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Techniques of Accounting and Finance | Sainsbury's plc

Question :

This assessment will cover following questions:

  • Discuss the management accounting & financial management techniques which are currently is use in Sainsbury's plc.
  • Provide understanding of accounting and finance in the consideration of your employment.
  • Give relevant evidence from the Annual Report and Financial statements.
  • Give the details for any 3 riding problems that has occurred in the group? and how such problems dealt with and was a satisfactory conclusion reached?
Answer :

INTRODUCTION

The term accounting and finance play a significant role in aspect of proper management of monetary resources of companies. Accounting can be defined as a way of recording financial transactions in systematic manner for a particular time period (Cleary and Quinn, 2016). If companies records their transactions in an effective then it becomes easier for them to focus on better utilisation of available financial resources. The aim of project report is demonstrate understanding about benefits to suppliers because of merger. The project report is based on Sainsbury's plc financial analysis so that small companies can take decision about whether they should enter in business with them or not. The project report is categorised into two parts A & B. The part A covers about CORE analysis of Sainsbury company. As well as part B includes information regards to various techniques of management and financial accounting.

Analysis of financial performance and position.

An analysis of Sainsbury's plc by help of core analysis.

CORE analysis:

Context- The Sainsbury's plc is third largest chain of supermarket in United Kingdom and their share in supermarket sector is of 15.3%. This company was founded in year 1869 by John James Sainsbury. The ownership of company is public limited and there are about 1415 shops in entire United Kingdom. As per the published information in year 2018, there are about 186900 employees in different stores of United Kingdom (About Sainsbury's plc, 2019).

 Overview- The above Sainsbury's plc is one of the leading food retailer in United Kingdom and it is registered with LSE and FTSE 100. The company produces and sales a vital range of products such as food product, clothing and daily using commodities. The company operates in supermarket field and face tough competition from others such as Tesco, Morrisons and many more. In order to gain higher value of profitability, this company merged with ASDA which can be beneficial for external stakeholders.

Ratio- In the aspect of better financial analysis of companies performance, the ratio analysis play a key role. It is so because by help of calculating and analysis different number of ratios, this becomes easier to companies in finding strengths and weaknesses. As per it, their managers prepare and formulae strategies. As well as stakeholders get aware about actual financial position of companies and  accordingly make investment. In the aspect of above Sainsbury's plc, ratio analysis is done below that is as follows:

1. Profitability ratio:

  • Gross profit ratio-

2016

2017

2018

2019

Gross profit ratio

6.19%

6.23%

6.61%

6.92%

Analysis- On the basis of above presented graph this can be find out that above company's gross profit margin is increasing in significant manner. Such as in year 2016, it was of 6.19% that raised in middle years and became 6.92% in 2019. It is indicating that company is gaining better profitability from their sales outcomes.

  • Operating profit ratio-

2016

2017

2018

2019

Operating profit ratio

3.00%

2.45%

1.82%

1.07%

Analysis-  As per the above graph, this can be stated that company's operating profit margin is decreasing continuously. Like in year, 2016 it was of 3.00% which reduced and became of 2.45% in year 2017. Same as during year 2018-19, it reduced by 0.41% and became of 1.07% in year 2019 (About Sainsbury's plc financial statements, 2019). It is indicating that company's operating expenditures are increasing.

  • Net profit margin-

2016

2017

2018

2019

Net profit margin

2.00%

1.44%

1.08%

0.75%

Analysis- Same as the above operating profit ratio, this ratio is also decreasing. Such as in year 2017, company was getting net revenue margin with 2.00%. In upcoming years, this ratio decreased and became of 0.75% in year 2019. The reason of this deficiency is decreasing in total value of net profits.

  • Return on capital employed

2016

2017

2018

2019

ROCE

6.90%

5.75%

4.43%

2.57%

Analysis- The efficiency of generating return on invested value of capital is decreasing. This is indicating by above graph that in year 2017, the ROCE was of 6.90% which decreased in next year 2018 and became of 5.75. In current year 2019, the efficiency of generating return of above company is of 2.57%.

2. Liquidity ratio:

  • Current ratio-

2016

2017

2018

2019

Current ratio

0.66 times

0.74 times

0.76 times

0.66 times

Analysis- The above graph, states that current ratio of above company is fluctuating during the mentioned four years. This ratio is increased between year 2016-17 and 2017-18. While, it decreased in year 2019 because in 2018, it was of 0.76 that fell down and became of 0.66 times. As well as company is unable to meet the criteria of ideal ratio that is of 2:1.

