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Financial Performance: Technique to analyze economic structure

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Managing Financial Principles and Techniques

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Introduction

Financial performance of any organization represents entity's profitability and earning power to formulate and implement strategies. It is related with firm's effectiveness and enhancing its efficiencies at high level. The present report is based on understanding different financial  reports and techniques to analyze economic structure as well improving quality services for further implementation of Sainsbury. It is public retail sector large scale supermarket chain of UK that provides groceries and food items. However, pricing strategies and costing systems are to be described. Including this, different forecasting and decision making tools for implementing further business operation can be determined. Moreover, budgetary planning system and costing methods for strategic planning procedure and making decisions regarding business activities can be recognized. In addition to this, various financial appraisal methods and technqiues for adequate investment is to expressed through this assignment.

TASK 1

1.1 Importance of costs in the pricing strategy of an organisation:

Pricing Decisions: Ho much company spend to produce a unit of product is valuable when figure out the sales price. If Sainsbury Company want to compete on price, than they have to keep price of product as low as possible. But if product is sold at cost less then manufacturing cost then they cant go for long in market. So while selling it is important to keep price not to high and not too low and at this point of time different cost concept is used to fix adequate price (Bakand, Hayes and Dechsakulthorn, 2012).

Preparing Financial Reporting: Adherence to more specific cost technique are require under General acceptance Accounting Principles. For external financial reports purpose and GAAP require all manufacturing cost that incurred in manufacturing goods. Costing system that behave cost in this manner are called absorption technique, full cost costing, traditional system.

Helpful in Budgeting: Cost concept also help in budgeting and budgetary control. There are various tools used in budgetary control. Fixed, Variable and Zero base budget (Bartram, Brown and Waller, 2016). With this budgeting system financial requirement can be fulfilled within limited resources and maximum utilisation of financial sources can be made possible and from it, pricing of product that is ready for sale in market is optimised.

Many business decision requires a firm knowledge of several cost concept. Different type of cost having different characteristics. Consequentially when reviewing a business case to determine which way to choose it is important to understand following cost concept to choose.

Fixed, Variable and Mixed cost: A fixed cost such as rent, does not changes in with level of activity. In opposite to it variable cost such as direct material is changeable with level of activity. Those few cost which changes somewhat with activity are included in mixed cost (Battiston and et.al., 2016). It is important to understand the differences, since the decision to alteration in level of activity may or may not alter cost. For ex, shutting down a facility may not terminate associated building lease payment which are fixed since duration it was leased.

Marginal cost: It is total of variable cost i.e., prime cost plus variable overhead. It is bsed on difference between fixed and variable cost. Fixed cost are ignored variable cost are considered for determining cost of production, work in progress and value of finished goods (Caspin and et.al., 2013).

Out Of pocket Cost: It involves payment to outsiders such as increase in cash expenditure as proportionate to cost of depreciation, which does not concluded any cash expenditure. Such cost are used in price fixation at time of recession or when make or buy alternative option of decision is made.

1.2 Design a costing system for use within an organisation

A costing system is designed to monitor the cost incurred by the business. Whole business system is connected to sat of forms, process, control and reports that are designed to aggregate and report to management revenues, cost and profitability. Areas included in can be any part of the company, including Customers, Department, Facilities, Process, Product and services, Research and development, Sales etc.

There are two main type of costing system. A business can circulate information based on either one of these or mixed that is called hydride system that mix match system to meets its need.
Job costing System: Material, labour, and overhead are compiled from individual unit or job. This approach best for unique purpose such as custom design machine or consulting projects. It is highly detailed and labour intensive (Cheng, Ioannou and Serafeim, 2014).

Process costing System: Material, Labour and overhead are totalled for an entire production process and then are allocated to individual production unit, processing of milk, Petroleum products, Cell phone manufacturing are part of process costing where production done at large level. Cost accumulated is highly efficient and divided in no. of units per batch is possibly be automated.

Differential Cost: Change in cost due to change in level of activity,pattern, technology, process or method of production is known as differential cost. If any changes proposed or happened in existing level or method of activity of production, the increase or decrease in total cost because of decision is known as differential cost (Chhokar and et.al., 2013). If changes increase in cost, it is called incremental cost and if there is decrease in cost results from decrease in output the result is known as decremental cost.

