Financial Management Analysis

LO1, LO2 ,LO3 & LO4

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

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.

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.

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.

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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