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Financial Management Analysis

University: Kensington College Of Business

  • Unit No: 15
  • Level: High school
  • Pages: 16 / Words 3985
  • Paper Type: Assignment
  • Course Code: N/A
  • Downloads: 287
Question :

This sample will let you know about:

  • What is Financial management ?
  • Discuss about the Importance of accounting techniques.
  • Discuss about the Management accounting of financial sustainability.
Answer :
Organization Selected : Sainsbury

INTRODUCTION

Financial management in a business refers to strategic planning, organisation, directing & controlling the financial undertakings of business. The financial management also includes application of management principles in the business. They also play an effective role in decision-making and also have an effective role in fiscal management. Present report is explained taking Sainsbury for financial management. It will cover the different approaches that are used for supporting the decision-making. It will also be analysing financial management principles that are essential for making the financial strategies. This will also provide the role of management accountants and the accounting control systems in maintaining sustainability of business. This will also cover the manner in which sustainable performance is supported by the financial decision-making.

LO1, LO2 ,LO3 & LO4

Use of data and information in strategic and operational decisions of company.

The financial data and information is used for analysing the financial health and performance of company. The data obtained is used by the accountants in making strategic decision identifying the position of company and comparing it with those of the competitors. They frame policies and procedures keeping in mind the financial information obtained by the business. Management can identify the internal performance such as its effective in carrying out he production processes keeping the cost of sales to minimum, its liquidity position and capital structure. These data and information are important for making strategic and operational decisions (Madura, 2020). The trends of the financial information helps company in making forecasts and in planning the future strategies. It enables the company in identifying the effectiveness of existing strategies from the returns generated from the business.

Comparison and contrasting three investment appraisal techniques and their effectiveness in maximising return on investments.

Investment appraisal techniques are used by Sainsbury for identifying the viability of investments that it is proposing to make. These techniques help in effective decision making for the utilisation of business funds. The different techniques used in investment appraisals are payback period, ARR, net present value or IRR.

Net present value is an discounting technique where it is used in identifying the present value of the future cash flows generated from the investments. Investment is considered favourable if the NPV is positive after deducting the cost of investments. The technique considers time value of money that is not considered by other investment appraisal techniques. The methods is easy and simple to calculate and measure but do not consider the other factors affecting the cash flows. Payback period is used for measuring the time length within which it will be recovering the cost of investment (Barr, and McClellan, 2018). If the payback period is larger than the investments should not be made, where the shorter pay back period represents profitability as company will start earning profits after reaching the break even. The technique provides break even to the comapany for investment. Demerit is that it do not consider time value of money. Accounting rate of return provides company with the return in percentage terms from the investments. This is the only technique that consider accounting profits in the investments. If the adequate return is not generated than company should not adopt the investment. This provides the management in taking considering profits in percentage terms (Martin, 2016). The technique do not consider the time factor and focus is only over accounting profits. All these techniques are important for effective decision-making considering all the influential factors. Want to get Assignment Samples?Talk to our Experts!

Importance of accounting techniques in decision-making process.

There are various accounting techniques that helps in making financial decisions.

Income Statement - The income statement is prepared for organisation for analysing the results from running business. The income statements reflects whether the business has earned profits or suffered losses. Managers of Sainsbury identify the the sources of income and various expenses incurred for business. Management frames their decisions based on its income statements for ensuring increased level of sustainability.

Cash Flow Statements -Cash flow statements are prepared by organisations for reflecting the inflow and outflow of cash from different activities. Cash flow statements consists of operating activities, investment activities and financing activities. This provides management with information related to these activities separately. It could easily identify the areas where the cash is being flowing so that it can assess its importance for the business (Cornwall, Vang and Hartman, 2019). Management takes measures by implementing new strategies for improving the financial position and maintaining the adequate liquidity levels.

Break Even Analysis -This technique is of great importance to the business in taking decisions. The break even analysis tells the manager about the level at which company would be covering its cost. Profits are made after the cost are recovered by company. This helps in analysing the level of sales required for covering its cost of production (Lewis, 2018). All the other costs are covered after production costs. It required company to take adequate measures for achieving the break even.

