's financial statements, using ratio analysis to assess its financial viability and compare its performance to that of its competitor, Tesco. Key financial ratios such as profitability, liquidity, solvency, and efficiency ratios are examined. The report also assesses strategies for monitoring both tangible and intangible resources, and it explains the importance of cost in pricing strategies, suggesting improvements to existing costing systems. Finally, the report explores investment appraisal techniques and analyzes the viability of expansion plans through these techniques, alongside strategies for minimizing different types of financial risks. The report provides a detailed overview of Sainsbury's financial position, performance, and management strategies.

Strategic Financial Management

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1. Evaluating the risks that can occur from inadequate resources along with the planning tools
for the same..................................................................................................................................3
2. Analyzing financial statements of Sainsbury to determine its financial viability...................5
3. Assessing strategies and tools that can be employed for monitoring both tangible and
intangible resources...................................................................................................................12
4. Explaining the importance of cost in pricing strategies and recommending improvements
for the exiting costing system....................................................................................................14
TASK 2..........................................................................................................................................14
1. Investment appraisal techniques............................................................................................14
2. Analyzing viability of expansion plan through investment appraisal techniques.................17
3. Different types of risk and strategies to minimise risks........................................................20
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................24

INTRODUCTION
Strategic financial management is the process that lays high level of emphasis on the
attainment of long term organizational goals. In the present era, firms make focus on employing
the tool of strategic financial management which in turn facilitates specific planning pertaining
to the usage and management of organizational financial resources. Moreover, strategic planning
assists firm in making allocation of monetary resources according to goals and thereby helps in
generating high return as well as maximizing shareholder’s return. Such field of finance also
helps in assessing potential investment opportunities that available to business and thereby
ensures smooth functioning of business operations and functions.
For this project, Sainsbury, largest chain of supermarket in UK, has been selected. It
offers wide range of products or services to the customers at suitable prices. In this, the present
report will shed light on the tools & techniques that can be undertaken for the purpose of
planning and allocation of financial resources. Further, report also highlights the extent to which
financial position and performance of Sainsbury is good. It also depicts the manner in which
organization can monitor both tangible and intangible resources. Report will also provide deeper
insight about the way in which capital budgeting tools & techniques aid in decision making.
TASK 1
1. Evaluating the risks that can occur from inadequate resources along with the planning tools for
the same
Financial decisions that are undertaken by manager have significant impact on both
internal and external performance of an organization.
1. Strategic decision -
The strategic decision is taken to formulate future of the business in effective way so that
it may be able to beat competitors in effectual way. This is required so that organisation may
flourish in the best possible way. The strategic decision is taken and is really difficult to ascertain
and is affected by internal and external factors and as such, it is basically formulated with
objective of the capital expenditures, plant layout and many more which are examples of

strategic decision taken by organisation (Sofat and Hiro, 2015).
2. Basic decision -
The basic decisions are required to be taken by organisation which are much vital for it.
These are to be taken deliberately by organisation so that it may move ahead of the rivals quite
effectively. Thus, it involves plant location, channels of distribution and other basic decisions
which affect organisation's performance in the positive way. These decisions are taken by
organisation so that it may perform well in the market and as such, it may earn profit with
implementation of structured policies.
3. Policy decision -
Policy decision are taken by upper management or top management of the organisation to
take better and effective decisions. It affects entire organisation and as a result, it is able to
perform well by implementing well-structured policy decisions. It affects internal and external
factors as well. The policy decisions are taken which consists of financial structure, policies
related to marketing and maintaining effective organisation structure as well (Chandra, 2011).
These policy decisions form the basis of effective performance of the organisation and as such,
goals are achieved by taking enhanced decisions. The above three key resource decisions are to
be taken effectively by management so that organisation may flourish in the market with much
ease.
Occurrence of risk from inadequate resources
 In the case of having inadequate resources Sainsbury plc would not become able to grab
profitable opportunities which will arise in near future. This in turn places direct impact
on organizational profitability and overall position.
 Sainsbury plc will also face difficulty in investing money in R&D activity when the
situation of financial inadequacy exists. Now, innovative offering become key for success
which in turn assists in gaining competitive edge over others. Thus, if firm does not have
enough resources for research activity then there are no innovative and lack of
competitive edge (Hill, 2007).
 Along with this, financial inadequacy also impacts expansion plan of business to a great
extent. Now, with the motive to widen customer base leading companies like Sainsbury
makes more focus on doing business at global level. Hence, in the absence of having

