Seven Oaks College Association for Tourism and Hospitality Executives (ATHE)

Level 7 Diploma in Strategic Management Finance for Strategic Managers Unit Code: 7.4

A Briefing paper on policy of Finance in Business Strategy

Submission Deadline 21 December 2012 Submitted by:

Sonia 1201170 lotus00719@gmail.com

Table of Contents
Introduction Task 1 Financial Information and Strategy Formulation Various Business Risks Key financial information Task 2 Structure of published financial information Main stakeholders of Sainsburys and need of Financial Information Long and Short Term Finance Sainsburys Key financial ratios Appraising capital projects Weakness of Financial statements 5 6 7 8 9 11 3 3 4 3

Task 3 Difference between corporate governance of public and Private sector Managers accountability in Decision Making in Public and Private sector Conclusion References and Bibliography 11 12 12 12

Introduction
Managing finance is a difficult task and good financial management is required to meet the financial objectives of company. There are many factors which needs to be considers while managing finance. The Financial management includes financial planning, Control and Decision making. There are many techniques which are used for this purpose. It includes the investment appraisal methods and their application on the projects available to company. It also includes decision making tools related to finance and analyzing the profits of the company using different ratios.

Financial Information and Strategy Formulation

Financial information is very important for any strategy formation. It is required to assess the financial requirements. Unless and until it is not know that what the financial position of the organization is, it is useless to work a strategy. Each kind of strategy execution needs some resources and financial resources are required in almost every kind of strategy. The strategy formulation needs to know there is need of finance from where it can be obtained. Financial information helps in planning for new projects and setting and meeting targets.

Various Business Risks

Risks can be ascertained by various techniques of Risk Modeling. There are different risks to the business like market risks, Compliance, operational risks etc. Operational Risk: Operational risk is the potential for a loss arising from people, processes, systems, or external events that influence a business function. An operational risk is an adverse event or outcome, which occurs as a consequence of a organizations activity. Operational risk is the broad discipline focusing on the risks arising from the people, systems and processes through which a company operates. It can also include other classes of risk, such as fraud, legal risks, physical or environmental risks. Strategic Risk: Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. This risk is a function of the compatibility of an

organizations strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. Compliance risk: is the current and prospective risk to earnings or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain bank products or activities of the Banks clients may be ambiguous or untested. Market Risks: Financial losses, damaged reputations and corporate failure through unforeseen market forces are a constant threat to businesses. But not even the most enlightened could have predicted how difficult recent trading conditions would become.

Key Financial Information

Profitability It is the efficiency of a company or industry at generating earnings. Profitability is expressed in terms of several popular numbers that measure one of two generic types of performance. Profitability is a term used by corporations and financial experts when they discuss whether to make or sell a good or service. It is an expectation of making more income from sales of the good or service than they spend performing the services or making the goods. Profitability is different from "profit" in that profitability is an idea or expectation while the "profit" is the physical result. Cash Flow Cash flow refers to the money coming into a business from selling its products and the money it spends on all aspects of production. A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities - financing, operations or investing - although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance.

An accounting statement called the "statement of cash flows", which shows the amount of cash generated and used by a company in a given period. It can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company's financial strength. In business as in personal finance , cash flows are essential to solvency. Having ample cash on hand will ensure that creditors, employees and others can be paid on time. If a business does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.

Cost Projections Cost projections provide details and total funds needed for the implementation of a project. This information assists management in establishing the project budget within the realm of the entire company's budget. For example, if the cost projection is greater than the available budget, management may use the projection to determine where they need to cut back on spending, either for the company or for the project. The cost projection and the budget that follows also helps keep the project on task and avoids accidental over-spending. The projection also provides information the company uses to assess when the project has essentially "paid for itself."

Task 2 In this part of the report Sainsburys which one of the leading grocesary chain in UK is choosen to explain the various concepts of business finance.

Structure of published financial information

Financial statements provide an overview of a business or person's financial condition in both short and long term. All the applicable financial information of a business enterprise, presented in a structured manner and in a form easy to understand. Moreover, it could be understood by all group of people who are interested in the business. This information is called the financial statements. There are four basic financial statements:

1. Balance sheet: These are also called statement of financial position or condition. Balance sheet contains company's assets, liabilities, and Ownership equity at a given point in time. 2. Income statement: These are also called Profit and Loss statement. Theses statements contain income, expenses, and profits of business over a period of time. Profit & Loss account provide information on the operations of the enterprise. These include sale and the various expenses earned during the dealing state. 3. Statement of retained earnings: These statements tell about the changes in a company's retained earnings over a period of time. 4. Statement of cash flows: These statements tell the company's cash flow activities which are particularly operating, investing and financing activities. For large corporations, financial statements are mostly complex. They may include a broad set of notes to the financial statements and management discussion and analysis. These notes usually describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an essential part of the financial statements. The rules of government financial statements for the recording, measurement and presentation of may be different from those required for business and even for non-profit organizations.

