Accounting can be determined as the language of business enterprises. It is a financial language through which an entity can communicate its financial position to its users. Through the means of accounting user can determine the strength, weakness, opportunities and threats of the cited entity. Accounting statements reveals the financial position of an enterprise which allows its users to take relevant decisions. Through these statements the management of cited entity can check or analyse that weather or not the present situation of entity is in the way to achieve predetermined objectives or not. Leaders and managers of cited entity needs to take such decisions though which they can utilize their strengths similarly they can also eliminate their weaknesses. In this report, there are two assessments, through which user can get information regarding the financial statements and the way that reveals the financial positions, further assessment is made upon cash flow and performance in financial terms by using horizontal and vertical trend analysis. The report is based on case study of Sainsbury which is UK based retail store. It is the second largest chain of supermarket in UK.(Neustadt, R.E. 2011)
Financial accounting is totally depends on the financial statements of an organisation. There are various kinds of financial statements which an enterprise needs to maintain. In case of companies, management of company requires to maintain all the financial statements which are mandatory in nature.(Kimmel, P.D., Weygandt, J.J. and Kieso, D.E., 2010) There various types of financial statements like income statement, cash flow statements, statement of financial position,Statement of changes in equity and gains and Notes to Financial statement. These statements assist the managers and leaders to take decision foir the achievement of predetermined goals and objectives. Income statement contains the transaction regarding any income and expenditure which occurred during the whole financial year which are always as per accrual basis.(Porter, G.A. and Norton, C.L., 2012) Through the detailed analysis of income statements the user of financial statement can take decisions and he can also frame certain strategies to fulfil the requirements and to achieve goals and targets. On the other hand the statement of financial position reveals the position of an entity as on the date on which such balance sheet or statement of financial position has been prepared. Through statement of financial position commonly known as balance sheet a user can check weather or not its financial position is as per the plan and managers and leaders can also check the indebtedness of entity. Further they can also compare it with the assets they have so that they can analyse weather or not they are able to make payment of their debts.(Skogstad, G.D., 2011)
Cash flow statement is a statement which shows the inflow as well as the outflow of cash during the whole financial year. Cash flow statements doest follow the accrual concept because in this transaction are always recorded on cash basis. Which means weather or not the transactions are related with the current financial year but if movement of cash is there then that will be recorded in the cash flow statement. Cash flow statement contains following three sections :
Operating Activities :
Operating activities are those activities which are solely related with the operations of an enterprise. Operations are those activities for which business enterprise is running further it can be described as the main activity of an organisation. So any transaction which involves movement of cash and that is related with the operations, will be put in this category. Excess of inflows of operating activities over its outflow will be regarded as the cash generated from operating activities.(DRURY, C.M., 2013)
Investing Activities :
The activities in which an organisation spends its fund, which are not their operational activities will be regarded as investment. For example if a computer software development company employs its fund in construction of building or for purchasing any equipment or machine then this will be regarded as investing activity for such company. Any inflow or outflow from such activities will be considered in investing activities.(Needles, B.E., Powers, M. and Crosson, S.V., 2013)
Financing Activities :
The activities which are related with capital and funding is considered as financing activities. Issue of equity shares, debenture or bonds, payment of dividend and repayment of bank loan are a few examples of transactions which can be considered as financing activities.
Trend analysis of financial statements :
- Trend analysis or Horizontal trend analysis is the method through which analysis can be made of items containing in the financial statement. In it such items are placed in a horizontal statement and a comparative list has also made in such statement of those items with the amount of last financial year. This can provide trend in various items. So that user can easily compare the figure of current financial year with the previous years.(Schaltegger, S. and Burritt, R.L., 2010)
- Vertical analysis divides items of financial statements into three categories ; assets, liabilities and equity. It presents all these three items as in the proportion of total account.
There is a difference between vertical analysis and horizontal trend analysis. As horizontal trend analysis compares the figures of items of financial statement between a number of years. But on the other hand, vertical analysis is completely different. It compares the proportion of assets, liabilities, and equity with total amount. Ratio, vertical analysis and horizontal trend analysis are the three elements of financial analysis through which the user can get knowledge about the financial position of a firm or entity.(Bilcke, J., and et.al., 2011)
Financial reports describe the financial position a certain organisation on a certain date. As there are various stakeholders which can utilize the financial statements for their benefits so its become very important for a user to have understanding of financial reports. For a better understanding of financial reports which can assist the user in decision making process, financial analysis can be made. A user can analyse the financial statements and the items containing in such financial statements through ratio analysis, vertical analysis and horizontal trend analysis. Ratio analysis contains various types of ratios through which a user can estimate weather or not Sainsbury is beneficial for him or not. Ratio analysis can be described as the quantitative analysis of items which are contained in the financial statements. Ratio analysis is based on the items which are contained in the financial statements like income statements and statement of financial position or balance sheet. Ratio analysis evaluate the liquidity, efficiency, profitability and solvency of Sainsbury. (Van Ittersum, K., 2012)
Efficiency ratios or liquidity ratio :
It describe or explains the way in which sainsbury can use its assets and liabilities. Further it also has some short term solvency ratios which are used to analyse the ability of cited entity to repay its short term liabilities. Solvency ratio consists current ratio and quick ratio which is also known as Acid test ratio. Current ratio compares current assets with current liabilities. On the other hand quick ratio compares quick assets with current liabilities. Quick assets here refers to all current assets other than closing stock and prepaid expenses.
