Finance for Strategic Managers

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Finance for Strategic Managers

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Number of words: 3000

Finance for Strategic Managers.

Table of Contents

1 Introduction........................................................................................................................1

2 The role of financial information in business strategy.......................................................2

2.1 Need for financial information in business.................................................................2

2.2 Risks related to financial and business........................................................................4

2.3 Financial information required in strategic business decision making.......................5

3 Analyse financial statements for strategic decision making purposes...............................6

3.1 Purpose, structure and content of published accounts.................................................6

3.2 Interpretation of financial information in published accounts....................................9

3.3 Financial ratios from published accounts..................................................................11

4 Assess and finance non-current assets, investments and working capital.......................14

4.1 Long and short-term finance requirements for businesses........................................14

4.2 Sources of long and short-term finance for businesses.............................................15

4.3 Importance of managing cash flow and examine cash flow management techniques16

4.4 Methods for appraising strategic capital or investment projects...............................17

5 Different ownership structures and the way they influence and measure financialperformance..............................................................................................................................18

5.1 Corporate governance, legal and regulatory requirements of different businessownership structures.............................................................................................................18

5.2 Accountability for and roles of owners and managers in decision making fordifferent business ownership structures................................................................................20

6 Conclusion........................................................................................................................21

7 References........................................................................................................................22

8 Web References................................................................................................................24

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1 Introduction

In todays market financial information of a company plays a major role compared to past

and this is mainly because of the more volatile environment that companies have to work

within. In assessing finance requirements and obtaining funds, reporting and setting up

targets and mainly in managing risks this is really important. Also with that it is important to

identify different risks related to the company and use them in the future business decision

making. In analysing financial information it is really important to have properly structured

accounts and the ability to calculate different ratios to support business decision making.

Sainsbury's is the second largest chain of supermarket in the UK and in the market that they

operate it is more important to get all these correct in the first place. A company must

differentiate their long and short term finance requirements and find different sources as

suitable for them and their financial structure. With that its also important to get a good

understanding different ownership structures and their influential companys financial

performance. In this assignment while giving focus to these different topics they will be

matching with Sainsburys activities.

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2 The role of financial information in business strategy

2.1 Need for financial information in business

As per Linzer (2008), in the modern business era it is clearer that financial information plays

a more vital role than the days we came pass by. With the dynamic or volatile economy in

each country and with the increase rate of competitors coming into the market without more

accurate financial information it would be really difficult for a company to carry on their

business activities in their environment. For a company like Sainsbury's financial information

will be more critical as they operate in a sector where there are many players as well there is

a high risk in operating of losing out profit if they are unable to plan out the requirements

properly. These financial information are important in assessing financial requirements where

for Sainsbury's it will about funds required to obtain more market share, different sectors they

havent looked into yet. In doing this financial information will also be helpful to decide in

obtaining finance for those requirements as they prefer.

Figure 2.1-1: Source: 2014 Annual report of Sainsburys

According to Scarlett (2009), these financial information is also important in giving a detailed

report to the owners/shareholders and the other stakeholders to get a more clear idea about

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what is happening with the company in the market. Financial information is also helpful in

setting and meeting targets where with the proper financial information management will be

able to see where they can set high targets and standards to achieve while where to set a much

lower standards and targets. If a company is able to gather necessary financial information in

appraising projects they can take a better decision with the funds they will be available to

select the most suitable project. And also with the proper information managing risk will be

able to handle in better way.

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2.2 Risks related to financial and business

J Sainsbury plc. is engaged in grocery and related retailing. The Company is organized into

three segments: Retailing (Supermarkets and Convenience); Financial services (Sainsburys

Bank joint venture), and Property investments (The British Land Company PLC joint venture

and Land Securities PLC joint venture). When we see into different market that they do

operate we can see number of risks that they are operating with. In terms of strategic and

market, compliance, operational there are different risks that Sainsbury plc. is facing. (Annual

report, Sainsbury PLC (2013/2014))

Under strategic there are many types of risks that Sainsbury could face and one of the main

risk is failure in different investments due to not analysing the available financial information

or not having financial information. In marketing not having proper details about how the

market operate will lead to number of risks and also in terms of operational buying unwanted

stocks for supermarket chain will lead to lose profits with not undertaking detailed financial

information (Rhodes, 2010).