Financial decision-making in long term sustainability of business.

Sainsbury

Particulars

Formula

 

2019

 

2018

Profitability Ratios

 

 

 

 

 

Return on capital employed

Net operating profit/Employed Capital

 

1.58%

 

2.65%

 

 

 

 

 

 

Employed Capital

Total assets - Current liabilities

23541-3828

19713

(22001-2436)

19565

Net operating profit

 

 

312

 

518

 

 

 

 

 

 

 

 

 

 

 

 

Return on Equity

Net Income / Shareholder's Equity

 

2.59%

 

4.17%

Net Income

 

219

 

309

 

Shareholder's Equity

 

8456

 

7411

 

 

 

 

 

 

 

Gross profit margin

Total Sales - COGS/Total Sales

 

6.92%

 

6.61%

COS

 

27000

 

26574

 

Sales

 

29007

 

28456

 

 

 

 

 

 

 

Operating profit margin

Operating Income/ Net Sales

 

1.08%

 

1.82%

Operating income

 

312

 

518

 

Revenues

 

29007

 

28456

 

 

 

 

 

 

 

Assets Turnover

Sales / Net assets

 

123.22%

 

129.34%

Sales

 

29007

 

28456

 

Net assets

 

23541

 

22001

 

 

 

 

 

 

 

Liquidity Ratios

 

 

 

 

 

Current assets

 

7589

 

7866

 

Current liabilities

 

11417

 

10302

 

Inventory

 

1929

 

1810

 

Quick assets

 

5660

 

6056

 

 

 

 

 

 

 

Current ratio

Current assets / current liabilities

 

0.66

 

0.76

Quick ratio

Current assets - (stock + prepaid expenses)

 

0.50

 

0.59

 

 

 

 

 

 

Efficiency Ratios

 

 

 

 

 

Inventory

 

1929

 

1810

 

Trade Receivables

 

144

 

117

 

Trade Payables

 

3044

 

2852

 

Days

 

365

 

365

 

COS

 

27000

 

26574

 

Sales

 

29007

 

28456

 

 

 

 

 

 

 

Inventory days

Inventory/COS*365

 

26.077

 

24.861

Debtor days

Debtor/ Sales*365

 

1.81

 

1.50

Creditor days

Creditor / Sales*365

 

38.30

 

36.58

 

 

 

 

 

 

Gearing Ratio

 

 

 

 

 

Long-term debt

 

1003

 

1505

 

Shareholder's equity

 

8456

 

7411

 

Debt-equity ratio

 

 

0.12

 

0.20

The above ratio analysis of Sainsbury for the year 2018 and 2019 provides the company with the required results that are essential for decision-making for the sustainability of business. It is used by company for making decisions after analysing the financial heath and position of company.

Return on capital employed of company represent the utilisation of resources of company for generating profits. The returns of company is very low and has declined from previous year. The profitability of company is going downwards. It should take steps for making the adequate use of resources of company. Return on equity is used by investors and management for assessing the returns generated to shareholders to their investments. Lower returns that the business is not running well.

This represents the inefficiency of management in performing the business operations (Alhadhrami and Nobanee, 2019). It is required by company to reframe its strategies for giving adequate return to shareholders. Gross profit margins and operating profit margins are used by organisation for assessing the results of business. The gross profit and operating profit margins of company are too low. It has gone even lower from last year. The margins are required to be increased so that it will be having adequate returns. They are increased by framing effective strategies that helps company in controlling its cost of sales (Lan, Yang and Tseng, 2019). At the same time the management is also required to take decisions considering marketing strategies which will help the organisation in increasing its revenues. These profitability ratios are of great importance for both the internal and external users of financial statements. The actual position of the company can be identified and based on this management decisions are taken taken for sustainability. Current ratios of company is 0.66 and it has lowered from last year. The current ratio assess the ability of company in meeting its short term obligations from the available current assets. The liquidity position of company is not strong and this requires the management to analyse it cash flow activities.