Debt management ratio :
Debt management ratio are also known as long term solvency ratio. In it a user of financial statements can calculate financial leverages and through it user can also quantify the ability of cited entity to avoid financial stress. Debt ratio , Debt- equity ratio are some examples of debt management ratio. Where debt equity ratio compares the outside liabilities with owner's fund. (Stevens, G.W., Deuling, J.K. and Armenakis, A.A., 2012)
Asset management ratio :
It deals in assessing a cited entity's success in management of assets to produce sales. In this category of ratio various items of financial statements are compared with net sales. Net sales can be derived after deducting sales return out of total sales. Asset management ratios are usually know as activity or turnover ratios. Some of the examples of turnover ratio are ; debtor turnover ratio, inventory turnover ratio, fixed asset turnover ratio, total asset turnover ratio. In ratios other than inventory turnover ratio net sales is taken as the numerator and other item is taken as denominator. But in case of inventory turnover ratio, cost of goods sold is compared with inventory.
Profitability ratio :
It assist the user of financial statements to analyse the performance of cited entity in terms of profitability or income. (Blengini, G.A. and Di Carlo, T., 2010)
Market value ratio :
This ratio assists the user to analyse the market value of an entity. Price earning ratio is an example of market value ratio.
Sainsbury has some key ratios like Current ratio which was 0.36 in 2014 and 0.61 in 2013, its quick ratio was 0.28 for 2014 and 0.29 for 2013. Further debt-equity ratio for 2014 was 0.37 and 0.46 for 2013.
Working capital can be described as the excess of current assets over current liabilities. The objective behind the working capital management is to ensure the management of payables, receivables and inventories. Its goal behind managing these elements of financial statements, is to ensure the ability of cited entity to repay the short term debts and to other expenses which incurs during the course of business operations. Working capital management can assist management and leaders of Sainsbury to employ the funds and resources generating fund in right task. (Ho, W., Xu, X. and Dey, P.K., 2010)
Working capital cycle :
It is the method to measure the time of conversion current assets and current liabilities into cash. Longer working capital cycle represents the time for which funds are employed in opeerations. Which means funds are blocked in operations without earning any return over it.
Need for the working capital management are described as below :
Management of inventory : inventory management refers to managing inventory so that the funds not gets blocked. Excess of inventory holding leads to blockage of working capital in it. Because of it cited entity will not get the required amount of return which they can earn if the fund which are blocked in inventory, invested some where else. In other words opportunity cost of funds invested in inventory is considered during inventory management. Sainsbury can manage its inventory holding so that the carrying cost can be minimized by maintaining the required quantity of inventory. (Mozumder, P., Flugman, E. and Randhir, T., 2011)
Management of debtors : sale has been promoted through management of debtors. Further the objective behind debtor management is to manage the funds which are blocked in debtors.
Management of trade payables : The objective behind management of trade payables or creditors is to evaluate the amount of debt, which a sainsbury needs to pay to its creditors. Further it will also assist the management of sainsbury to frame policies for its creditors.
Optimal pricing : The objective behind optimal pricing is to maximise the profit. Optimal pricing model has various methods to maximise profit, but most common method is demand price for full capacity of output for any particular product. Sainsbury can use the methods of optimal pricing so that the profit can be maximised. Optimal pricing is a situation where marginal revenue is equal to marginal price. (Carvalho, S.B., and et.al., 2011)
Marginal Cost :
Marginal costs are actually the variable cost which contains cost associated with material and cost associated with labour. Marginal costing is a branch of management accounting which deals in charging variable cost of production to the cost of unit and it writes off the fixed cost in the aggregate contribution. Further through marginal cost the management team of sainsbury can analyse the change in cost of production due to change in quantity of production. Sainsbury needs to employ the principles of marginal costing to analyse that how variable cost changes as per the change in production. Marginal cost also explains that fixed doesn't vary as per level of production. Fixed cost has been excluded from the concepts of marginal costing. Marginal costing assist the management team of Sainsbury to take decision regarding production and to make such policy to minimise the variable cost.
Relevant cost in decision making :
As per the concept of marginal costing the fixed cost are not considered as relevant. As the fixed cost remains unchanged, weather the production level goes high or it gets decreased. Variable cost changes as per the change in production level. Hence it can be said that carrying and ordering cost or variable cost is relevant cost. Sainsbury needs to minimise its variable cost. (Balshem, H., and et.al., 2011)
Budgeting is a method through which an organisation can maintain its income and expenditure. Budget is nothing but a quantitate expression of plan which is framed by an entity to to manage its funds through budget sainsbury can organise its funds. That will assist its management to employ the sources of funds in the right project. For the success of Sainsbury budgeting can be considered as the mile stone. As budgeting is an important factor in managing funds and to attain success. Budgeting can also be described as forecasting of income and expenditure for any period of time.