Sunk Cost: Sunk cost is irrevocable cost and is caused by complete abandonment or shutting down of plant of business. It is written down value of abandoned plant less its salvage value. Such cost are historical cost which are incurred in past and are not relevant for decision making and are not affected by increase or decrease of volume of output. Thus expenditure which has taken place is irrecoverable in a situation is treated as sunk cost. Such cost included depreciation of fixed assets (Clark, Gilbert and Ca, 2014).

Opportunity cost: It is maximum possibility alternatives earnings that might have been earned if productivity capacity or service had been put to some alternative use. In simple words it is advantage in measured term gone due to not using other alternatives that could have generated more profit then current cost. For example, If owned building is proposed to be used for projects then rent on building is considered to be an opportunity cost while taken into consideration the evaluation of the profitability of projects.

1.3 Improvements to the costing and pricing systems used by an organisation

Improvement in costing to good financial management: Ability to identify, interpret and present cost as they are related to organisational economic flow of goods and services, both historical and forward looking context, is necessary for an informed understanding of the organisational driver of profit and value (Midrigan and Xu, 2014).

Material cost effectiveness: The designed, implementation, and continuous improvement of costing method, improvement in data collection and system should reflect a balance between the required level of accuracy and the cost of measurement (cost benefits tradesoff) depends on competitive situation of the organisation.

Time and Consistency: Cost information should be collected and analysed in systematic manner so as to ensure comparability over time, whether in routine information system, or for specific application and or purpose (Park and Park, 2014).

Transparency and auditability: Definition and source of data, the operational and other non financial data and method of calculating cost needs to be transparent to customers and recorded and capable of review, risk analysis and assurance.

Replacement cost: It is cost at which there is purchase of assets or material exactly replica that would have been replaced or re-evaluate. It is cost of replacement at current market value.
Avoidable and unavoidable cost: Those cost which are avoided if particular product or department with which they are directly related is discontinued. For ex, salary salary of clerk belongs to department employed is eliminated if that department is discontinued.

Unavoidable cost is opposite to avoidable cost which is not been avoided even with discontinuation of projects or department (Park and Park, 2014). For ex, Salary of factory manger, factory rent etc.

TASK 2

2.1 Forecasting Techniques in an Organisation to make Cost and Revenue Decisions

Forecasting means predicting about the future on the basis of past and present data and the trends followed by the organisation.

Types of Forecasts :-

  • Economic Forecasts
  • Technological Forecasts
  • Demand Forecasts

Categories of Forecasting Methods :-

A. Qualitative v/s Quantitative Method – Qualitative Method is a technique based on opinions, judgements, intuitions, emotions, or personal experiences, and also is subjective in nature. Whereas, Quantitative Method of forecasting is based on mathematical(quantitative) models, and is also objective in nature. This method of forecasting heavily relies on mathematical computations (Pasquariello, 2014).

B. Time Series Method – Time series method uses the historical data as basis for forecasting future outcomes. It's objective is to draw a pattern in the past values of the data. This method is useful only when historical data is present and there is no change in the pattern of historical data. This method of forecasting thus cannot evaluate any kind of change in the future outcome if there is any kind of change in the value of the variable.

Kinds of Time Series Methods :-

  • Moving Average
  • Weighted Moving Average
  • Kalman Filtering
  • Exponential Smoothing
  • Trend Estimation
  • Linear Prediction
  • Extrapolation

C. Judgmental Methods :- Judgmental forecasting method comprises of opinions, subjective probability estimates and also intuitive judgement (Segal, Shaliastovich and Yaron, 2015). This method of forecasting is used in a newly formed organisation or in an organisation where there is lack of historical data which cannot be used for forecasting.

Judgmental Method Includes :-

  • Composits Forecasts
  • Cooke's Method
  • Delphi Method – It developes forecasting through group consensus.
  • Forecast by Analogy
  • Scenario Building – It is the process of considering alternative outcomes in process of analyzing future events.
  • Market Surveys – Market surveys comprises of use of questionnaire to be filled by the market elements to identify their testes of new products and services.

D. Naive Approach :- The Naive approach of forecasting is the most cost effective forecasting model. This approach provides a benchmark against which comparison between different models is been done. The Naive forecasting approach is most suitable for time series data.

E. Other Methods :- Their are certain different methods of forecasting in an organisation which can be used for the betterment of the organisation's functioning and growth of the organisation:

Simulation
Prediction Market
Probabilistic Forecasting, and
Ensemble Forecasting.