The company should reduce its short term loans for meeting the working capital requirements by raising long term loans. Quick ratio checks liquidity position excluding inventory from its current assets. It is also very low. The liquidity positioning is required to be strengthened by taking adequate and corrective measures for managing the financial resources of company (Silvius and et.al., 2017). If company is not able to meet its short term obligations its operations will be affected and company go for closure if required steps are not taken on time. Measures are required to be taken for strengthening the liquidity positions by investing the funds in short term investments. It should raise long term loans rather than short term loans. Stakeholders of business are concerned with liquidity position of company for knowing whether they will receive their payments or not. Efficiency ratio of company are for assessing the management and its effectiveness in managing its operations. The inventory days shows the time within which inventory is moving from company. High inventory days represents that inventory is not moving fast. Steps to increase the sales are required to be taken on high inventory days. The debtor days of company and it represent that the collection period is very short.

Company may increase the debtor days for generating more revenues. Giving higher credit is an effective method for increasing the sales level. On the other hand creditor days of company are adequate they are not too high. Company may request or negotiate with the creditors for increasing the creditor days. It can make bulk purchases and asking them for more discounts. If the operations of company are not managed adequately than the company may operate business at sustainable scale (Clark and Gorina, 2017). Therefore the management is required to frame policies and procedures for increasing the efficiency and achieving sustainability. The debt equity ratio of company shows the financial risks associated with the company.

The analysis of debt-equity shows that it has has shown a downward trend. The debt of company is reduced from last means company has made payments of significant amount of its debt. Where the equity of shareholders have raised from last year this shows that company has issued new share capital. This has declined the ratio. If the debt equity ratio is not low company may be at risk with the level of this profit. This helps company in making decisions related with the financial sustainability of business (Lopez, 2019). They should attempt for making adequate capital structure for business where the cost of capital of the company is low. There should not be high debts as the finance cost drives the profit of company down. Ask for assignment help from our experts!

Management accounting in improving the financial sustainability.

Management accounting consists of process involving cost analysis of different business operations to prepare internal financial records, reports and accounts to help management of Sainsbury in decision-making to achieve the desired goals and objectives of business. Management accounting consists of various accounting concepts and techniques that are essential for smooth conduct of business operations (Management accounting, 2019). The businesses are required to maintain sustainable growth and management accounting principles helps company in achieving sustainable growth and success.


Activity Based Costing - 
Activity Based Costing refers to a method where the overhead costs and indirect costs related to the products or services. This method recognises relationship between overhead activities, costs and the manufactured products and assigns indirect costs to the products and services. This activity helps Sainsbury in assigning the indirect costs appropriately as compared with the conventional costing methods. Adequate allocation of costs to to products helps company in having adequate profit margins for maintaining sustainability by maximising the wealth of business.

Investment Appraisals- Investment appraisals refers to the management techniques that provides the management to make decisions about a project or investments. This is essential for the business to ensure that whether the project is profitable or not. Investment in any project involves huge funds and resources therefore it is important to assess the importance of investments (Shapiro and Hanouna, 2019). Investment appraisals consists of techniques that are used in assessing the profitability of project or investments. The company can also make comparisons between various options available in projects and investments and choose the most profitable option for the company. Company using these techniques prevent from investing funds in less profitable or loss making investments. Adequate application of funds provides sustainability and growth of businesses. Take Marketing Assignment Help from professional experts!

Budgeting - Budgeting refers to preparation of spending plans for company. Budgeting ensures that resources are adequately used by organisation. This is a management accounting method used by companies for making future forecasts about the income and expenses of company. It prepares budgets for departments separately and a master budget is prepared considering all the departmental budgets (Caruana and et.al., 2019). This enables company in making proper allocation of resources to different activities and operations. It helps management of Sainsbury in balancing the expenditures against its revenues. It is essential for the business to ensure that existing resources are utilised in the best manner generating maximum benefits. Proper spending plans helps the company to keep its expenditures under control.

CONCLUSION

From the above study it could be concluded that business cannot survive without adequately managing its financial resources. They are required to manage its financial resources using appropriate methods and concepts that are essential for the management of the organisation for making informed decisions. The cost accountant play plays an important role in managing the financial resources of company. It ensures proper allocation of resources using the methods of management accounting like budgeting, investment appraisal techniques. They provide the management with required information for making decisions for the growth and sustainability of business.

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