Business organizations are required to make investment decisions in an appropriate manner because these decisions are the most crucial for business and it has direct impact on profitability. In addition to this, these decision consists huge financial resources. Commercial entities are required to evaluate available proposals in suitable manner to select viable option for investment. For this purpose, management of organizations is required to consider external and internal factors. Collected information from these factors should be analyzed through financial tools and techniques. Present project report is based on evaluation the impact of entering into new market opportunities on the financial performance of Sainsbury Plc (Sainsbu
Sainsbury is one of the largest retail company in world operating with more than 161,000 employee in 1312 locations. Present report analyses impact of attainment of new market opportunities by Sainsbury in emerging nations on financial performance of the company. Areas of evaluation comprises of ratio computation, reasons of entering into emerging market, cost information to support decision-making and other related factors. In accordance with the study of (), expansion into emerging countries provide glorious opportunities for growth in market share and increase in profitability. In addition to this, it assists in creating in better global image and strengthen financial position.
Overview of Sainsbury
Sainsbury is founded by John James Sainsbury in 1869. Cited company is second largest chain of supermarket in UK with a market share of 16.9%. At present, company is operating mainly with their convenience stores and supermarkets. In addition to this, they are engaged in banking industry, phone networks, online internet shopping services and fuel forecourts. Management of company had attained growth to 282% between 1990 and 2010. In accordance with the study of CACI, Sainsbury has market dominance in 8 postcode areas and this position is continuously strengthening. Sainsbury deals with various products and services in retailing and non-retailing sector (Broadbent and Cullen, 2012).
Management of Sainsbury is continuously focused on developing new business opportunities by expanding their market shares in emerging nations such as China. It is because, emerging markets have potential of high growth because of high economic growth rates in comparison to the developed countries (Herman, 2011). In addition to this, this strategy had provided various cost advantages to the Sainsbury as company was in position to access new capital. Generated funds has been used by Sainsbury for the expansion in domestic as well as international countries.
Impact of decision of expanding into emerging nations of financial statements of Sainsbury
Objective of investment
Main objective of Sainsbury of expanding in emerging nation was to enhance their global market share and strengthen their financial position. Directors of Sainsbury Plc had declared in November 2010 that retailer would consider moving into two or three developing markets. For this aspect, company had developed sourcing office of about 100 people in Shangai and team of six managerial persons for the purpose of scoping out retail market in China. In this aspect, Board of directors of company had stated that expansion in China is part of their long term growth strategy. In order to avail this market opportunity company had sacrifice various investment options in existing countries such as Europe. According to the financial prospects of the directors of the company, there is increase of 37% in the net profit of the business through operational activities in China. This growth has been attained due to property disposals and increase in overall turnover of the company (Nickels, McHugh and McHugh, 2010).
With this investment strategy, main focus of Sainsbury was to enhance their overall market share in retailing industry. Further, they planned to avail benefit of increasing growth of economic rate in China as purchasing power of consumer is constantly improving. In addition to this, organization has also expanded their operations in other industries such as banking industry, phone networks, online internet shopping services and fuel forecourts to generate better revenue and profitability. These investment strategies has boosted the sales of the company in previous five years (Siano, Kitchen and Confetto, 2010).
Impact of expansion in China on overall financial performance of Sainsbury
Assessment of impact of expansion in China on overall financial performance of Sainsbury can be done by making intra comparison of financial ratios of the company. By making use ratio analysis changes in the financial performance of the Sainsbury can be identified. On the basis of these factors, effectiveness of the investment decisions can be assessed.
In accordance with the financial ratios of the company it can be noticed that there are various improvements in financial performance. However, investment strategies also have negative impact on the financial values of the company. Year 2010 to 2014 shows that company had made continuous increase in their turnover through expansion in emerging markets however in 2015 this growth has been converted into negative. In addition to this, increase in turnover is at decreasing growth rate (Swayne, Duncan and Ginter, 2012). This aspect shows that initially investment strategies had assisted company in attaining growth but later effectiveness of investment has been reduced.
By considering efficiency ratios i.e. return on invested capital of Sainsbury it can be said that there is consistency in previous five year profitability but in 2015 negative returns are generated. This aspect depicts that increase in sales is equivalent to increase in asset due to which their efficiency is not modified (Conway, 2013).
In accordance with the liquidity ratios of organization it can be said that current assets are equal to the liabilities which shows that company is not having higher liquidity. On the basis of financial aspects ideal current ratio is 2:1 or 1.5:1. However, current ratio and quick ratio of the Sainsbury is not up to these standards (Epstein and Buhovac, 2014). This aspect depicts that investment strategy of Sainsbury is focused on capital profitability without considering efficiency in working capital management.Investment ratios of Sainsbury shows that company is providing sufficient return to the shareholders of the business. On the basis of data of year 2010 to 2014 EPS and ROE has been consistent over the period. However, in 2015 it has been reduced.
