Assignment Sample on Finance for Decision Making for Business Expansion
Introduction
This study will evaluate profitability ratio, liquidity ratio, efficiency ratio, gearing ratio, capital structure ratio, and investment ratio of Sainsbury PLC. Performance and of Sainsbury PLC will be enlightened through financial analysis of this company. Financial projection plans for business expansion of Sainsbury PLC will be discussed in this study. The break-even point for business projection plan will be discussed in this study to measure efficiency of financial projection plan. Requirements of financial projection for decision making have been evaluated in this study. The advantages and disadvantages of the Sainsbury Plc business projection plan will be discussed in this study. Better financing opportunities to improve performance of Sainsbury Plc for its business expansion plan will be evaluated to find the most profitable and efficient way to sustain business activities in the long term.
Financial ratio analysis
Profitability ratio
Gross profit ratio
Ratio of gross profit is almost 7.49% in 2021 in Sainsbury Plc that is a good gross profit margin for a company in retail industry. As cited by Satryo, Rokhmania & Diptyana (2017), gross profit ratio helps to identify the profitability of a company before deduction of indirect expenses. Financial health of an organization is easily identified by evaluating different types of profitability ratios. Sainsbury Plc has executed a consistent gro0ss profit over years and sustained its business activities.
[Refereed to appendix: 1]
Ratio of operating profit
Operating profit ratio is calculated to understand profitability of a company from its operating activities. As opined by Miransyah & Dempo (2021), operational expenses are deducted from operating income to calculate rat6io of operating profit. Operating profit ratio of Sainsbury Plc is more than 2.44% in 2021 (sainsburys.co.uk, 2021). This operating profit margin of Sainsbury Plc must be improved for its business expansion plan because a lot of internal financial resources are required to promote the company in different regions.
[Refereed to appendix: 1]
Liquidity ratio
Current ratio
Liquid ratio is calculated to find the ability of a company to pay all current liabilities by selling available current assets. As per the opinion of Dimyati, Supeni & Saputri (2021), required working capital is maintained by calculating the current ratio of a company. A current ratio of Sainsbury Plc is around 1.51 in 2021, more than 1 current ratio is considered as a good current ratio. Sainsbury Plc has maintained its liquidity effectively so that this company does not face any complications during executing operating activities. Investors have a positive approach towards a company with a well maintained current ratio because it represents ability to pay short term liabilities before competitor companies.
[Refereed to appendix: 2]
Quick ratio
Liquid test ratio is calculated to find the capability of a company to maintain short term liabilities. As cited by Syarifah (2021), company’s ability to pay all the current liabilities except bank overdraft by selling available current assets without selling inventories. A quick ratio of Sainsbury Plc is almost 1.16 and that this company contains current assets more than current liabilities. Supply chain of Sainsbury Plc is effective and faster than market competitors because of having available cash in the company.
[Refereed to appendix: 2]
Efficiency ratio
Trade receivable days
Trade receivable of Sainsbury Plc is almost 725 million pounds and sales are more than 29048 million pounds that receivable days of this company are around 9 days in 2021. As cited by Brambilla et al. (2018), receivable days represent the period that a debtor of a company takes to pay their dues. Low trade receivable days help to maintain liquidity of a company and it enhances performance by providing a smooth flow of financial resources for business operation. Free companies do not allow dues to their consumers that affect service quality.
[Refereed to appendix: 3]
Trade payable days
Payable days are calculated to identify the period that a company takes to pay its dues to their suppliers. As opined by Hodzic & Celebi (2017), high payable day’s represents inefficiency of a company to pay their suppliers that affects long term decision making. Days of trade payable is more than 56 days in Sainsbury Plc, this company has taken more than usual time to pay its suppliers to maintain liquidity. Suppliers have reported so many times to Sainsbury Plc to pay their dues within a short period but that must be managed by this company to sustain its business in the long run.
[Refereed to appendix: 3]
Gearing ratio
Gearing ratio of a company is calculated to evaluate performance of a company by providing clarity of financial sources for operation activities. Sainsbury Plc gearing ratio is more than 39%, more than 25% gearing ratio is considered as a good leverage company (sainsburys.co.uk, 2021). As opined by Valogo, Shafiwu & Adabuge (2018), the total debt of business and equity of company is evaluated in a ratio of capital gearing. It is unnecessary to improve the gearing ratio to 50% of Sainsbury Plc to attract potential investors for the organization. Financial leverage of Sainsbury Plc is high and financial managers do not face aunty complications during business expansion decision making.
[Refereed to appendix: 4]
Investment ratio
Dividend per share
Announced dividend of Sainsbury Plc is almost 232 million pounds and a number of shareholders of the company are more than 2180 million per share dividend is around 0.20 in 2021. As opined by Lordkipanidze (2019), high dividend rate enhances growth of shares and attracts investors to get finance for the company. Per-share dividend directly indicates income of shareholders; Sainsbury Plc has maintained a consistently high dividend in the London stock exchange. A large number of national and international investors have invested in Sainsbury Plc so that this company never faces financial crisis during business expansion decisions.