Main stakeholders of Sainsburys and need of Financial Information

Equity Investors Equity investors want information about share prices in future, dividends that a company might be paying in future. They look for a well written plan for growth business. They require information about that would help them reach voting decision. Customers: They need to know information which will help them understand the long term viability of the business. For e.g. buyers may need replacements and after sale care therefore would not want to purchase from a company which they perceive may go in liquidation soon.

Business Rivals for every organisation ratio analysis is very important. Rivalling organisations need important financial ratios of each other to compare how well or how worst off they are doing. They use each other ratios as industrial benchmarks. Additionally need information about any special offers, new promotions or new business ventures.

Managers - need almost all financial projection relating to aspects such as organisations long term viability, short term position (e.g. cash flow), labour efficiency etc. Employees need information about long term feasibility of the organisation to insure occupation safety. Additionally they require information regarding the profitability so that they can get commission or negotiate pay raise with management.

Government Govt. need information for taxation point of view which it can get from the financial accounts. Additionally the government may need to look into the financial health of various industries to create budgetary concessions and recommend subsidies.

Public As a measure to support ethics and societal wellbeing organisations are increasingly providing the general public with information on social welfare spending. Communal companies are bound by regulation to make its economic report open to members of the public.

Long and Short Term Finance

Loan Financing: The loans form a bank or financial institution contributes the debt equity of organization and has to be repaid by it. This source could be much easier than the grant funding to acquire. Also, it takes less time than acquiring money form grants. But this has to be paid back unlike grant funds and their cost is paid in form of interest. The loans are granted against some asset. This sometimes also involve the analyzing the success record of non profit organization to pass the loan. Thus it might be difficult for a new or small organization to get loan. Contracts: A contract is a form of trading where there is a formal agreement between two parties. Trading: Many organisations earn income by selling goods and services to members, service users the general public or other organisations.

Shares: A share is a part ownership of a company. Shares relate to companies set up as private limited companies or public limited companies. There are many small firms who decide to set themselves up as private limited companies; there are advantages and disadvantages of doing so. Venture Capital: Venture capital is becoming an increasingly important source of finance for growing companies. Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. Venture capitalists are on the look out for companies with potential. They are prepared to offer capital (money) to help the business grow. In return the venture capitalist gets some say in the running of the company as well as a share in the profits made. Franchising: A company gives right to operate its business under its trade name, to anther company. Franchisee pays to operate business to franchisor. Debentures: A type of long-standing secured or unsecured debt occupied by a corporation, which it agrees to refund at a particular upcoming date. The company will generally pay a preset rate of interest to debenture holders every year until maturity. Factoring: Factoring provides the company with finance, beside invoices that its consumers have not so far paid.

Sainsburys Key Financial Ratios

Profitability Sainsburys 500 superstores and 300 convenience stores have been performing strong over the past few years with its consistent approach towards its operation and growth expansion. From its 15.1% increase in operating profit, the underlying operating profit margin has increased by 26bps. Well controlled direct expenses have helped to maintain a steady average of 5.98%. Even though the operating margin was expected to rise by 12-30bps with the help of stronger sales and smaller proportionate contribution from lower-margin petrol sales. The rising grocery prices have boosted sales at Britain grocers for nearly over a year but food price inflation slowed to 1.6% in September, the slowest annual increase since may 2006.

The net profit margin and interest cover are quite consistent with an average of 1.75% & 4.61% as compared to healthy 7.46% & 8.18%, respectively of M&S and could help the investors build their confidence.

However, Sainsbury's underlying retail profit margin -- up 26 basis points to 3.26 percent -lagged rivals, due largely to its higher rent bill.

Financial Strength The current ratio for Sainsburys has dropped nearly 30% to 0.54 since 2007 as compared to 13.2% increase in M&S ratio and Industries (0.96). Due to stock the quick ratio has dropped by 41.17%. It does show its aggressive strategy for the operations and working capital management, which could prove to be risky for the company over the long run. The retailer has also disclosed to a rise of $445m to accelerate growth drive and deliver extra trading space of 2.5m sq ft. by March 2011. If we further drill down the breakdown of current assets and current liabilities of both the companies, we could have a broader view about the Financial Directors strategy, to facilitate the companys objectives. Its gearing control shows a better managed picture of its finances and gives a better debt/equity of 0.47 average over the last three years, which shows that most of its funding was by short term debt finance.