2.2 Sources of Finance

Finance is the most essential requirment for an organisation's growth, it's expansion and also it's development. Finance is the core element in an organisation's working. Finance can be made available for an organisation from sources such bas internal as well as external sources. It's organisation's choice from where to get the funds as it is crucial to select the most appropriate source as different sources carry different costs (Senge, 2014). Sources of finance can be classified as Internal or external, long term borrowing's and short term borrowing's, debt, equity, etc.
Internal Sources of Finance:

Internal sources of finance are the funds which are available with the organisation ie.. the self generated funds within the organisation.

Retaines Earnings/Profits - It is the internal source of finance as it is the profit kept with the organisation after paying the dividends to the shareholder's and drawings. It is also termed as Ploughing back of profis.
Sale of Assest - It is an another internal source of finance as whenever organisation is in a need of funds and an asset is abondoned it can be sold and cash can be generated for the projects. It also reflects as long term and short term finance (Stevens and Whittle, 2016). Suppose when a car is sold it reflects short term finance and when a land, building or a machinery is sold it ensures the long term borrowing for the organisation.
External Sources of Finance:

External sources of Finance are the funds which are been arranged from outside the business. It generally includes long term sources and short term sources.

Equity share capital – It is the most important source of finance for a company. It is raised through the organisation's shareholders. It is called as permanent capital but the shreholders receive a share in profits in the form of dividends. The most important key feature of equity share capital is sharing of ownership right, which dilutes the right of current shareholders to some extent (Subrahmanyam and Titman, 2013). There are 2 different types of shares :- Ordinary shares and Preference shares.

1. Ordinary shares - Ordinary shares are the most common shares as been hold by the ordinary shareholders whether in any company or organisation. In these kind of shares dividend depends on the profit earned by the organisation. But holders of ordinary shareholders carry voting rights.

2. Preference shares – Preference shares carry a less risk than the ordinary shares as they are not the owner's of the company or been an organisation. Though they are offered a fixed rate of return which may be less than that of ordinary shareholder's.

Long term Debt – One of the major sources of long term financing is long term debts. These debts are generally been taken for a period more than a year. An advantage of these kind of loan is that the can be repayed over the period of time.

Debentures – Some lind of loans are are secured by a fixed or floating charge against the organisation's assets, such kind of loans are called Debenture loans. Debenture holder's receive their interest before any dividend paid to the share holder's and in case debenture holder's are not paid they will be treated as the preferential creditors (Valackiene, 2015).

Short term sources:

  • Bank Loans – These kind of laons require a rigid agreement between the bank and the bowwower. The amount should be paid within a certain period of time as specified in the agreement.
  • Bank Overdraft – Businesses now-a-days require cash on a daily basis because of a certain gap between it's collection and payment. Thus Bank overdraft is the easiest mode of short term financing in an organisation.

B. Short term sources:

Budgetary control is the process of determining various actual results with budgeted feature for enterprises for future period and standard set then comparing the budget with actual performance for calculating variance (Clark and Gilbert, Ca, 2014). Budgetary control is system of cost controlling which include preparation of budget, coordinating and controlling department and establishing responsibilities, comparing actual performance with budgeted one and acting onto it to achieve maximise profitability. In short planning in advance so as whole system can be controlled.

Some few budget are Fixed,Variable and zero based budgeting.

  • Fixed budget is budget which is designed to remain unchanged irrespectively with the level of activity. It is based on single level of activity. This budget's performance report compare data from actual operation with single level of activity reflected in budget. It is based on assumption that company will work on some level of activity and specified production can be achieved
  • Flexible budget is defined as a budget which recognise the difference between fixed, semi-fixed and variable cost is change as per change in level of activity. It is also known by other name like variable, dynamic etc (Pasquariello, 2014).
  • Zero based budgeting is method of budgeting in all expenses are clarified for each new period. It starts with zero base and all function in an organisation are analysed for demand and cost.

3.2 Participate in the creation of a master budget for an organisation

Master budget is comprehension projection or interconnected budget of sales, production cost, purchase and income etc. and also include financial statement. A budget is future financial transaction planning. Master budget serves as a planning and controlling tool to the management since they can plan the business activity during the period on the basis of master budget. At the end of each period actual budget can be compared with master budget (Segal, Shaliastovich and Yaron, 2015).

