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Economic and Financial Management Factors

University: N/A

  • Unit No: 8
  • Level: High school
  • Pages: 15 / Words 3722
  • Paper Type: Assignment
  • Course Code: N/A
  • Downloads: 272
Question :

This sample will let you know about:

  • Explain the significance of accounting ratios ?
  • What is the macro and micro economic factors ?
Answer :
Organization Selected : N/A

INTRODUCTION

Financial management refers to the strategic planning and organizing and directing the financial undertakings in an organization. While, economic factor are that factor which deals with tax rates, unemployment and polices. These factor creates both positive and negative impact upon business such that inflation rate creates opposite impact while, decrease in tax rate affect business in positive manner. Therefore, these economic factor may create hinder and success of the business. Further, the current report will describe how the macro as well as micro- economic factor affect the business using diagrams. Also, current study will describe some financial ratio of Sainsbury for each consecutive years i.e. return on capital employed, net profit margin, current ratio, debtor collection period, creditor payment period and efficiency ratio with their importance. Last, report will recommend three strategic actions that a company should take by evaluating the financial performance of company.

A. Assessment of an economic factors and its effect on business

Economic factors are stated as the factors that impact an overall economy and the business that involves tax rates, wages, governmental activities, interest rates etc. there are mainly two major economic factors that has a great impact on the business organizations that includes macro and micro economic factors.

Macro economic factors referred as the factor that affects national economy as a whole while a micro economic factor impacts business and an individual’s (Fernández, González and Rodriguez, 2018). Major macro-economic factors that influence the business are unemployment, interest rate, inflation and economic output. Main micro-economic factors that impact the business are employees, competitors, shareholders, suppliers and the customers.

Interpretation- The above graph shows that with increase in the price level of company's product, demand for its commodity decreases that in turn cause a shift in the aggregate demand curve (Saghir and Aston, 2017). On the other hand decrease in price results to increased demand for an entity's product. This affects an aggregate demand of the company's product in the overall market.
The Laffer curve shows impact of tax rate which is a macro economic factor on the working of business. Higher the tax rate, less amount of revenue for an enterprise, however, decline in tax rate increases revenue for the company.

As indicated the profit margins of Sainsbury are reducing over the three years due to lower price and increase in the cost, expenses and the tax rate (Zvarikova and Kacerauskas, 2017). Thus, in this way macro and micro economic factors directly affects the profitability and the sales of the business organization so it is critical for an entity to consider all the economic factors that impacts the performance of an entity in an entire market.Need Help With Marketing Assignment Help ? Talk to Our Experts.

B. Computing Ratios for 3 years

Sainsbury

Particulars

Formula

2017

2018

2019

 

 

 

 

 

Operating profit

 

642

518

312

Total assets

 

19737

22001

23541

Current liabilities

 

8573

10302

11417

Capital employed

Total assets-current liabilities

11164

11699

12124

Return on capital employed

Operating profit/capital employed*100

5.75%

4.43%

2.57%

 

 

 

 

 

Liquidity ratio

 

 

 

 

Current assets

 

6322

7866

7589

Current liabilities

 

8573

10302

11417

Current ratio

Current assets/Current liabilities

0.74

0.76

0.66

 

 

 

 

 

Profitability ratio

 

 

 

 

Net profit

 

377

309

219

Net sales

 

26224

28456

29007

Net profit margin

Net profit/Net sales*100

1.44%

1.09%

0.75%

 

 

 

 

 

 

 

 

 

 

Non interest expense

 

-9

26

10

Operating profit

 

642

518

312

Loss loan provision

 

0.00

0.00

0.00

Efficiency ratio

Non-interest expense/(operating income – loss loan provision)*100

-1.40%

5.02%

3.21%

 

 

 

 

 

Trade debtors

 

106

117

144

Revenue

 

26224

28456

29007

Debtor collection period

Trade debtors/Revenue*365

1.5

1.5

1.8

 

 

 

 

 

Trade payables

 

2685

2852

3044

Cost of sales

 

24590

26574

27000

Creditors payable period

Trade payables/cost of sales *365

39.9

39.2

41.2

 

C. Explaining the meaning of accounting ratios and its significance in the business

Accounting ratios refers to an important subset of the financial ratios that is stated as the group of the metric which is been used for measuring profitability and an efficiency of the company on the basis of its financial statements (Joly, Flynn and Wolkovich, 2019). It is the tool that facilitates the way of expressing a relationship between one accounting year to another and are used as basis of the ratio analysis.