  • Quick ratio-

2016

2017

2018

2019

Quick ratio

0.52 times

0.53 times

0.59 times

0.49 times

 Analysis- The above graph is indicating that company is unable to meet criteria of ideal ratio 1.5:1. Such as in year 2016, it was of 0.52 times that raised in next two years but in year 2019, it decreased and became of 0.49 times. It is interpreted that company has no enough value of current assets to make payment of short term debts.

 3. Efficiency ratio:

  • Accounts receivable turn over ratio-

2016

2017

2018

2019

Accounts receivable turn over ratio

245 times/ year

247  times/ year

243 times/ year

201 times/ year

 Analysis-  On the basis of above calculated ratio, this can be find out that receivable turn over ratio is fluctuating in four years. Such as in year 2016, the turnover of accounts receivable was of 245 times that raised in next year and became of 247 times. While in year 2019, it was of 201 times per year. This is indicating that company's efficiency to get back amount on which goods are transferred on credit basis.

  • Inventory turn over ratio-

2016

2017

2018

2019

Inventory turn over ratio

22.78 times/ year

13.85 times/ year

14.68 times/ year

14 times/ year

 Analysis- On the basis of above calculated ratio, this can be find out that inventory turn over ratio of above company is increasing and decreasing throughout of these four years. Though, in year 2016 their efficiency to utilise stored goods was of 22.78 which fluctuated in next years and became of 14 times in year 2019. 

  • Accounts payable turn over ratio-

2016

2017

2018

2019

Accounts payable turn over ratio

11.29 times/ year

9.77 times/ year

9.98 times/ year

9.52 times/ year

Analysis- The above presented graph shows that company's efficiency to pay their creditors or accounts payable is decreasing in a significant manner during accounting period of 2016-19. Such as in year 2016, this ratio was of 11.29 times which decreased and became of 9.52 times in year 2019.

  • Total assets turn over ratio-

2016

2017

2018

2019

Total assets turn over ratio

1.38

1.33

1.29

1.23

Analysis- The assets turn over ratio of above Sainsbury's plc is decreasing in all four years. Such as in year 2016, it was of 1.38 which decreased and became of 1.33 in year 2017. As well as in upcoming time periods, this ratio fell down in similar manner. This is indicating that efficiency to utilise the total assets of above company is decreasing year by year. 

  • Fixed assets turn over ratio-

2016

2017

2018

2019

Fixed assets turn over ratio

1.88

1.95

2.01

1.82

Analysis- The fixed assets turn over ratio of above company is fluctuating in a significant manner. Like during year 2016-18, it was increasing but in year 2019, it decreased and became of 1.82. This is indicating that above business entities' efficiency to make in and out flow of fixed assets is decreasing in year current year. 

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Evaluation: On the basis of above ratio analysis of Sainsbury's plc, this can be find out that their financial performance is not so effective. They are operating their activities and functions with an average monetary outcome. Under the ratio analysis, four years financial data has been taken starting from 2016 and ending at 2019. In this aspect, this can be difficult for Bramley foods to get back the return from invested capital. It is so because a company gives higher return to their investors when net profits are higher. The above company does not have enough amount of net profit in order to pay their stakeholders. As well as their efficiency ratios such as accounts payable ratio is also in poor condition that indicates that company is not able to make payment on right time to their suppliers. Thus, the small United Kingdom based companies should not enter with Sainsbury's plc as a supplier.  

Management and financial management techniques.

In the aspect of internal and external management of business entities, there are different kinds of techniques. It depends on business entities that how well they are using these techniques (Bepari and Mollik, 2015). There are basically, two kinds of accounting which are management and financial accounting. Both of these play a key role in the context of better management. Herein, below some key techniques of management and financial accounting are demonstrated that are as follows:.

Management accounting – It can be defined as a kinds of accounting that is linked with process of gathering monetary and  non monetary information in order to produce internal reports. These reports contributes to managers for taking corrective action of various aspects. Herein, below some key techniques of management accounting are as follows:

  • Financial planning- This is one of the key technique of management accounting which is linked with process of making better financial plan (Ratiu, 2015). The term financial planning can be defined as a way of determining monetary activities of businesses in advance in order to achieve common objectives. It consists prediction of both long and short term financial objectives. In this aspect, management accounting helps by providing key information regards to each aspect of financial transactions (Fourie, Opperman, Scott and Kumar, 2015). Such as in the aspect of Sainsbury' plc, their finance department makes effective financial plan by information derived from this accounting. They make a better projection of their financial resources for upcoming time period which helps in effective utilisation of available monetary resources.
  • Standard costing – It can be defined as a kinds of technique in which a proper estimation of futuristic cost is done (Fischer-Pauzenberger and Schwaiger, 2017). This estimation of cost leads to a suitable framework for making comparison with actual results. By help of this costing techniques, companies become able to find out variation between actual and estimated result that help in taking corrective action for better improvements. In the context of above Sainsbury' plc, their finance department implements this costing technique with an aim of making compare actual occurred cost with estimated volume of cost. In the case when actual cost is higher then to projected cost then it is considered as negative condition for company and they take suitable action accordingly. As well as if actual cost is less then to estimated cost then it is considered as a favourable condition.
  • Budgetary control- This is a type of technique which is related with setting monetary and anti monetary goals of businesses by help of various kinds of budgets (Beaumont, 2015). Basically, it is based on the budgets and indicates about efficiency of managers in which they use budgets for monitoring and controlling cost during a particular time period. The main objective of this techniques is to keeping an extra sight of eye over performance of companies. In the context of above chosen Sainsbury' plc, they use this technique in order to manage their performance and for this purpose their finance department utilise key information throughout different budgets. By help of this technique, their senior managers ensure that spending limits are adequate as well as it plays a significant role for monitoring overall revenues and expenditures in operating activities.
  • Communicating – This is important to communicate key financial and non financial information with the managers so that they can become aware about actual position. Eventually, the success or failure of a business entity depends on flow of information from manager to employees. If communication structure of a company is not so effective then it may lead to evolution of a wide range of conflicts. Such as in the aspect of above Sainsbury' plc, their accountants spread key financial and non financial information with their managers so that effective decisions can be taken. Hence, it is also an another important technique of management accounting.
  • Marginal costing – This can be defined as a type of accounting technique which is related to process of considering both costs in a different manner. Under it, fixed cost is considered as cost of period and variable cost is assigned as cost of product (Fisher, Garnsey and Hughes, 2016). It is being used by companies in order to produce income statements in an easy manner. In the context of above Sainsbury' plc, their accountants use this accounting technique with an objective of preparing income statements. As well as it helps them in categorising both of costs in a various manner.
  • Historical cost accounting – This can be defined as a type of accounting in which previous time period's financial data is provided to management so that an effective comparison can be done with standard costs. Under this accounting, information regards to cost of each job, process and department is provided to managers. In the aspect of above Sainsbury' plc, this accounting system is being implemented in order to assessing past years' financial information and to take futuristic actions in a corrective manner. By help of this, their managers make an accurate comparison of their estimated cost and actual costs.

So these are the key techniques of management accounting. Apart from it, financial accounting also help to managers in order to do better internal management. Analysis of techniques of financial accounting is mentioned below that is as follows:

Financial management – This is a type of management which is related to planning, organising, directing and controlling of monetary activities of business entities. It consists different types of techniques which are as follows :

  • Common size statements- The term common size statements are those in that figures are converted into percentage form on some basic base. Basically, the common size balance sheet and income statements are prepared for vertical analysis and interpretation is done for finding cause of changes taken  during a particular time period. In  these statements, each percentage shows the relation of individual item to its respective total. In the context of  Sainsbury' plc, they produce these common size statements so that they can get aware about each elements' information in an effective manner.
  • Cash flow analysis- This can be defined as a kind of statement which consists information regards to cash receipts, cash payments and change in cash for a particular time period (Rossi, 2016). Basically, it is prepared on the basis of three activities which are operating, financing and investing activities. This statement reconciles the opening and closing balance of cash and cash equivalents for a particular accounting period. In the context of above company, they produce this statement with an objective of analysing total activities regards to cash. The cash flow of above company during four years (2016-19) is different. Such as in year 2016, there was cash out flow of £288 million. While in rest of three years, they gained cash inflow of £409, £664 and £24 million for year 2017, 2018 and 2019 respectively.
  • Fund flow analysis – The fund flow statements provides detailed information regards to variation in financial position of a concern between two balance sheet dates. Eventually, this statement consists detailed information regards to monetary resources that have become available during the accounting period. Eventually, it refers to movement of funds that cause a variation in working capital of company. The net increase or decrease in working capital is analysed by preparation of statement of change in working capital position. This statement is a way of evaluating of better use of working capital. It is being used for long term planning in which estimation of liquid resources is wide. In the context of above Sainsbury' plc, this statement is being prepared in order to assess the variation in total amount of funds during a particular time frame. By utilising key information through this statement, their managers take suitable action related to allocation of their available financial resources. So these are the key benefit of fund flow analysis for companies as well as for above mentioned business entity.
  • Ratio analysis – It is considered as one of the key tool for businesses in order to do proper measurement of financial performance (Watson, 2015.). Under this, a wide range of ratios are calculated and interpreted with an aim of assessing various aspects of companies. In addition, it helps in making quantitative judgement regards to financial position and performance of business entities. In this aspect, the comparison of past years ratios with futuristic ratios indicates the firm's relative strength and weaknesses. In the aspect of above Sainsbury' plc, they apply this technique and compute a range of ratios for assessing actual monetary performance. Such as their gross profit ratio is increasing in a significant manner like in year 2016, it was of 6.19% which increased and next year and became of 6.23% in year 2017. Same as the ratios are calculated like efficiency ratio, liquidity ratio and many more in order to evaluate their current position.
  • Working capital management – It can be defined as a type of management which is related to assessing companies efficiency by help of its current assets and liabilities. The term working capital is being calculated analysing variation between current assets and liabilities (Maskell, Baggaley and Grasso, 2017). This can be negative in the case when value of current liabilities is more then current assets. As well as in the case when current liabilities are less then to current assets then it is assessed as favourable condition for companies. It is so because availability of enough current assets indicates that company is able to make payment of their short term debts. In the aspect of above Sainsbury' plc, they fulfil the requirement of working capital by increasing value of current assets. Such as in year 2016, their working capital was of £-2280 million that is showing that they do not have enough amount of current assets for making payment of current liabilities. As well as in year 2017, it was of £-2251 million. Hence, their efficiency of paying day to day activities is too poor and they are needed to make improvement in this.