Two components of Master Budget Included 3 major component expenses revenue and profit. But in detailed it contain Sales budget, Production budget, Direct material purchase budget, Direct labour budget, Overhead, Selling and administration expenses budget, cost of goods manufactured budget.

Financial Budget: Financial budget includes information about how business will go about acquiring cash inflow and cash outflow and how will it spend cash at that period of time. One of the major section of financial budget is cash budget. Capital expenditure budget is another type of Financial budget that deals with major upcoming expenses. Scheduled expected cash receipt from customer, expected cash payment, Cash budget, Budgeted income statement, Budgeted balance sheet are included in it.

3.3 compare actual expenditure and income to the master budget of an organisation

All transaction related to company like retail are included in book of account strictly according to double entry system. At the end of the year result obtained through final account. It include two type of accounting Income and expenditure and balance sheet (Cheng, Ioannou and Serafeim, 2014).
The account through which surplus or deficit of company is concerned as Income and expenditure account. All necessary journal entries are entered in ledger account. Its left hand is debit side record all revenue expenditure and right hand is credit side indicates surplus i.e., excess of income over expenditure. Conversely the balance of account if debit indicates deficit, excess of expenditure over income.

Following are characteristics of Income and expenditure account are

It it is fact like profit and loss account of profit seeking concern
All experiences are recorded in debit side while all income are recorded in credit side.

All revenue transaction are included in it. No capital items are taken into account.
Its balance is transferred to capital account.
It does not start with opening balance.

3.4 evaluate budgetary monitoring processes in an organisation

Budgetary monitoring process: Once cash flow are decided and allocated sunsbery needs tpo have system in place to monitoring performance. The complex of arrangement for monitoring the budget will depend on the size of company and availability of staff in organisation. Key process to monitor budget is:

Monitoring and reporting against internal budget on a consistent and regular besis whether target are being met.
Forecasting to manage gaps between estimates and actual budget in order to identify quickly, and respond to changes in the external environment or internal activities (Senge, 2014).
Reviewing and improving internal budget process by monitoring the accuracy and timeless budget process to identify areas of improvement.
Revising the internal budget through a coordinated process.

TASK 4

4.1 recommend processes that could manage cost reduction in an organisation

Cost control: The process of monitoring and regulating the expenditure of funds is known as cost control. In other words it means, to regulate control the operating cost in business firm.
Cost reduction is not concern with setting target and standards. Cost reduction is the final result in cost control process. Cost reduction aims at improving the standards. It cntinuous, dynamic, and innovative in nature, looking always for measure and alternatives to reduce cost. It is corrective function. It is applicable to every activity of business. It adds thinking and analysis to action at all levels of management.

Process of cost reduction in organisations:

Organisation and method
work Study
material handling
Automation
Value analysis
variety reduction\
Production control
Design
material quality
Quality control

4.2 evaluate the potential for the use of activity-based costing:

Advantage and disadvantages of activity based costing

1. Advantages:

More accurate costing of product/services, customers, SKUs, Distribution channels (Bakand, Hayes and Dechsakulthorn, 2012).
better Understanding overheads
Easier to understand for everyone
Utilize unite cost rather then just total cost.
Makes visible waste and non value added activities.
Supports performance management and scorecards.
enable costing of process, supply chain and value steams.
Activity based costing mirror way work is done.
Facilitates benchmarks.

Disadvantages or Limitation of activity based costing System:

Implementing an ABS is a major project that requires substantial resources. Once implemented an ABS is costly to maintain. Data must be allocated checked and entered into system.
It can easily be misinterpreted and must be used with care while using data.

TASK 5

5.1 Financial appraisal methods to analyze investment projects in public and private sector

Investment appraisal techniques for effective financial performance is beneficial to create balance of incurred expenses and gained revenue. There are several methods used for choosing best project planning such as average rate of return, pay back period, internal rate of return etc. Therefore, economic growth of Sainsbury can be gained at high level that impacts on organization's effectiveness. However, for public and private sector organization, investment for projecting is obtained in different ways. In this regard, government interferes for public sector entities while investment decisions for private sector company is taken by private individuals (Bartram, Brown and Waller, 2016). Thus, different financial appraisal techniques are applied for investment and getting sources for effective fund allocation.