adequate financial resources Sainsbury would not become able to execute plan in relation
to expanding operations globally.
There are several tools and techniques which can be used for financial planning and
allocation of resources:
 Budgeting: By undertaking budgeting tools and techniques such as incremental, ZBB,
ABB etc Sainsbury Plc can make optimum allocation of financial resources in different
business activities. Traditional technique such as ZBB lays high level of emphasis on
resource allocation as per the needs or requirement. According to zero base budgeting,
every list of item is clearly justified which in turn gives indication regarding optimal
financial allocation (Hofstede, 2013). Further, budgeting tool also helps in ascertaining
the position of surplus / deficit and helps in finding suitable ways that contributes in goal
attainment.
 Budgetary control: For planning purpose, budgetary control tool is considered as good
which also helps in making suitable allocation of financial resources. Hence, by doing
comparison of actual results with standards firm can assess both deviations and
associated causes (Curry, 2013). Thus, by taking into account the outcome or analysis of
budgetary control business unit can develop competent plan for the upcoming time
period.
 Capital budgeting: By employing capital budgeting tools such as payback, NPV, ARR
and IRR Tesco plc can do effectual planning. Moreover, methods of investment appraisal
help in determining project which prove to be more beneficial for them (Dada, Azim and
Ullah, 2014). In this way, by selecting suitable project firm can do suitable planning.
2. Analyzing financial statements of Sainsbury to determine its financial viability
Ratio analysis may be served as a financial tool that provides high level of assistance in
summarizing and evaluating financial statements of the firm. By using such tool firm can assess
the extent to which its performance is improved over the time frame (Benedict and Elliott, 2008).
Further, such technique also helps firm in evaluating its position over rival. In this, to ascertain
monetary position of Sainsbury in against to the rival firm Tesco, leading retail chain of UK, has
been considered. Hence, such technique is highly significant which in turn assist firm in
evaluating its performance and helps in developing competent framework.

Ratio analysis of Sainsbury for the period of 2016 and 2017is as follows:
Sainsbury Plc (internal
analysis)
Tesco Plc
(external
analysis)
Particulars Formula 2016
2017 2017
Profitability ratios
Gross profit 1456
1634 2902
Net profit 471 377 -40
Operating income
606
(Sainsbury
Plc
financials,
2018))
427 1017
(Tesco Plc
financials,
2018)
revenues 23506 26224 55917
Gross profit margin (Gross profit/sales)*100 6.19% 6.23% 5.19%
Net profit margin (Net profit / sales)*100 2.00% 1.44% -0.07%
operating profit margin
(Operating profit / sales *
100) 2.58% 1.63% 1.82%
Liquidity ratios
Current assets 4444
6312 15417
current liabilities 6724
8573 19405
Inventory 968 1775 2301
Prepaid expenses 107
- -
Current ratio
(Current assets / current
liabilities) 0.66
0.74 0.79

Quick ratio/acid test ratio
(Current assets-stock) /
current liabilities 0.50
0.53 0.68
Efficiency ratios
Inventory turnover ratio COGS / Inventory 22.44
17.93 22.41
Fixed assets turnover ratio Net sales / fixed assets 2.42
2.65 3.11
Solvency ratio
Long-term debt 2053
625 9330
Shareholders’ equity 6365
6872 6438
Debt-equity ratio
Long term debt /
shareholder’s equity 0.32 0.09 1.45
Profitability ratios

Gross profit
margin Net profit margin operating profit
margin-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Sainsbury Plc 2016
Sainsbury Plc 2017
Tesco Plc 2017
Graphical presentation shows that GP ratio of Sainsbury Plc inclined from 6.19% to
6.23% respectively. However, GP margin of the firm was highly lower and no significant growth
rate found under such category. Hence, performance trend shows that firm failed to exert high
control on direct expenses. Nevertheless, in comparison to Tesco, GP margin of Sainsbury Plc
was good.
Outcome of ratio analysis shows that operating margin of Sainsbury Plc declined over the
time frame from 2.58% to 1.63%. In contrast to this, in 2017, operating margin of Tesco Plc was
1.82%. Referring such aspect it can be depicted that Tesco’s margin was good in 2017 which in
turn indicates that Sainsbury’s need to exert control over expenses.
In the accounting year 2016 and 2017, NP margin of Sainsbury plc account for 2% &
1.44%. Hence, decreasing trend was assessed in the NP margin of such retail unit during the
concerned accounting years. The main reasons behind decreasing margin are high level of
indirect expenses and extent to competition. On the other side, in 2017, NP margin of Tesco plc
accounted for -0.07% significantly. Hence, as compared to competitor firm profitability aspect of
Sainsbury Plc was recognized as good.
Liquidity ratios