The risk management process is closely aligned to Sainsburys strategy. Risk is an inherent

part of doing business. The management of these risks is based on a balance of risk and

reward determined through careful assessment of both the potential likelihood and impact as

well as risk appetite. Consideration is given to both reputational as well as financial impact,

recognising the significant commercial value attributable to the Sainsburys brand. Each

principal risk and uncertainty is considered in the context of how it relates to the achievement

of the Groups strategic objectives.

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2.3 Financial information required in strategic business decision making

As per Jackson (2013), strategic business decision making is where decisions are being taken

to decide where company will be operating in the coming future, where they will invest more,

etc. Finance department of a company plays a more vital role compared other departments of

the company. Profit and loss accounts will give the company details about how the company

make use of its financial resources, efficiently or not. These strategic decisions are taken at

the highest level of the management and these decision making process usually includes

CEO, board of directors and also other higher level management employees. These decision

are taken about the future of the company may be over months or years. For Sainsbury PLC

chairman and CEO along with the rest of the management board will take decision for the

company behalf of the owners. In these decision making financial information will play a

really good role in assessing their decisions. These financial details will guide them to decide

whether to carry out different sections of the company or not to, where to invest more, which

market they should be targeted into, and which products of them will need more attention and

which will gain more demand in the future. Also if they are underperforming these

information will guide them to correct those problems and go ahead.

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3 Analyse financial statements for strategic decision making purposes

3.1 Purpose, structure and content of published accounts

According to Dodge (1997), the main purpose of published account can be taken as to

provide information to shareholders/stakeholders and the other users of published accounts.

Budgets are plans for the future. This can be included shareholders, potential shareholders,

managers, employees, lenders, creditors, suppliers, customers, community, and competitors.

There are different types of annual reports which are main financial statements, directors

report, audit report, notes to accounts etc. These main financial statements includes

statements of financial position, income statements, sources and statements of cash flows.

Financial statements such as the profit and loss account and the balance sheet provide

information about past performance. In a company accounts can be taken two types

considering the use of them by managers where they can be categorized as internal

management accounts versus published financial accounts. Managers are able to monitor

accounts in order to spot variances and make ongoing adjustments to plans.

Financial information provides invaluable statistics and evidence on which managers can

make informed decisions and plans.

Figure 3.1-2: Income statementSource: Annual report 2013/2014 Sainsburys

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Figure 3.1-3: Statement of Balance sheet.Source: Annual report 2013/2014 Sainsburys

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Figure 3.1-4: Statement of cash flowSource: Annual report 2013/2014 Sainsburys

Cash flow will mainly tell about where the real cash are lying in and at the end of the yearposition of the company with the readily available cash for their business activities. This willclear the doubtful picture income statement gives with considering not real cas such as saleson credits, payables, depreciation, etc.

Figure 3.1-5: Return on capital employedSource: Annual report 2013/2014 Sainsburys

Return on capital employed will enable the company to see into the real earning for what theyinvested and also the owners/shareholders will be able to see the return they get.

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3.2 Interpretation of financial information in published accounts

Interpretation of published accounts is where a company analyses its figures which theyobtained through different financial statements, may be over the years, may be with anothercompany, etc. to understand where they want to improve and where they have achieve agreater scale.

Figure 3.2-6: Five year financial record.Source: Annual report 2013/2014 Sainsburys

As per Annual report, Sainsbury PLC (2013/2014), Sainsburys has been equity accounted

for the 46 weeks to 31 January 2014 and 100 per cent consolidated for the four weeks to 28

February 2014. Sainsburys Bank contributed 24 million to UPBT in 2013/14, compared to

22 million in 2012/13. Sainsburys achieved around 120 million of operational cost savings

which offset the impact of inflationary pressures on costs during the year. Retail underlying

operating profit increased by 5.1 per cent to 873 million (2012/13: 831 million), with retail

operating margin improving by eight basis points.

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Underlying basic earnings per share increased to 32.8 pence (2012/13: 30.8 pence), a 6.5 per

cent improvement year-on-year. This was higher than the increase in underlying profit,

primarily due to the impact of the reduction in the statutory corporation tax rate. Basic

earnings per share increased by 17.8 per cent to 37.7 pence (2012/13: 32.0 pence), higher

than the underlying measure as a result of a profit of 100 million on items excluded from

underlying results.