[Refereed to appendix: 5]
Earnings per share
Earnings per share are one of the main investment ratios that represents return rate on investment directly. Profit before paying dividends and after paying tax to the government is more than 258 million pounds in 2021. As cited by Jin, Xu & Zou (2021), company’s ability to earn profit and growth rate of share is directly reflected by EPS and Sainsbury Plc has maintained this over years. Per-share earnings are almost 0.11 in 2021 in Sainsbury Plc that has attracted a large number of investors to expand business in different regions.
[Refereed to appendix: 5]
Capital structure ratio
Debt equity ratio
Debt equity ratio is dependent on industry and Sainsbury Plc must improve its capital structure and increase its debt for the total utilization of available resources of a company. As cited by Sutomo et al. (2020), companies maintain balance among debts and equities by calculating the ratio of debt-equity. Debt and equity must be changed in the assumption of financial resources of Sainsbury Plc’s business expansion plan.
[Refereed to appendix: 6]
Assets to equity ratio
Total assets of Sainsbury Plc are almost 7073 million pounds and total equities are more than 7874 million pounds. Assets to equity ratios are calculated to understand the use of financial resources in purchasing current and fixed assets that are collected from equities. Sainsbury Plc has managed assets to equity ratio of more than 0.89 in 2021 (sainsburys.co.uk, 2021). It has been seen that Sainsbury Plc uses most of the equities for business activities and uses the least amount of debts to reduce external liabilities.
[Refereed to appendix: 6]
Financial projection for Sainsbury Plc
Sainsbury Plc has maintained excellent profitability and liquidity over years but it takes too much time to pay its suppliers. As opined by Sari & Sedana (2020), debt financing helps to operate business in difficulties against a few interests, but Sainsbury Plc does not prefer to use this financing opportunity. Sainsbury Plc will include debt financing opportunities to expand business in different regions. Around four new shops will open based on these financial assumptions to expand business. Opening four new retail shops require almost 4000 million pounds, it is assumed that more than 2800 million pounds will be collected from debt financing and around 1200 million pounds will be invested through equity financing. Fixed cost for this project was assumed to be almost 2500 million pounds and variable cost is approximately 1000 million pounds. Sainsbury Plc can make sales of almost 5000 million pounds by selling 100000 units of goods.
These assumptions for the financial projection of Sainsbury Plc will generate a large amount of profit for the organization. As cited by Fatih & Fachriza (2021), financial projection helps to evaluate business expansion plans with the development of current performance of a company. Different management tops are used during the financial [projection of a company that helps inaccurate decision making. Available debt sources will be effectively managed by Sainsbury Plc through this financial projection. Total debt will be adjusted and the debt-equity ratio will be improved. These activities will ensure financial stability of the company by total utilization of available resources.
[Refereed to appendix: 7]
Break-even analysis for Sainsbury PLC
Breakeven point of Sainsbury Plc has been calculated in this study to measure financial development of the company for making business expansion plans. As per the opinion of Pujiati, Oktavilia & Damayanti (2018), breakeven analysis is used to find the point of selling units where a company will recover its fixed and variable cost for a particular project. Sainsbury Plc will make a strategy to open four new retail shops in n different regions of the UK and target to produce almost 100000 unit products for potential consumers. Fixed cost of this business expansion plan is almost 2500 million pounds and more than 1000 million pounds are included as variable costs in the business expansion project of Sainsbury Plc.
Variable cost is almost 0.01 million pounds and sales per unit is around 0.05 that contribution for this projected expansion plan is approximately 0.04 million pounds. As cited by Sintha (2020), companies ensure production units earn a fixed amount of profit in an unknown marketplace that reduces the risk of a company. Break-Even Point for this business projection is almost 62500 units. After selling 62500 units this company will be in a no loss and nonprofit position that will guide project managers to estimate sales units to earn a good profit margin.
[Refereed to appendix: 8]
Evaluation of financial sources
Requirements of financial projections
Financial projections are necessary to estimate the expenses and revenue that will be earned after choosing a particular strategy. As cited by Phanthunane, Pannarunothai & Pagaiya (2017), a business expansion plan requires preparing a financial projection model that includes different sources of funds that the company will use to execute projects. As opined by Tokarski, Tokarski & Wójcik (2017), the balance sheet of a company is maintained for effective business projection and the income statement improves by it. Business projection model is a document of forecasted planning of an organization about their business expansion or growth plan. A large number of financial data of a company is evaluated in financial projection to make accurate decisions for a company. In this study Sainsbury Plc has made a business expansion plan that financial projection is necessary for effective financial decision making.
Financial projection is required to make the most effective estimation plan for business expansion. As opined by Taliento, Favino & Netti (2019), projections are made for a particular period, fixed cost, variable cost and expected sales are evaluated to make efficient decisions. Different ratio of company n is used to measure profitability, efficiency, and capital structure of a company that decisions are made accurately by well defined financial projection.