2016 2017 2017
Sainsbury Plc Tesco Plc
0.55
0.6
0.65
0.7
0.75
0.8
Current ratio
Current ratio
2016 2017 2017
Sainsbury Plc Tesco Plc
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Quick ratio/acid test ratio
Quick ratio/acid test ratio
By doing analysis of financial statements, it has assessed that current ratio of Sainsbury
was improved over the period. In the financial year 2017, current ratio of Sainsbury and Tesco
accounted for .74:1 & .79:1. It presents that capability of both the firms in relation to meeting
financial obligations from current assets are similar to a great extent. However, as compared to
ideal ratio such as 2:1, current position of both the firms pertaining to meeting obligations are not
good. Further, quick ratio of both the firms is equal to standard such as .5:1. As, in 2017, quick
ratio of Sainsbury and Tesco Plc was .53 & .68:1. Considering current situation, it can be
presented that Tesco plc was highly capable in relation to fulfilling obligations from current
assets other than inventory and prepaid expenses. Thus, both Tesco and Sainsbury Plc needs to

undertake strategic measure for maintaining enough assets within the firm and strengthening
liquidity position (Thomas, 2009).
Solvency ratio analysis
2016 2017 2017
Sainsbury Plc Tesco Plc
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Debt-equity ratio
Debt-equity ratio
Ratio analysis results show that debt-equity position of Sainsbury Plc declined from .32:1
to 0.09:1 at the end of 2017. Moreover, in 2017, long term debt level of Sainsbury decreased
from 2053 to 625 GBP million which in turn resulted into lower solvency position. On the other
side, debt-equity ratio of Sainsbury Plc was 1.45 in 2017. In accordance with ideal ratio such
as .5:1, business unit should issue 2 equities in against to 1 debt for ensuring proper balance in
capital structure (Coleman, 2007). By taking into account overall position it can be mentioned
that solvency position of Sainsbury Plc was not in line with ideal measures. Further, higher debt
level also imposes monetary burden in front of firm so it can be said that solvency position of
Tesco Plc was also not good.
Efficiency ratios

2016 2017 2017
Sainsbury Plc Tesco Plc
0
5
10
15
20
25
Inventory turnover ratio
Fixed assets turnover ratio
Inventory turnover ratio presents declining trend in the performance of Sainsbury plc
from 22.44 to 17.93 respectively. In this, decreasing trend presents that stock of such retail unit
was not sold and replaced frequently in 2017 over 2016. In the current times, UK retail sector is
filled up with high level of competition which in turn closely influences firm’s overall
performance. However, stock turnover ratio of Tesco plc was 22.41 significantly at the end of
2017. It shows that customers are purchasing retail products or services more frequently from
Tesco plc as it offers high discounts to the customers over others. Thus, it can be presented from
evaluation that stock turnover ratio of Tesco Plc was good as compared to Sainsbury Plc.
Graph of fixed assets turnover ratio shows increasing movement from 2.42 to 2.65 times
respectively. However, still fixed assets turnover ratio of Sainsbury plc was not good over the
years and rival firm. Thus, Sainsbury is required to undertake strategic measure for making
improvement in its efficiency ratios or aspects.
Recommendations for improvement: On the basis of ratio analysis result’s following
recommendations are given to Sainsbury plc for enhancing financial performance such as:
 It is advised to Sainsbury plc to employ modern budgeting tools and techniques such as
zero or activity based model which in turn helps in making optimal allocation of financial
resources. Along with this, considering appropriate and realistic budget firm should make
comparison of actual performance with standards (Zoan, 2014). In this way, by taking