Sainsburys net debt includes the cost of acquiring Sainsbury, but excludes Sainsburys own

net debt balances. As at 15 March 2014, net debt was 2,384 million (2012/13: 2,162

million), an increase of 222 million year-on-year. This was driven primarily by the

additional funding used to acquire Sainsburys Bank and an increase in working capital,

offset by cash generated from sale and leasebacks and lower investments in new space.

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3.3 Financial ratios from published accounts

According to Black (2009), financial ratios are able to convey the performance of the

company and are able to show relationships and trends. The analysis of financial ratios done

in a regular manner will help the company to be on the correct path and will control some of

the actions, for example high receivable days will alarm the company to take necessary

action. For this not only

Figure 3.3-7: Sales and earnings ratiosSource: http://www.reuters.com/finance/stocks/financialHighlights?symbol=SBRY.L

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Figure 3.3-8: valuation ratiosSource: http://www.reuters.com/finance/stocks/financialHighlights?symbol=SBRY.L

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Figure 3.3-9: Financial and profitability ratiosSource: http://www.reuters.com/finance/stocks/financialHighlights?symbol=SBRY.L

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4 Assess and finance non-current assets, investments and working capital

4.1 Long and short-term finance requirements for businesses

As per Kotler at. El. (1999), for a company there are different financial needs that arise in

each year. These may be due to long term requirements as well as short term requirements of

the company. Short-term requirements can be included working capital requirements, and

fund requirements like that. Also long term requirements can be included fund requirements

for buying an asset, invest in a new project, research, etc. These finance requirements are

quite different to one another. Therefore funding them must be handled in a different way. For

Sainsbury it may be filling short term requirements for buying goods for their markets and

opening up a new supermarket in a new area. It is important to match these criteria in a way

which will match them. Balancing liquidity and profitability is an important part of this.

For long term requirements Use more of long term financial sources & For short

term requirements - Use more of short term financial sources Or a use a mixture both types of financial sources in all requirements.

It is important to see how the managements behavior in terms taking funds from outside

whether they are aggressive, moderate or conservative.

Aggressive Use more short term sources in all types of requirements. Moderate Use more of long term financial sources & For short term requirements -

Use more of short term financial sources Conservative Use more long term sources in all types of requirements.

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4.2 Sources of long and short-term finance for businesses

As per Gowthorpe (2005), when we talk about sources to fund long and short term financial

requirements of a business it will include range of sources, externally and internally to fulfil

them. As we discussed earlier we can use different sources for different requirements or a

mix of them for all the requirements. In this there are advantages and disadvantages in both

types of sources, implications to the companys growth, and there are roles that government

plays in these funding methods.

Long term sources these includes different sources which are there for a long time to

repay. Such as long terms loans, Bonds, Preference shares, etc. these are less costly

compared to short term sources but still make an impact on gearing levels as well

companys profit levels. But since these are tax deductible it will enable company to

save a large sum of money in paying interest. These sources can also be included such

options like share issuing. These are mainly important for long term requirements

where benefits will derive to the company in the longer run. When considering

Sainsbury they are mostly into long term sources as their working capital management

is at a very good level to have enough funding for short term requirements. Short term sources These includes number of different sources which are short term

or will be valid only for a little period of time. Such as short term bonds, over drafts,

trade credit, etc. but the problem with this method is high cost involving when paying

back and therefore will have a bigger impact in the financial statements though

obtaining these are much easier than other methods (Ogilvie, 2009).

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4.3 Importance of managing cash flow and examine cash flow management

techniques

As per Lunt (2009), for any company it is important to manage the cash flow and understand

cash flow differences which using different cash flow management techniques. Managing

cash flow forecasts is important to understand whether the company will enough funding for

their day to day requirements. This will include managing inventory, trade payables and trade

receivables which we named as working capital management to see how fast we can convert

goods into money. In this we need to manage three different areas very effectively to manage

cash properly. Length of the working capital cycle is mainly divided into two parts which are

permanent and temporary. Therefor managing each part is really important for the company.

Without overtrading mange them in the right way is the most important thing. For this

collecting receivables quickly either by giving more discounts, enforcing rules, factoring, etc.

is needed. Also delaying payments to creditors is another techniques which is not

recommended really but can be used to stop cash going out. To manage inventory going for a

method like just in time will be important but this will require better management of

resources.