Advantage of financial projections
Financial projection helps in making effective decisions for a company and it is necessary for business expansion plans or introducing new products and services in the market. As cited by Jones & Comfort (2020), risk of a company is reduced by financial projection because expected incomes and losses are easily calculated through a project expansion plan. The financial department of Sainsbury PLC will be able to control cash flow efficiently and predetermined benchmarks of the company easily achieved through contingency planning. Preparation of the budget for a company becomes much easier for preparing a financial projection plan before preparing a budget.
A financial projection is potential for a small business start-up and it helps to indicate overall financial needs to improve the capital expenditure of a business. As per the opinion of Derfler-Rozin & Pitesa (2020), accurate financial projection helps to monitor price changes or cash flow of a business and it makes it easier for improving the production plan. There are numerous key benefits of financial projection such as improved financial planning, setting up different goals, and financial plan to standard performance, decision-making plan, and guide for action to achieve several objectives. A financial projection is beneficial to achieve the realistic goals of a small business. It can easily demonstrate company beliefs and that makes it easier for handling any business changes. Sainsbury’s opened their 4 shops in the UK market to enhance its business growth.
A disadvantage of financial projection
A financial projection is complicated and it never completes an accurate forecast to improve small business activity. There is a lack of data credibility and incomplete information that does not fulfil Sainsbury’s business requirements. Sometimes authentic data does not describe future opportunities and growth. As cited by Botha & Watermeyer (2021), the main disadvantages are sales forecasting and time investment is required to fulfil some business approaches. Inaccurate sale projection and schedule is the potential to enhance business opportunities but there is a lack of time scheduling to oversupply inventory. Oversupply of the business is enhancing inventory cost and both are negative consequences are imbalance between sales and production volumes.
The general balance of sales and production has the potential to improve small business production. There are some disadvantages of financial projection such as loss of autonomy, complications of future selling, and lack of stability of Sainsbury. Financial risk, insufficient knowledge, and undesirable duties do not increase business demands. As a result, sales volumes are gradually decreasing and it does not enhance sales forecasting.
Suitability of financial projection
Sainsbury has focused on equity financing but there are more chances to manage numerous difficulties by debt financing equity. As opined by Xu & Chen (2019), debt-equity enhances the cost of sales and this is maintaining operating profit margin by enhancing their total sales. Financial projection helps to indicate the overall financial requirements of Sainsbury and it can fulfil overall business demands or capital expenditure of the business. The financial projection helps to compare overall outlines of sales projection and serious investors are enhancing their interest by the business sustainability.
A financial projection helps to understand financial position by the income statement, balance sheet, and cash flows for improving the overall business plan. This specific projection helps to describe detailed forecasted sales volume and reduces general administrative expenses of a business. As per the study of Javal & Kwon (2021), debt financing helps to borrow money with low-interest rates. Debt financing includes bank loans, mortgages, overdrafts, and equipment leasing. A financial projection helps to manage realistic goals for a small business and these also identify numerous expectations of a small business. An accurate forecast helps to provide sufficient time and reliability to improve the future goals of the business.
Discussion on better financing opportunity for Sainsbury Plc for business expansion
Debt of Sainsbury Plc is low because it has an opportunity to collect funds from different external sources to earn more profit for the organization. As cited by Walmsley et al. (2018), bank loans, short-term and long term loans from other financial institutions can easily be collected by Sainsbury Plc because financial leverage is good in this company. Risk of managing this company is low due to not using much debt finance for the organization. Liquidity of Sainsbury Plc is good but its receivable days are comparatively low than other competitors and payable days are high.
Lack of payment to suppliers affects the brand value of the company that it must issue loans to expand business as well as reduce payable days of Sainsbury Plc. As cited by Eko, Adebisi & Moses (2020), demand for retail products is increasing day by day and Sainsbury Plc has an opportunity to expand business in different regions of the country. Expanding business with an accurate projection plan will ensure the success of Sainsbury Plc in the long run. Receivable days of Sainsbury Plc are lower than market competitors that give a competitive advantage to this company and business expansion plan may create new opportunities for Sainsbury Plc.
Sainsbury Plc will be able to know its potential consumers more closely through a business expansion plan that will reduce risk of selling goods to companies. As opined by Ouassini (2018), companies can collect data and understand the demand of more consumers that will help to make products according to their demands that it is necessary to reduce the risk of production. Sainsbury Plc financial records are effective and can get finance from different sources easily so that this company will enjoy a plot of competitive advantage in the upcoming market.
Conclusion
Based on this study it can be concluded that Sainsbury Plc is a profitable company and has satisfied its investors over years by providing high rate dividends and EPS. Sainsbury Plc can earn a large amount of profit by using debt financing within the organization. Based on the business expansion plan of Sainsbury Plc, the projection plan has shown that this company will be able to earn profit at low risk. Financial projection is necessary to improve the quality of the budget because it evaluates cash flow, financial statement and balance sheet of a company.
Sainsbury Plc will get a lot of opportunities by using debt financing because it provides a large amount of money to business organizations against interest. It can be said that a business projection plan is necessary to make effective decisions and sustain operation activities for a long period. Ratio analysis helps to understand the gaps of organizational activities and helps to control over financial activities of a company. Break-even analysis has provided an estimated production unit that Sainsbury Plc will be in no profit and no loss situation.
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