effectual measure on time business organization can control expenses and enhance profit
margin.
 Further, it is recommended to Sainsbury Plc that in the near future emphasis should be
placed on issuing debt for the development of suitable financial structure. Thus, firm
should keep in mind ideal ratio while taking decision in relation to fulfilling monetary
needs from varied sources.
 Sainsbury Plc also needs to make focus on maintaining enough current assets such as
inventory, cash etc within the firm for enhancing liquidity position. This in turn makes
improvement in firm’s capability regarding meeting of current liabilities such as bank
overdraft, creditors etc (Brown and Petersen, 2011).
 For enhancing inventory turnover ratio and sales firm needs to highlight both price as
well as quality in promotional campaign. Moreover, now customers are highly concerned
toward both pricing and quality of products or services. Thus, through the means of
promotional plan or campaign firm can attract more customers (Chavis, Klapper and
Love, 2011). Along with this, for increasing the level of fixed assets turnover ratio
Sainsbury Plc needs to lay emphasis on maintenance and conducting training &
development session for personnel.
3. Assessing strategies and tools that can be employed for monitoring both tangible and
intangible resources
Tangible resources
1. Physical resources -
This tangible resources include assets which consists of buildings and plant and
machinery. It is essential that business should take effective steps to maintain physical resources
so that it may yield adequate revenue in effectual way. For effective maintenance, reduction in
life cycle costs should be made, make effective maintenance of monitoring system so that assets
may provide better results in effectual manner (Renz and Herman, 2016).
2. Material resources -
The material resources are need to be effectively managed by company so that it may
yield benefits to organisation in effective way. This includes strategies to effectively maintain
resources by reusing, recycle material resources. The material resources are required to be

managed by having adequate policies' formation so that it may yield better results to company.
Intangible resources
1. Direct Intellectual capital methods -
The value of intangible assets such as copyright, trademarks is estimated by identifying
various elements of it. Once these are identified, it can be directly evaluated with much ease.
2. Market capitalisation methods -
The value of intangible assets is calculated by difference between shareholder's equity
and that of market capitalisation as it intangible value quite effectively.
3. Technological resources -
These resources form the basis of value of intangible assets of the company. It includes
various software used by firm in effective way (Anderson, Reeb, Upadhyay and Zhao, 2011).
Moreover, it includes proper utilisation of technological aspect so that firm may yield better
results. For protection purpose, intellectual property is being taken so that it may not be taken in
control of other company. As such, it provides complete protection from any unauthorised
access.
Value of intangible resources
Intangible resources are important part of company though it cannot be seen and touch,
But it has immense value to business as it affects profitability of the concern. This includes
technological aspect of the business which is required so that innovation may help company to
achieve goals in effectual way with much ease (Lins, Servaes and Tamayo, 2011). The reputation
is important aspect of the firm as without this, customers' will not be attracted and as such, it will
affect profitability aspect of the organisation. Moreover, goodwill is also important and any
unstructured strategies may ruin reputation and goodwill of the organisation. Furthermore,
intangible resources are quite helpful for organisation as it is deeply involved in the business and
as such, it is quite important for company to have immense efficiency and this is also difficult to
analyse by rivals as well.

4. Explaining the importance of cost in pricing strategies and recommending improvements for
the exiting costing system
From assessment, it has found that cost is one of the main elements that give input for
setting appropriate prices for the offerings. According to financial management cost is the sum of
both direct and indirect expenses that incurred by business unit for manufacturing and offering
products or services to the customers. Every business unit performs activities with the aim to
generate suitable margin (Newell and Seabrook, 2006). In this regard, firm needs to assess cost
incurred by it for manufacturing and offering products. There are several pricing strategies that
can be undertaken by Sainsbury plc such as cost plus, marginal etc.
Under cost plus pricing method, business unit determines price by adding desired level of
margin into it. Hence, as per such method for the determination of price information regarding
cost is highly required (Peirson and et.al., 2014). Along with this, in other methods such as
marginal, competitive etc information regarding unit cost is highly required. Currently,
Sainsbury Plc is undertaking competitive pricing strategy considering the trend of competition in
UK market. On the basis of such method, firm determines cost and sets prices as per the rival
firm’s policy. Now, profitability aspect of firm decreased as compared to before times. Thus,
existing costing system can be improved by Sainsbury Plc through the means of ABB technique
which in term helps in determining cost associated with operations and thereby helps in setting
suitable pricing policies.
TASK 2
1. Investment appraisal techniques
The investment appraisal techniques are quite useful for company to invest in new project
to analyse whether investment will be profitable or not in the long run. This is important as
company invests money in the new project with the expectation that it will yield adequate returns
within stipulated time in the best possible way. ABC manufacturer is planning to launch new unit
in other country and for this, investment needs to be made by analysing aspects of the project. As
such, capital investment appraisal techniques are of utmost vital to ABC manufacturer. The
various investment appraisal techniques are discussed below-
Payback period -