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4.4 Methods for appraising strategic capital or investment projects

As per Dransfield (2013), in appraising there are many techniques available for a company

such as Net present value, discounted cash flows, internal rate of return, payback, accounting

rate of return, cost benefit analysis, value for money. Each method consists pros and cons

which will help managers to gain a good understanding about the project that they are going

to undertake. In the Net Present Value it is mainly about taking the value of money over a

certain period of time with the money value going down. The main drawback in this method

would be not considering re investment decision. Internal Rate of Return known as IRR is a

step forward from NPV which consider the re investment decision will consider what will

happen if re investment is undertaken. Payback is another method which consider mainly

about how quickly we can pay back the investment and this doesnt consider the time value

of money at all. This is one main draw back in this method not consider as a superior method

to appraise project in a volatile environment. Therefor two main ways can be considered as

NPV and IRR where this depends on the market they operate and how the Cost of Capital is

happening with their projects. For a company like Sainsbury it is important to go ahead with

one of these methods to appraise their project which will consider the time value of money.

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5 Different ownership structures and the way they influence and measure

financial performance

5.1 Corporate governance, legal and regulatory requirements of different business

ownership structures

Sainsbury take succession at Board and senior management level very seriously and

Sainsbury believe that they have a good record of identifying the resourcing needs of the

business, developing our own people, attracting external talent and planning and

implementing change. Managing the succession of a chief executive is a key priority for any

board. Sainsburys Chief Executive Succession planning process took place over a number of

years. It included a comprehensive external search facilitated by Egon Zehnder International

and enabled the Board to conclude to take the Company forward (Financial Statements,

Sainsbury PLC (2013/2014)).

Board evaluation

During the year, a thorough review of your Boards performance was completed by

Manchester Square Partners, who provide board evaluation and advisory services and have

no other relationship with Sainsburys. Our last external review was completed in January

2011. This was also conducted by Manchester Square Partners, but by different partners.

Since 2011, we have conducted comprehensive internal reviews which have ensured that we

have continued to build on our strengths, and that we are working effectively.

Diversity

One of Sainsburys strengths continues to be our diversity, which is the result of a high

proportion of women having been appointed on merit throughout the organisation. Sainsbury

have three women on our Board (30 per cent) and three on our Operating Board (27 per cent),

exceeding the aspirational target of the Davies Report that 25 per cent of the Board positions

at FTSE 100 companies should be filled by women by 2015. A review of our broad diversity

targets is set out on page 46.

Remuneration

There continues to be a great deal of focus on Directors remuneration and the way it is

disclosed. Under Mary Harris leadership, the Remuneration Committee has ensured that

there is a direct link between pay and performance in the areas most valued by our

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shareholders. Sainsburys Directors Remuneration Report, including Marys annual

statement to shareholders, reflects the latest remuneration reporting regulations. At this years

AGM, shareholders will have the opportunity to participate in a binding vote on our forward

looking Directors Remuneration Policy, as well as an advisory vote on the remainder of the

Directors Remuneration Report.

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5.2 Accountability for and roles of owners and managers in decision making for

different business ownership structures

Managers or the board of directors are the main link between owners and management of the

company in considering the accountability for a cooperative. The Boards key focus in

helping to create long-term sustainable value for shareholders is on strategic leadership,

performance management, investor relations, risk management, governance and succession

planning. The Board has a scheduled forward programme of meetings to ensure that we can

allocate sufficient time to each of these key areas. This enables us to plan Board and

Committee meetings appropriately and use the Boards time most effectively. There is

sufficient flexibility in the programme for specific items to be added to any particular agenda

and this ensures that the Board can focus on the key matters relating to the business at the

appropriate time. (Annual report, Sainsbury PLC (2013/2014))

As per Tracy (2002), there are also a number of informal meetings of the Board, which enable

all the Directors to spend more time together and to discuss specific areas of the business

with individual Operating Board members. Sainsburys annual Board evaluation exercise

enables us to review whether Board meetings are structured with a clear focus on the key

issues facing the Company, with a full and open debate before major decisions are taken.

Sainsbury ensure that all Directors are aware of the key discussions and decisions of each of

the four principal Committees the Chairman of each Committee provides a detailed

summary to all Directors at the Board meeting following the relevant Committee meeting.

The Board has a schedule of formally reserved powers, which it reviews each year, and

receives a number of in-depth presentations during the year.