Appraising Capital projects

The basic purpose of systematic appraisal is to achieve better spending decisions for capital and current expenditure on schemes, projects and programmes. This document provides an overview of the main analytical methods and techniques which should be used in the appraisal process. These techniques can also be used in the evaluation process. More detailed information on individual techniques can found in financial and economic textbooks, examples of which are listed at the end of this document and in other guidance material on the VFM portal. Net Present Value Method (NPV) In the NPV method, the revenues and costs of a project are estimated and then are discounted and compared with the initial investment. The preferred option is that with the highest positive net present value. Projects with negative NPV values should be rejected because the present

value of the stream of benefits is insufficient to recover the cost of the project. The NPV is viewed as the most reliable technique to support investment appraisal decisions. There are some disadvantages with the NPV approach. If there are several independent and mutually exclusive projects, the NPV method will rank projects in order of descending NPV values. However, a smaller project with a lower NPV may be more attractive due to a higher ratio of discounted benefits to costs Discount rate The discount rate is a concept related to the NPV method. The discount rate is used to convert costs and benefits to present values to reflect the principle of time preference. The calculation of the discount rate can be based on a number of approaches including, among others:

The social rate of time preference The opportunity cost of capital Weighted average method

The same basic discount rate (usually called the test discount rate or TDR) should be used in all cost-benefit and cost-effectiveness analyses of public sector projects. Internal Rate of Return (IRR) The IRR is the discount rate which, when applied to net revenues of a project sets them equal to the initial investment. The preferred option is that with the IRR greatest in excess of a specified rate of return. An IRR of 10% means that with a discount rate of 10%, the project breaks even. The IRR approach is usually associated with a hurdle cost of capital/discount rate, against which the IRR is compared. The hurdle rate corresponds to the opportunity cost of capital. In the case of public projects, the hurdle rate is the TDR. If the IRR exceeds the hurdle rate, the project is accepted.

Weakness of Financial statements

Financial Statements represent the past

It's important to remember that financial statements represent the past performance of a company. Past performance carries no guarantee of future results. However, how we analyze this past data is very important. In other words, if a company has consistently performed well over the last 5-10 yrs., the probability of it continuing to do so in the future is much higher Financial Statements ignore the qualitative aspects of running a company They do not represent any qualitative aspect of company. One must avoid the trap of being too number-bound by paying attention to the qualitative aspects of your analysis, too. Financial Statements don't directly show you changes in the structure of the company It's absolutely crucial to know about structural elements of a company that change. For instance, a company could have added a new plant, launched a new product, be preparing for an acquisition etc. Financial Statements may not directly show these changes especially if it's slated for the future.

Task 3

Difference between corporate governance in public and Private sector

There is a large variation in the quality of corporate governance practices adopted by firms even when they are subject to the same contractual environment. Therefore, it is possible that firms within the same country have widely divergent standards of overall corporate governance. This leads to the fact that different firms could have varying standards of corporate governance disclosure. Four layers of corporate governance conceptions: System of arrangements, structures, and processes to ensure accountability and responsibility in policy/service design and delivery (universal) Core elements like (multi-faceted) accountability, compliance, performance, (many) Reference to governmental functions of service delivery, policy outcomes, legislative administration, statutory responsibilities, reporting lines, financial, management (common)

 Reference to soft factors/values like transparency, trust, behaviour, ethic

Managers accountability in Decision Making in Public and Private sector

Being in a managerial role usually requires prompt decision making. Decision making process is the process by which managers respond to opportunities, threats, analyze all the available options and make a sound decision which is commensurate with the goals of the organization. Decisions made by top managers commit the total organization towards a particular course of action. Decisions made by lower level managers implement the strategic decisions of top managers in the operating areas of the organization. Top managers make Category II decisions. Operating managers make Category I decisions, while the middle managers supervises the making of Category I decisions and support the making of Category II decisions. The success of the decision taken is a function of the decision quality and decision implementation.

Conclusion
Finance is the elixir that assists in the formation of new businesses, and allows businesses to take advantage of opportunities to grow, employ local workers and in turn support other businesses and local, state and federal government through the remittance of income taxes. The strategic use of financial instruments, such as loans and investments, is key to the success of every business.

References
Atrill, P. (2009), Financial Management for Decision Makers, 5th edition, Pearson Education Limited, Essex. McLaney, E. (2009), Business finance: theory and practice, 8th edition, Pearson Education Limited, Essex. Milling, B. (2003), The Basics of Finance: Financial Tools for Non-Financial Manager, Chilton Book Company, Lincoln.

NGFL (2008) Investment Appraisal, Available at: http://www.ngflcymru.org.uk/investment_appraisal.pdf [Accessed on 15 February 2013].

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