The payback period is important method which provides clarity to organisation related to
profitability aspect of the new project. The main essence of this method is that it gives
information in years that how much time project will require providing adequate returns. Thus,
company comes to know about when will project provide returns. Less the payback period, better
for the organisation as it will yield results quickly (Gundersen and Garasky, 2012). The payback
method takes cash inflows to equal cash outflows of the project. As such, recovery of money
invested in the project will be analysed and cash inflows and outflows will match accordingly. As
a result, it provides clarity to ABC manufacturer that when it will recover cost of investment.
Accounting Rate of Return (ARR) -
ARR method is also known as return on capital employed provides clarity how much
profit will be gained by the company on the investment made. Thus, it is clearly identified that
company can expect profitability aspect of the new project and as such, decision may be made
regarding to invest in the project or not. This provides clarity and transparency to company
related to profitability aspect of the project. It is much easier to compute ARR as information is
given regarding investment. It is not based on cash flow statement but is related to profits which
are included in the financial statements of organisation. It is quite useful technique than payback
period as it takes entire years involved in useful life of project (Parker, 2012).
Net Present Value (NPV) -
NPV method is another useful technique to analyse profitability aspect of the project.
This method provides clarity about the project by taking difference between present cash flows
and value of present cash outflows to determine profitability aspect of the new project. The
difference value of present cash inflows and outflows should be positive and it implies that
investment in the project will be sound enough and will yield adequate returns. Positive value
means that revenues is much greater than expenses or costs of the project. The main essence of
NPV method is that it considers time value of money of the project. By analysing NPV, firm may
be able to analyse whether investment in the project will be viable or not in the best possible
way.
Internal Rate of Return (IRR) -
IRR is useful capital investment technique to be used by management of ABC
manufacturer to take expansion decision or not quite effectively. This is percentage discount rate

method that makes NPV of cash flows equal to zero of the project. As such, rate of return is
calculated which is then used to determine profitability of the project (Klieman and Feldmeier,
2011). This is quite advantageous to organisation as it takes into account time value of money.
Moreover, total cash inflows and outflows are taken to determine viability of the new project.
Higher the IRR, better for ABC manufacturer and it should invest in the project with much ease.
Profitability Index method -
It is also important method of analysing viability of the investment. It is just like NPV but
the main difference is that it NPV deducts initial investment while in profitability index method,
it is taken as divisor. In simple words, this method is arrived by dividing future cash flows with
initial investment of the project. As per market analysts, if the profitability index of the project is
greater than 1, then it should be accepted. Thus, if investment in the new project of ABC
manufacturer in terms of profitability index method is greater than 1, then it should invest in the
same. As such, this method is a useful tool to rank project quite effectively.
Discounted Payback period -
The discounted payback period method is another useful method for analysing
profitability aspect of the project. Thus, it will be helpful to ABC manufacturer to analyse
whether it should invest in expansion of unit or just drop the plan. This method considers time
value of money quite effectively. As such, cash flow is being broken in periods to equal cash
inflows and outflows (Top 7 investment appraisal techniques, 2018 ).
The above investment appraisal techniques may be used by company to take better and
effective decision whether to plan for expansion or not.
Sources of finance
1. Bank loans -
This is quite effective way of raising funds from banks. This method should be taken by
analysing financial strength of organisation so that it may repay principal amount along with
interest thereon. As such, it is effective source of raising funds for daily requirements of business
and as such, ABC can take bank loan for expansion of unit.
2. Retained earnings -
When business earns profit, it pays out dividends to shareholders'. But instead of
providing whole amount of profits, it may retain some part of profits which can be used for
future operations. This part of profits is known as retained earnings. ABC Ltd is successful