Ratios are counted as best tool for the business organization as it helps in measuring solvency, liquidity, profitability and an efficiency of the management. Role of accounting ratios is seen as very significant with respect to increasing effectiveness and efficiency in management, ensuring control or reducing expenditure that in turn leads to increase in the profit rate.

Ratio analysis helps in assessing probable cause relation in different items after scrutinising and analysing past years results (Rashid, 2018). It helps management of an organization in preparing the budgets, anticipating, formulating the policy and in preparing for the future action plan. It enables in considering time dimension by way of trend analysis that is whether a firm is deteriorating or is improving over the years. Accounting ratios assist in making an inter firm comparison between different departments or between same type of companies. With the use of ratios, meaningful information could be communicated to all the users and resulting, analyst could draw for right decisions. There are different ratios which depicts efficiency, liquidity and profitability of the company that are as follows-

Return on capital employed- It means the ratio that depicts efficiency and profitability of the firm in using its capital. It measures the way in which an entity generates profits from that of its capital. This ratio is counted as important and is been used by the investors at the time of screening for a appropriate investment candidate (Kim, Schmidgall and Damitio, 2017). ROCE is considered as useful metric as it helps in comparing profitability generated by companies on the basis of an amount of capital used by it. Therefore, this ratio is stated as very critical for the firm as it shows an effective and efficient use of capital made by an entity in order to generate large amount of profits.

Particulars

Formula

2017

2018

2019

Return on capital employed

Operating profit/capital employed*100

5.75%

4.43%

2.57%

Interpretation- Over the 3 years, ROCE of Sainsbury is showing a declining trend because it operating profits are reducing with an increase in the capital employed. This means that company is not making efficient use of its capital in generating higher profits. From the evaluation it has been depicted that in the year 2017, 2018 & 2019, the ratio resulted as 5.75%, 4.43% and 2.57%. This clearly shows that the ratio is falling with passage of one accounting period to another. In order to improve ROCE, Sainsbury should take appropriate or corrective measures that is reducing cost and increasing sales volume which results to generation of more and more profits. By selling off inefficient and surplus assets which doesn't generate revenue and increasing the price leads to improvement in the profits that result to improved ROCE.

Net profit margin- It is the ratio that reflects the percentage of the revenue which is remaining after deducting all the expenses from the sales. It is the measurement that reveals an amount of the profit that is earned by the business after paying off all its costs, expenses and tax obligations. This shows the profitability performance and capability of the company in meeting its cost, interest expenses and tax liabilities (Murad, Wang, Chu, and Lin, 2019). It is computed by dividing the net profits with that of the net sales where net profit is calculated by subtracting operating expense, preferred stock, taxes, interest from total revenue of an enterprise.

Particulars

Formula

2017

2018

2019

Net profit margin

Net profit/Net sales*100

1.44%

1.09%

0.75%

Interpretation- The above results shows that net profit ratio of Sainsbury in the past 3 years is seen as falling which reflects a poor performance of the firm. It has been stated that higher the net profit margin, better is the performance of company. This shows that over the years net profit of an entity is decreasing because its expenses are increasing with an increase in the sales. It indicates that firm is not generating higher profits in meeting its expenses and taxes. Therefore, it is important for Sainsbury to take corrective measures for the purpose of improving its profit margins that is it should reduce utilities, labour cost, insurance premium, operation cost so that revenue increases and in turn result to increased profitability.

Current ratio- It is referred as the liquidity ratio that measures an ability of the company in paying off its current liabilities along with generation of cash funds by making use of its current assets. It is the ratio that depicts proportion of an enterprise current assets to that of its current liabilities (Kahn and Baum, 2020). Current ratio is counted as an indication of company's liquidity and effectiveness in meeting its short term debts. It tells an investors the ways in which company could maximise its current assets on their balance sheet for satisfying its short run debts and the other payables.Take Examples of Assignments Now!