There are basically three techniques in budgeting :
Incremental Budgeting : Due to certain economical reasons like inflation sainsbury needs to prepare budgets through incremental budgeting techniques. As it considers the change in rate of various elements due to inflation. Data from the previous period has been collected and then a certain percentage of increment has been made which is as per the inflation rates.
Zero base budgeting : As the name itself denotes that zero base budgeting is a technique which has an assumption of zero base cost. In zero base budgeting sainsbury can make certain decisions which includes decisions like analysing the purchasing capacity as well as the need to purchase anything or to make any expenses.
Budgeting and strategic financial management is closely related with each other because in strategic financial management strategies are made which are totally depends on various budgets like sales budget, production budget etc. (Shen, M., and et.al., 2012)
Capital is the most important aspect for any business enterprise. It is irrelevant weather it is a manufacturing enterprise or not. Hence decisions regarding capital investment is a very important aspect for sainsbury.
Pay back period : pay back period is that period in which a particular project return the amount of initial investment. When sainsbury is making any decision regarding investment in any new project, at that time it should consider its pay back period and it should also compare it with other options.
Accounting rate of return : it is also known as average rate of return. It is technique which is used in capital budgeting. It calculates the return that can be generated as net income from any project in which capital is to be invested. The only draw back of ARR is it ignores concept of time value of money.
Net present value : it is basically the difference between present value of cash inflow and present value of cash outflow. It can be used by sainsbury before making investment into any project to analyse its profitability.(Hyndman, N. and Connolly, C., 2011)
Internal rate of return : It is technique in which discounting is made to convert the NPV of cash inflow equal to zero.
Limitations of capital investment appraisal techniques : in NPV method the size of project is not considered. Further in IRR method the results if compared with results of NPV then it will give conflicting results.(Neustadt, R.E., 2011)
Large business organisations usually divides their organisational structure into small sub divisions. This will help entities like sainsbury which operates in UK and worldwide. That will help it to manage its operations easily and efficiently. Certain advantages and disadvantages of divisionalization are as follows :
- Divisions need not to rely on parent company
- It provide specialization to each department of each division.
- Divisionalization increases the cost of parent company for maintaining such division.
- It gives too much freedom, which leads to miss utilization of organisational resources.
In divisional organisational structure measurement of performance is based on individual performance of divisions. Sainsbury needs to implement non financial performance measures in its organisational structure so that employees can get motivated for their other works also. (Porter, G.A. and Norton, C.L., 2012)
Business finance of any entity can be divided into two categories ; small business finance and long term finance. Both are mentioned below :
Small Business Finance : it is also known as start up financing. It is means of finance through which the new entrepreneurs can get finance for starting up their business. Sainsbury can use such means of finance for the acquisition of any small business further it can use it to finance any business activity.
Some important sources of business finance are as follows :
- Debt financing
- Equity financing
Longer Term Financing : This type of financing consists those type of finance resources which lasts for more than a year.
Types of longer term finance sources are as follows :
- Equity shares
How UK market operates : London stock exchange (LSE) is the third largest stock exchange in the world. It consists coffee house and royal exchange. After the IPO of any company the shares gets listed in UK stock market, which allows public to buy shares of such company.(Kimmel, P.D., Weygandt, J.J. and Kieso, D.E., 2010)
Vertical integration : It is a strategy in which a company expands its business activities into various steps but the production path remains same, such as when a manufacturer takes over the business of its supplier.
Horizontal Integration : Horizontal business is nothing but the acquisition of business with different business activity. Which exist at same place on value chain.
Swot analysis : SWOT analysis can be made before acquisition of any business. Through it Sainsbury can analyse the strength of other company which can be the main reason for its acquisition. Further the management of sainsbury also needs to deal with weaknesses, opportunities and threats of that company.
Environment based strategic options : Sainsbury needs to take decisions regarding acquisition of a business enterprise by considering its business environment. Further it needs to make strategies in accordance with such environment.
Resource based strategic options : Sainsbury needs to take decisions regarding acquisition by considering the resources of that entity as well as management should also consider resources of Sainsbury.(Skogstad, G.D., 2011)
Sainsbury has responsibilities towards ethical environment and corporate social responsibilities. All business organisation are responsible towards the society whatever they are using, belongs to the society only. So sainsbury is accountable towards society and this principle is termed as corporate social responsibility. Corporate governance can be described as rules framed by business environment to conduct its operations. Sainsbury needs to bring transparency in its business process which builds up the confidence of customer in it. Further Sainsbury also needs to comply its organisational structure with rules and norms of legislation. Which allows uninterrupted business operations. (DRURY, C.M., 2013)
In the above mentioned report it has been explained that how sainsbury can operate its business operations more efficiently by implication of certain techniques of budgeting and capital investment decisions. It also gives review of financial accounting. It also mentions in detail about various financial statements and their uses by management of sainsbury in decision-making.
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