business and can use retained earnings to be used in the expansion unit.
2. Analyzing viability of expansion plan through investment appraisal techniques
According to the scenario, ABC Ltd is considering expanding its business and it has three
options available for the same that is either to expand its business in USA or France or in
Switzerland. Before reaching to final decisions, firms require examining all of these thoroughly
considering relevant costs and benefits associated with it. Hence, for evaluating the viability of
proposals from financial perspective NPV technique of investment appraisal has been
undertaken. The rationale behind the selection of such firm is that it presents solution by taking
into account time value of money concept. According to NPV criteria, firm should focus on
investing money in the project that offers high return.
USA
Year
Revenue
(refer
working
note 1)
Expected
running
expenses
Approva
l fees
Net
Cash
flow
(outflow
–
inflow)
PV factor
@ 10%
Discounted
cash inflow
1 333333 210,000 22000 101,333 0.909 92112
2 318182 210,000 22000 86,182 0.826 71186.2
3 304348 210,000 22000 72,348 0.751 54333.2
4 333333 210,000 22000 101,333 0.683 69210.7
5 311111 210,000 22000 79,111 0.621 49128
6 280000 210,000 70,000 0.564 39480
Total
discounted
375450

cash
inflow
Less:
initial
investment
(Refer
working
note 1) 22000
NPV 353450
Working note 1:
Year Revenue
Exchange rate (US $ v/s
GBP)
Value of revenue in
GBP
1 700000 2.1 333333
2 700000 2.2 318182
3 700000 2.3 304348
4 700000 2.1 333333
5 700000 2.25 311111
6 700000 2.5 280000
Approval fees of 22000 GBP is considered as an initial investment.
France
Computation of net cash flow and NPV
Y
ea
r
Revenu
e (refer
working
note 2)
Expecte
d
running
expense
s
Appro
val
fees
Total
cash
outflow
Net Cash flow
(outflow –
inflow)
PV factor
@ 10%
Discounte
d cash
inflow
0 25000
1 250000 190000 25000 215000 35000 0.909 31815
2 236842 190000 25000 215000 21842.1 0.826 18041.6
3 225000 190000 25000 215000 10000 0.751 7510
4 214286 190000 25000 215000 -714.29 0.683 -487.86
5 230769 190000 25000 215000 15769.2 0.621 9792.69

6 236842 190000 190000 46842.1 0.564 26418.9
Total
discounted
cash inflow 93090.4
Less: initial
investment
(Refer
working note
3) 50000
NPV 43090.4
Working note 2: Conversion of Euro into GBP
Year Revenue
Exchange rate (Euro v/s
GBP)
Value of revenue in
GBP
1 450000 1.8 250000
2 450000 1.9 236842.1
3 450000 2 225000
4 450000 2.1 214285.7
5 450000 1.95 230769.2
6 450000 1.9 236842.1
Working note 3: Initial investment
Particulars Figures (In GBP)
Royalty fees payment 25000
Payment of approval fees in advance 25000
Initial investment 50000
Switzerland

Year
Revenu
e
(consid
er
workin
g note
4)
Expens
es
Licensi
ng fees
Inspecti
on cost
Total expenses or
outflow
Net
cash
flow
1 38000 200000 30000 230000
-
19200
0
2 31666.7 200000 30000 230000
-
19833
3
3 27142.9 200000 30000 70000 300000
-
27285
7
4 31666.7 200000 30000 230000
-
19833
3
5 29230.8 200000 30000 230000
-
20076
9
6 27142.9 200000 30000 70000 300000
-
27285
7
Working note 4:
Year SF SF/GBP Figures (In GBP)
1 380000 10 38000
2 380000 12 31666.7
3 380000 14 27142.9
4 380000 12 31666.7
5 380000 13 29230.8
6 380000 14 27142.9
Interpretation: By applying tools and techniques of investment appraisal it has assessed
that lower initial investment and high NPV associated with expansion plan related to US such as
22000 and 353450 GBP. On the other side, comparatively initial investment is higher if ABC
takes decision in relation to operating unit in Europe. In such option, NPV accounts for 43090.4

GBP respectively. In contrast to this, negative returns will be generated by ABC Ltd if it makes
focus on establishing unit in Switzerland. Thus, considering overall evaluation and outcome it is
suggested to ABC Ltd to make more focus on US operations rather than others. Moreover, such
plan or proposal will offer high benefit to the concerned clothing manufacturer at low cost.
Hence, by establishing another unit in US business unit get desired level of outcome or success.
3. Different types of risk and strategies to minimise risks
1. Financial risk -
Financial risk in international market is quite important to be analyse so that risk may be
minimised up to great extent. This risk means that if company is in debt and if shareholders'
invest in the same, then they might lose their money. This is determined by analysing cash flow
statement which provides clarity about inability of company to meet financial liabilities. ABC
Ltd need to analyse effectively financial risk that might arise in the expansion of the business in
other nation. This is required so that it may perform well and earn good profits (Dew and Xiao,
2011).
2. Social risk -
The social risk means that citizens of the country may not be harmed by the business in
any manner. Thus, it creates social risk on the company to take care of the social aspects and
continue the business without harming citizens. This is important aspect and this should be
analysed quite effectively to mitigate risks in the business.
3. Technological risk -
The technological risk is that which results from failure of technology. This includes
security related to theft of customer database which results in severe damage of reputation and
causes legal issues. This may result into decrease in profitability of the concern. Technological
risk should be avoided by company in the best possible way so that risk may be minimised up to
great extent. As such, ABC organisation should try to mitigate technological risk in the best
possible way.
4. Operational risk -
The operational risk is aroused because of some weakening in internal environment of the
organisation. It usually results from breakdown of internal affairs of the business be it
employees, procedures and systems. In simple words, operational risk results from failing of
human in the business which are mistakes and errors done usually by employees of the