Description of different approaches for identification of appropriate cost information in order to support decision making process
Management of Sainsbury is integrated with the variety of suppliers instead of considering single source. Due to strong found, company is making reduction in their capital expenditure in order to enhance their cost savings. For this aspect, management of Sainsbury is sourcing with integrity (Lusardi, 2011). For this purpose, they assure that their cost of production model provide fair payment to the suppliers by which better relations can be maintained with them. In addition to this, Sainsbury continues to work with their suppliers to address the issue of sustainability in their products. In accordance with the statement of director of company, there are making use of supply chain strategies in order to build better network. By entering into new markets they are making effective use of available resources in order to enhance their profitability. Further, they are transferring this sources in their operating countries in order to attain overall cost advantage (Farmer and et. al.,2012). Benefit of these cost reductions are provided directly to the customer. By considering the recent statistics of Sainsbury it can be noticed that company has reduced prices of 1,100 products. Further, in comparison to their competitors they are providing products at low prices without sacrificing the factor of quality.
Following cost methodologies are used by management of Sainsbury in their accounting system in order to make viable investment decisions of the business:
Cost audit: Sainsbury has a provision to conduct cost audit in each accounting year in order to monitor all the capital and revenue expenditure. Through this approach, company is able to identify allocation of funds in business in order to identify scope of further improvement (Aras, Aybars and Kutlu, 2010).
Costing techniques: Various techniques such as product costing and department costing is used by Sainsbury in order to determine appropriable cost figures. By cost accounting of different department, individual profitability can be determined for further decisions. Similarly, this approach is applicable on the countries in order to determine returns provided by them. By considering this results, decisions for future investments are made in order to attain higher sales and profitability (McElroy and Van Engelen, 2012).
Strategic management accounting and Activity Based Costing in Decision making
Financial analysis assists in making comparative assessment of department cost and profit to make suitable decision for business. Complexity of actual operational activities of Sainsbury demands a rational approach for costing by which company can deal with inherent issues in costing. By making use of activity based approach, management of Sainsbury can make reductions in direct cost in order to generate high profits (Shields and et. al., 2015). Activity based costing will assist Sainsbury in identifying hidden waste cost consumption on the name of overhead. In addition to this, it will identify allocation of cost to each country in comparison to the return generated. In this manner, effective evaluation of investment decisions is done by management.
In comparison to cost allocation by Sainsbury in China, it can be stated that company has invested huge capital for expansion and it starting 5 years they had generated good returns on the same. However, financial figures of 2015 do not show effective allocation of funds. It is because; company had generated negative return (Garcia-Castro, Ariño and Canela, 2010). By considering this aspect, management of Sainsbury is required to reallocate their strategies and sources for generation of good profits. For this aspect, Sainsbury can make use of strategic management accounting.
Strategic management accounting is focused on both internal and external factors of company in order to make viable decision. For the purpose of capital investment in new market opportunities, Sainsbury had considered these aspects for effective allocation of cost in preparation of budgets and conducting break even analysis. By considering information from external factors company is able to do effective financial planning in order to achieve their aims and objectives (Epstein, Buhovac and Yuthas, 2015). This form of accounting had assisted management in making and implementation strategies to make increase in profitability of business. Further, it analyses cost of production such as raw material and overhead to optimize cost structure. For the future forecasting of demand in market, strategic management accounting will assist Sainsbury in evaluating trend and economic factors. On the basis of this information they can form better plans and strategies.
For future growth and success it is essential for management of Sainsbury to plan the cost of operational activities to make viable investment decisions. By considering this aspect, managerial persons of Sainsbury had set up the budgets on the basis of operational activities. This aspect is supported by technique of activity based costing as corporate head office is in position to analyse cost of different operations in different nations for the allocation of overheads on the basis of actual usage of resources. Various sub-entities of Sainsbury make use of activity based costing. In this aspect, cost incurred by organization is allocated on the basis of suitable cost drivers. Study of (Faems and et. al., 2010) shows that, Strategic management accounting and Activity Based Costing is most important techniques used for the evaluation of decision making procedure. It is because; these methods assists in appropriable evaluation of business information in order to make viable decision.
In accordance with the present study it can be concluded that investment decisions are important for the success of business organizations. By making investment in expansion strategies Sainsbury had increased their productivity and profitability. Gap between required and available financial resources are reduced by proper financial planning. In addition to this, strategic management accounting is used by management in forecasting of future demand in market, evaluating trend and economic factors. On the basis of this information they had formed better plans and strategies. However, company is required to modify these strategies as in last year it had provided negative return. Thus, Sainsbury is recommended to modify investment strategies for better profitability.
- Aras, G., Aybars, A. and Kutlu, O., 2010. Managing corporate performance: Investigating the relationship between corporate social responsibility and financial performance in emerging markets.International Journal of productivity and Performance management. 59(3). pp.229-254.
- Broadbent, M. and Cullen, J., 2012.Managing financial resources. Routledge.
- Carter, D.A. and et. al., 2010. The gender and ethnic diversity of US boards and board committees and firm financial performance.Corporate Governance: An International Review. 18(5). pp.396-414.
- Conway, J.B., 2013. A course in functional analysis(Vol. 96). Springer Science & Business Media.
- Epstein, M.J. and Buhovac, A.R., 2014. Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Publishers.
- Epstein, M.J., Buhovac, A.R. and Yuthas, K., 2015. Managing social, environmental and financial performance simultaneously.Long Range Planning. 48(1). pp.35-45.
- Faems, D. and et. al., 2010. Technology Alliance Portfolios and Financial Performance: Valueâ€Enhancing and Costâ€Increasing Effects of Open Innovation*.Journal of Product Innovation Management. 27(6). pp.785-796.