So these are the key techniques of financial management and each of them play a key role in the context of better management of different aspects and elements. In the Sainsbury's plc they implement all these techniques in order to keep an extra sight of eye over various activities of departments.

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CONCLUSION

On the basis of above project report, it has been concluded that monetary performance of above chosen company is not so effective. It is so because their most of the ratios are presenting negative results. Thus, the small manufacturer of United Kingdom should enter into business with them. For this purpose, different kinds of ratios are calculated such as profitability ratio, liquidity ratio and many more. The further part of report concludes about range of techniques of management and financial accounting such as fund flow analysis, standard costing etc.

APPENDICES

1. Profitability ratio- It can be defined as a kinds of ratio which is calculated by business entities in order to assess the value of profits that are gained during a particular time period. This consists different kids of ratios such as:

  • Gross profit ratio- This is a type of ratio that is calculated in order to assess relation between gross profit and net sales. It is calculated by a formula that is as follows: Gross profit= Gross profit/net sales * 100. In the aspect of above Sainsbury's plc, this ratio is calculated below:

2016

2017

2018

2019

Gross profit

1456

1634

1882

2007

Net sales

23506

26224

28456

29007

Calculation

1456/23506*100

1634/26224*100

1882/28456*100

2007/29007*100

Gross profit ratio

6.19%

6.23%

6.61%

6.92%

  • Operating profit ratio- It is a type of ratio that states the relation between operating profit and net sales. This is calculated by a formula which is as: Operating profit/ net sales*100.

2016

2017

2018

2019

Operating profit

707

642

518

312

Net sales

23506

26224

28456

29007

Calculation

707/23506*100

642/26224*100

518/28456*100

312/29007*100

Operating profit ratio

3.00%

2.45%

1.82%

1.07%

  • Net profit margin- This ratio is computed in order to find out actual amount of income which is gained after deducting all expenses. This is calculated by a formula which is as: net profit/ net sales*100.

2016

2017

2018

2019

Net profit

471

377

309

219

Net sales

23506

26224

28456

29007

Calculation

471/23506*100

377/26224*100

309/28456*100

219/29007*100

Net profit ratio

2.00%

1.44%

1.08%

0.75%

  • Return on capital employed- It is a kinds of ratio which determine the efficiency of companies in order to gain return on capital that is involved in businesses. This is calculated by a formula that is as: Operating profit/ capital employed*100

2016

2017

2018

2019

Operating profit

707

642

518

312

Capital employed

10249

11164

11699

12124

Calculation

707/10249*100

642/11164*100

518/11699*100

312/12124*100

Return on capital employed

6.90%

5.75%

4.43%

2.57%

2. Liquidity ratio- It can be defined as a kinds of ratio that defines about liquidity position of business entities. There two kinds of ratios that are as follows:

  • Current ratio- This is a ratio that states relation between current assets and current liabilities in order to find out efficiency of businesses to make payment of short term debts. It is calculated by formula that is as: Current assets/ current liabilities.