Particulars

Formula

2017

2018

2019

Current ratio

Current assets/Current liabilities

0.74

0.76

0.66

Interpretation- From above evaluation, it has been seen that the current ratio of Sainsbury is fluctuating that is increasing with very little points in 2018 and in the current year it is decreasing. Higher the current ratio, better is the liquidity state of an organization. However, as the CR of Sainsbury is decreasing at present, it means that firm is not making effective use of current assets in order to pay off its current obligations. This in turn means that for generating more and more funds, Sainsbury should convert its receivables on a faster basis, pay off its current liabilities, sell off its unproductive assets, improving current assets by way of rising the shareholders funds and sweeping the bank accounts.

Average receivable days- It means no. of days for which the customer invoice remained as outstanding prior to it is collected. It acts as most important ratio because it helps in determining an effectiveness of an entity's credit and the collection efforts for allowing the credit to the reputable customers and their ability in collecting cash within a specified time frame (Deeks, Higgins, Altman and Cochrane Statistical Methods Group, 2019). This measurement is applicable to an overall set of bill or invoices that an enterprise has outstanding at a point of time instead of a single invoice.

Particulars

Formula

2017

2018

2019

Debtor collection period

Trade debtors/Revenue*365

1.5

1.5

1.8

Interpretation- The above table depicts that debtor collection period of Sainsbury is very low which states that company is providing too less time to its debtors in paying off their invoices. Higher receivable days indicates that an entity's collection of an accounts receivable seems as efficient and in turn reflects that an organization is having higher proportion of the quality customers who pays their debts on a quick basis. It means that Sainsbury collects its owed money by the clients on quick basis in order to manage the credit. Maximum it takes 1.8 days in collecting its outstanding bills so that chances of default in making the payment reduce to a great extent. However, this also depicts that it could reduce the sales of the company as customers or clients prefers to take goods on credit so that they could buy for a bulk quantity at lower price.

Average payable days- It means the financial ratio that reflects an average time that the company takes in paying off its invoices and the bills to that of its trade creditors that involves vendors, suppliers and the other firms. It is computed by dividing trade payables with that of credit purchases or cost of sales (Rashid, 2018). This ratio helps the company in ascertaining the number of days it is been taking for making the payment to its suppliers. This shows the credibility of the company that it is having sufficient funds in making payment to its suppliers on time.

Particulars

Formula

2017

2018

2019

Creditors payable period

Trade payables/cost of sales *365

39.9

39.2

41.2

Interpretation- The above analysis shows that average payable days of Sainsbury is increasing over the 3 years which means that company is making payment to its suppliers on a slower basis and might be an indication of worsening a financial condition. Moreover, change in number of the payable days could also indicates an altered terms of payment with the suppliers though this rarely having more than a little effect on total no of the days since terms must have to be altered for many of the suppliers for improving the ratio.

Efficiency ratio- It is the ratio that measures an ability of the company in using its assets and in managing liabilities in an effective way in present period or in a short term (Murad, Wang, Chu, and Lin, 2019). It measures the way in which company makes use of its assets for generating revenues and capability of the firm in managing such assets.Finding Online assignment help UK ? Talk to Our Experts.

Particulars

Formula

2017

2018

2019

Efficiency ratio

Non-interest expense/(operating income – loss loan provision)*100

-1.40%

5.02%

3.21%

Interpretation- It has been analysed that an efficiency ratio of Sainsbury is increasing in the year 2018 resulted as 5.02% from -1.40% in 2017, this clearly shows that it has take adequate measures like effective use of assets that resulted. On the other side, in 2019, ratio decreases and accounted as 3.21% which means that efficiency of Sainsbury in using its assets decreases.

D. Recommendations

The above computation shows that overall the liquidity, profitability and efficiency of Sainsbury over three years does not seems as good so it should take appropriate steps for increasing its profitability, cash and revenue. For improving the liquidity position or current ratio, Sainsbury should opt for submitting the invoices on an early basis or in a timely manner. It should switch from the short run debs to the long run debts so that money can be saved and could be used in near term in a better way. By increasing the sales and reducing the cost, Sainsbury could improve its profitability condition. Sainsbury should focus on managing its expenses and the income in order to optimize its efficiency ratio.

CONCLUSION

By summing up the above report it has been summarised that economic factors has great influence on the business and affects the smooth functioning of an enterprise in terms of aggregate demand, tax rate etc. Accounting ratios is the most useful tool that helps in making the comparative analysis of current year results with that of past year results so that trend relating to financial performance of Sainsbury could be made effectively and efficiently.

Read Also :- Management Accounting System

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