organisation (Bethke-Langenegger, Mahler and Staffelbach, 2011). Moreover, it also includes
failure of equipments which hampers production procedures as well. Furthermore, it involves
any incident which hinders business processes severely. Poor operational management may hurt
organisation's reputation quite badly. For this, effective steps should be taken so that company
may be less prone to operational risk.
5. Reputational risk -
Reputational risk is nothing but loss to the company in event of any discrepancies are
observed. This includes lost in profits, increased in various costs or expenditures. Moreover, it
also results in deterioration of shareholder value (Kombo, Wesonga, Murumba and Makworo,
2011). This leads to destruction of reputation of the business. ABC Ltd need to ensure that it may
not destroy reputation in the establishment of new unit. Reputation risk is serious threat to
company and it results into deterioration of profits and also lead to complexity related to
sustaining in the environment. As a result, company's management should be careful as it might
destructs brand image and corporate identity of the organisation.
Different techniques for determining risk levels
1. Traffic light systems -
The business need to continuously monitor so that risks may be minimised up to great
extent. This involves three levels of risk which are typically based on three colours of traffic light
such as red, yellow and green. The results based on red colour conveys that certain action to be
taken by company so that risk can be minimised and as such, performance may be improved. On
the other hand, yellow colour indicates performance is equal to the target which simply means
that goal is achieved by company and as such, risk is minimised. While, green colour says that
risk is completely minimised as results are much better than expected to be.
2. Risk impact / probability grids -
Risk management is vital aspect in organisation as through this, it takes effective control
and monitor activities quite easily. As such, priority is being provided to risk so that it may not
deteriorate performance of the company. As such, ABC Ltd is planning to expand its reach to
other market, then it is essential to prioritise risks by it (Harrington, Hauser, Olney and Rosenau,
2011). The risk chart is based on two dimensions such as probability and impact. Probability
aspect states that risk may occur in the future event. The probability of risk is above than 0 % to
less than 100 %. On the other hand, impact of risk have always a negative impact on business but

impact is different on various business depending upon several elements. As such, risk impact /
probability grids consists of critical, medium level and low level risks.
3. Decision tree -
This is a decision support tool which is in the form of tree having various consequences,
outcomes of event and various costs. In simple words, decision tree is used to state every
possible consequences of a decision. As such, it is vital technique to analyse and monitor risk in
the best possible way (Haldane, 2013). This is important tool as it provides when business should
take effective decision which is provided by decision tree quite easily. It is a well-structured
format which is quite useful for company to take effective and better decisions with much ease.
CONCLUSION
By summing up this report, it has been concluded that by using financial management
tools Tesco can deal with the issue of inadequate resources. Hence, by employing budgeting and
budgetary control tools business organization can deal out with monetary risks more efficiently.
Besides this, it can be inferred that Sainsbury is required to make modifications in the existing
strategic aspects for enhancing profitability, liquidity, solvency and efficiency ratio. Further, it
has been articulated that cost is one of the main factors that provide high level of assistance to
business unit in setting suitable pricing framework.
It can be summarized from evaluation that Sainsbury Plc undertakes competitive pricing
strategies with the motive to enhance and retain customer base. Along with this, it can be stated
from evaluation that techniques of investment appraisal provide high level of assistance in
making selection of profitable project out of several. It can be seen in the report that ABC
manufacturer should focus on investing money in US venture as it will provide firm with high
returns and thereby aid in organizational growth as well as success. In addition to this, by doing
both internal and external analysis business unit can measure as well as monitor risk when
moving to international market.

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