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6 Conclusion

It is clear that financial information will always play a more vital role in a company

compared to past and the importance of this is increasing day by day. It is important for any

company to have detailed financial information in assessing finance requirements and

obtaining funds, reporting and setting up targets and mainly in managing risks this is really

important. Identifying risks the company is associating with has been largely linked up with

financial information company is handling. It also clear now in analysing financial

information it is really important to have properly structured accounts and the ability to

calculate different ratios to support business decision making. As the second largest chain of

supermarket in the UK Sainsbury's, in the market that they operate it is more important to get

all these correct in the first place. A company must differentiate their long and short term

finance requirements and find different sources as suitable for them and their financial

structure. With that its also important to get a good understanding different ownership

structures and their influential companys financial performance. Having more accountable

team of managers is really important for any company in operating really well in the future.

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7 References

Berry,A. (1999), Financial Accounting An Introduction, Second Edition, London: Thompson

Black, G. (2009), Introduction to accounting and finance, Second edition, Essex: Pearson

Education

Braiotta, L., Gazzaway, R.T., Colson, R. and Ramamoorti, S. (2010), the Audit Committee

Handbook, New Jersey: John Wiley & Sons

Brealy, R.A., Myers, S.C. and Allen, F. (2011), Principles of Corporate Finance, 10th

Edition, and New York: The McGraw-Hill

Dodge,R. (1997), Foundations of Business Accounting, Second Edition, Boston: Thomson

business press

Dransfield, R. (2013), Business Economics, Oxon: Routledge

Flick, U. (2009), An introduction to qualitative research, 4th edition, London: Sage

Publications

Gowthorpe,C. (2005), Financial Accounting for non-specialists, London :Thompson

Learning

Groppelli, A.A. and Nikbakhat, E. (2006), Finance, Fifth Edition, New York: Barrons

Horngren, C.T, Harrison, W.T. and Oliver, M.S. (2012), Accounting, Eleventh Edition, New

Jersy: Pearson Prentice Hall

Jackson, S.L. (2013), Statistics Plain and Simple, Third Edition, New York: Cengage

Learning

Kinney, M.R. and Raiborn, C.A. (2011), Cost Accounting, Eighth Edition, Mason: South-

Western Cengage

Kotler, P., Armstrong, G., Saunders, J. and Wong, V. (1999), Principles of Marketing, 2nd

Edition, Cambridge: Prentice Hall

Linzer, R. S. and Linzer, 0.L. (2008), Cash Flow Strategies, San Francisco: John Wiley and

sons

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Lee, T.A. (2006), financial reporting and corporate governance, West Sussex: John Wiley

and Sons

Lunt, H. (2009), Fundamental of Financial Accounting, Burlington: Elsevier

Ogilvie, J. (2009), Financial Strategy, Burlington: Elsevier

Rhodes, J. (2010), A guide to setting budgets and managing cash-flows, Brighton:

Straightforward

Robertson, L. (2009) Financial Management, Burlington: Elsevier

Scarlett, B. (2009), Performance Operations, Burlington: Elsevier

Tracy, J.A. (2002), the fast forward MBA in finance, Second Edition, New York: John Wiley

& Sons

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8 Web References

Finance, J Sainsbury plc. (LON: SBRY) (Online), Available from:

http://www.google.com/finance?cid=4062698 [accessed on: 02-09-2014]

Annual report, Sainsbury PLC (2013/2014), (Online), and Available from: http://www.j-

sainsbury.co.uk/media/2064053/sainsbury_s_annual_report_and_accounts_13-14.pdf

[accessed on: 02-09-2014]

Financial Statements, Sainsbury PLC (2013/2014), (Online), and Available from:

http://annualreport2014.j-sainsbury.co.uk/financial-statements/ [accessed on: 02-09-2014]

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1 Introduction2 The role of financial information in business strategy2.1 Need for financial information in business2.2 Risks related to financial and business2.3 Financial information required in strategic business decision making

3 Analyse financial statements for strategic decision making purposes3.1 Purpose, structure and content of published accounts3.2 Interpretation of financial information in published accounts3.3 Financial ratios from published accounts

4 Assess and finance non-current assets, investments and working capital4.1 Long and short-term finance requirements for businesses4.2 Sources of long and short-term finance for businesses4.3 Importance of managing cash flow and examine cash flow management techniques4.4 Methods for appraising strategic capital or investment projects

5 Different ownership structures and the way they influence and measure financial performance5.1 Corporate governance, legal and regulatory requirements of different business ownership structures5.2 Accountability for and roles of owners and managers in decision making for different business ownership structures

6 Conclusion7 References8 Web References

Finance for Strategic Managers

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