5.2 Strategic investment decision for organization through using financial information

Manager of Sainsbury analyzes financial information through its tools such as; balance sheet, profit and loss account, income statement, fund/cash flow statements and so on. On the basis of these components analysis, investment decisions are taken for operating business activities in future time. In addition to this, expenses and income are recognized for making decisions regarding further business operations. However, by using financial information, varieties of ideas are generated for economic stability and enhancing profitability at high level (Cummings and Worley, 2014). Therefore, strategic decision making process is implemented for strategic management and improving monetary position of entity efficiently. Thus, strategic investment decisions are made through identifying financial information effectively.

5.3 Audit appraisal

Investment and decision making appraisal is recognized through audit appraisal technique. In this regard, auditors and manager of organization analyzes financial performance and further prepares strategies for increasing profit earning capacity. In addition to this, using audit appraisal techniques are valuable to improving business performance and enhancing quality services of organization at high level. Thus,audit appraisal is useful for recognizing actual financial performance and increasing profit earning capacity of entity at high level (Stevens and Whittle, 2016).

TASK 6

6.1 Financial statements to assess financial viability of Sainsbury

There are several financial statements obtained such as profit and loss account, income statement, balance sheet and so on. Therefore, by analyzing these components, several ideas are created for economic growth as well improving earning capacity of firm at high level. In addition to this, financial viability is obtained through recognizing statements as well presenting income and expenses status (Battiston and et.al., 2016). However, it is useful for making decisions and preparing strategies related to effectiveness of Sainsbury. In accordance to this, financial statement assessment is liable to improve organization's performance as well enhancing quality services of firm effectively.

6.2 Financial ratios to improve quality of financial information for organization's effectiveness

Financial component as ratio analysis is valuable for presenting economic performance of entity. In this process, overall business operations are created as well through profitability and liquidity ratios. Therefore, improvement in monetary profile of organization is gained through this tool for strategic decision making process. Moreover, comparison between last years performance to present year's is determined that affects on entity's effectiveness. Thus, financial ratios and their analysis is useful for making decisions and strategic management regarding further business operations. In this process, quality performance and efficiencies of organization get improved at large scale that is interrelate with overall management of all business operations (Valackiene, 2015). Moreover, financial position of organization can be enhanced at high level through this process. Including this, through liquidity and profitability ratios, different ideas are generated for further implementation as well increasing efficiencies at large scale to improve effectiveness of Sainsbury.

6.3 Recommendation on strategic portfolio of organization

Strategic portfolio is related to preparing planning and making decisions for further business operations. However, it is helpful for improving quality services and making decisions for effectiveness of Sainsbury. It is analyzed that manager of organization analyzes business operations and its performance that leads to generate different ideas to enhance profitability that affects several activities such as production and distribution of goods and services etc (Midrigan and Xu, 2014). Therefore, it is needed for manager to formulate and implement strategies regarding effectiveness and improving efficiencies. However, strategic portfolio is considered as planning procedure tool for managing all business operations and improving them for better quality services. It influences business and competitive strategies to improve efficiencies and quality services at large scale. Thus, strategic planning procedure related to effectiveness and proper management of all business operations are impacted on entity's business performance. Including this, by following on all strategies and planning procedure, organization can reach out its set target efficiently. Therefore, several positive outcomes and implementation can be gained through this process system at high level.

Conclusion

The report is concluded that analyzing financial performance is crucial for improving profitability and managing strategic resources adequately. In this regard, several decision making tools are identified for further implementation and increasing quality services of Sainsbury. Moreover, investment appraisal techniques and ratio analysis component for improving financial performance of entity is recognized. In addition to this, budgetary targets and costing methods are presented for increasing profitability of firm. Whoever, decision making through investment appraisal techniques are determined effectively.

References

Bakand, S., Hayes, A. and Dechsakulthorn, F., 2012. Nanoparticles: a review of particle toxicology following inhalation exposure. Inhalation toxicology. 24(2). pp. 125-135.
Bartram, S.M., Brown, G.W. and Waller, W., 2016. How Important Is Financial Risk?(Digest Summary). CFA Digest. 46(10). pp. 69-138.
Battiston, S. and et.al., 2016. Complexity theory and financial regulation. Science. 35(6). pp. 818-819.
Caspin, W. and et.al., 2013. The Underexplored Role of Managing Interdependence Fit in Organization Design and Performance. Journal of Organization Design. 4(1). pp. 34-41.
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to finance. Strategic Management Journal. 35(1). pp. 1-23.
Chhokar, J.S. and et.al., 2013. Culture and leadership across the world: The GLOBE book of in-depth studies of 25 societies. Routledge.

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