2016

2017

2018

2019

Current assets

4444

6322

7866

7589

Current liabilities

6724

8573

10302

11417

Calculation

4444/6724

6322/8573

7866/10302

7589/11417

Current ratio

0.66 times

0.74 times

0.76 times

0.66 times

  • Quick ratio- It is a ratio which is calculated in order to assess the relation between quick assets and current liabilities during a particular time period. It is calculated by formula that is as: quick assets/ current liabilities.

2016

2017

2018

2019

Quick assets

3476

4547

6056

5660

Current liabilities

6724

8573

10302

11417

Calculation

3476/6724

4547/8573

6056/10302

5660/11417

Quick ratio

0.52 times

0.53 times

0.59 times

0.49 times

 

3. Efficiency ratio- This is a type of ratio which is calculated by companies in order to assess the efficiency of using their assets and liabilities in internal aspect. It consists below mentioned ratios that are as follows:

  • Accounts receivable turn over ratio: Credit sales/ accounts receivable

2016

2017

2018

2019

Credit sales

23506

26224

28456

29007

Accounts receivable

96

106

117

144

Calculation

23506/96

26224/106

28456/117

29007/144

Accounts receivable turn over ratio

245 times/ year

247  times/ year

243 times/ year

201 times/ year

 
  • Inventory turn over ratio- Cost of good sold/ inventory

2016

2017

2018

2019

Cost of good sold

22050

24590

26574

27000

Stock

968

1775

1810

1929

Calculation

22050/968

24590/1775

26574/1810

27000/1929

Inventory turn over ratio

22.78 times/ year

13.85 times/ year

14.68 times/ year

14 times/ year

  • Accounts payable turn over ratio- Credit sales/ accounts payables

2016

2017

2018

2019

Credit sales

23506

26224

28456

29007

Accounts payables

2082

2685

2852

3044

Calculation

23506/2082

26224/2685

28456/2852

29007/3044

Accounts payable turn over ratio

11.29 times/ year

9.77 times/ year

9.98 times/ year

9.52 times/ year

  • Total assets turn over ratio- Net sales/ total assets

2016

2017

2018

2019

Net sales

23506

26224

28456

29007

Total assets

16973

19737

22001

23541

Calculation

23506/16973

26224/19737

28456/22001

29007/23541

Total assets turn over ratio

1.38

1.33

1.29

1.23

  • Fixed assets turn over ratio- Net sales/ fixed assets

2016

2017

2018

2019

Net sales

23506

26224

28456

29007

Fixed assets

12529

13415

14135

15952

Calculation

23506/12529

26224/13415

28456/14135

29007/15952

Fixed assets turn over ratio

1.88

1.95

2.01

1.82

REFERENCES

Books and journals:

  • Cleary, P. and Quinn, M., 2016. Intellectual capital and business performance: An exploratory study of the impact of cloud-based accounting and finance infrastructure. Journal of Intellectual Capital. 17(2).  pp.255-278.
  • Bepari, M. K. and Mollik, A. T., 2015. Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing. Journal of Applied Accounting Research. 16(2).  pp.196-220.
  • Fourie, M .L., Opperman, L., Scott, D. and Kumar, K., 2015. Municipal finance and accounting. Van Schaik Publishers.
  • Fisher, I. E., Garnsey, M. R. and Hughes, M. E., 2016. Natural language processing in accounting, auditing and finance: A synthesis of the literature with a roadmap for future research. Intelligent Systems in Accounting, Finance and Management. 23(3).  pp.157-214.
  • Beaumont, S. J., 2015. An investigation of the short"and long"run relations between executive cash bonus payments and firm financial performance: a pitch. Accounting & Finance. 55(2).  pp.337-343.
  • Fischer-Pauzenberger, C. and Schwaiger, W. S., 2017, November. The OntoREA© Accounting and Finance model: ontological conceptualization of the accounting and finance domain. In International Conference on Conceptual Modeling(pp. 506-519). Springer, Cham.
  • Maskell, B. H., Baggaley, B. and Grasso, L., 2017. Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.
  • Ratiu, R. V., 2015. Financial reporting of European banks during the GFC: a pitch. Accounting & Finance. 55(2).  pp.345-352.
  • Watson, L., 2015. Corporate social responsibility research in accounting. Journal of Accounting Literature. 34.  pp.1-16.
  • Rossi, F. M., Cohen, S., Caperchione, E. and Brusca, I., 2016. Harmonizing public sector accounting in Europe: thinking out of the box. Public Money & Management. 36(3).,  pp.189-196.

You may also like to read:- 

Managing Financial Resources and Decisions

Management Accounting Techniques

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