ACCOUNTING AND FINANCIAL MANAGEMENT

Executive summary:

The study mainly focuses on analysing the financial strength of Sainsbury Plc. In addition,
the report also evaluates the company background and its tenure in the world. Moreover, the
report also produces the financial analysis of Sainsbury Plc for 2014 to 2013. In addition, the
study also uses different types of Operating Profit Margin, Gross Profit Margin, Gearing
Ratio, Interest Cover, Current Ratio, and Quick ratio. Moreover, the novice with the help of
these ratios is able to derive the current financial strength of Sainsbury plc. Furthermore,
these evaluations also help in comparing Tesco’s financial performance for 2014 with
Sainsbury. The report also provides different sources of finance available for Sainsbury Plc.

Moreover, the different types of internal source of finance like Retained earnings, Working
capital sources and Disposal assets is explained in the study. Moreover, the use of Tight
Customer credit policy, Reduce Inventories, and Delay supplier payment is helpful in
gathering internal source of finance in an organisation. Moreover, the report also suggests
different types of External Sources of finance like Debt accumulation, Preference Shares and
Ordinary Shares. In addition, different types of debt accumulation like Bank Borrowing,
Corporate Bonds, and Put options is also analysed in the study.

Furthermore, the report also provides details on the importance budgeting process in current
era. Moreover, the study also analyses the current budgetary process used in retail industry
and evaluates the weakness of traditional budgeting processes.

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 Table of Contents
Introduction: ............................................................................................................................... 4

Part 1: ......................................................................................................................................... 4

1.1 Company Background: ........................................................................................................ 4

1.2 Producing the financial analysis of Sainsbury Plc for 2014 to 2013: .................................. 5

1.3 Comparing Sainsbury Plc with its competitor: .................................................................. 13

Part 2: ....................................................................................................................................... 14

2. Sources of finance available for Sainsbury Plc.................................................................... 14

2.1 Internal source of finance: ................................................................................................. 15

2.1.1 Retained earnings: ........................................................................................................... 15

2.1.2 Working capital sources:................................................................................................. 16

2.1.3 Disposal assets: ............................................................................................................... 17

2.2 External Sources of finance: .............................................................................................. 17

2.2.1 Debt: ................................................................................................................................ 18

2.2.2 Shares: ............................................................................................................................. 19

2.3 Justifying the most accurate source of finance for Sainsbury: .......................................... 20

Part 3: ....................................................................................................................................... 20

3.1 The importance budgeting process in current era: ............................................................. 20

3.2 Analysing the current budgetary process used in industrial environment: ........................ 22

3.3 Weakness of traditional budgeting processes: ................................................................... 24

Conclusion and Recommendation: .......................................................................................... 25

Reference: ................................................................................................................................ 27

Appendices:.............................................................................................................................. 31

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Introduction:
The focus of the study is made on, the analysis of financial performance of Sainsbury Plc for
2013 and 2014. In addition, the report also contains detailed analysis of different types of
ratios, which could be used in interpreting the actual financial strength of the company.
Moreover, this report also includes different type sources of finance, which could be used by
the company. Furthermore, the novice also compares Sainsbury Plc with its compatriots to
analyse its financial strength. In addition, the novice also analyzes the importance of
budgeting process in the current business scenario. The weakness of budgeting process and
recommended budgeting process for the company is also mentioned in this report.

Part 1:

1.1 Company Background:

Sainsbury Plc is one of the largest retailers in United Kingdom after Tesco. In addition, the
company was formed in 1869 and currently operates over 1200 super markets with 161,000
employees. Until 1990, the expansion of Tesco, Sainsbury Plc captured the highest market
share in the retail sector of United Kingdom. Moreover, the company’s main vision is to
increase trust among its customers and employees to improve its productivity and
profitability. In addition, the goal of the company is to offer quality food at low prices to
attract more customers in the business. The company also has its presence in the internet to
support is operations and increase it reach to potential customers.

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 Market share of Retail Industry
3.1% 2.2% 2.6%
Tesco
4.0%
Sainsbury

4.8% Asda
29.6%
Morrisons
6.1%
The Co-op
Waitrose
11.5%
Aldi
Lidi
17.1%
17.1% Iceland
Others

Figure 1: Showing the current market share of Sainsbury and its competitors

(Source: Barber, 2015)

1.2 Producing the financial analysis of Sainsbury Plc for 2014 to 2013:
The financial analysis of Sainsbury for 2013 and 2014 is further conducted in study by
analysing its performance and comparing it with Tesco. Hillier et al. (2011) cited that
analysing the financial ratio helps in predicting the current financial strength of the company.
On the contrary, Kaplan and Atkinson (2015) mentioned that some companies use unethical
measures in inflating their financial report, which nullifies the result obtained from ratios. In
addition, with the help of ratios, investors are able to derive the debt accumulation conducted
by the company. Moreover, these ratios also help in evaluating the previous year’s
performance of the company.

Return on Capital Employed:

Ratio 2013 2014 Tesco 2014

Return on Capital 8.61 11.16 9.87
Employed

Table 1: Showing the Return on Capital Employed of Sainsbury and its competitor

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 (Source: Financials.morningstar.com. 2016)

From table 1, it can be evaluated that the Return on Capital Employed for Sainsbury Plc has
increased from 2013 to 2014. This indicates that the company has effectively used its capital,
which increased its return. Brigham and Houston (2011) stated that ROCE is effective
measurement tool from which management efficiency could be evaluated by the investors.
On the other hand, Brigham and Ehrhardt (2013) criticises that ROCE could only be effective
for the company by implementing other ratios in the analysis. ROCE is also helpful in
analysing the interest of investors by evaluating the investment capacity of the company.

Return on Capital Employed

12 11.16
9.87
10
8.61
8

0
Return on Capital Employed
2013 8.61
2014 11.16
Tesco 2014 9.87

Figure 1: Showing the Return on Capital Employed of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From figure 1, it could be derived that Sainsbury’s Return on Capital Employed is more than
Tesco, which indicates that Sainsbury has effectively managed its resource. In addition, it is
also derived that currently Sainsbury’s financial performance is better than its peers. Chandra
(2011) argued that during an economic rises it is difficult to analysis the actual performance
of companies. Chua et al. (2015) opined that declining ratios is not benefited to any
organisation and could affect its market share. In addition, depending only in ROCE
evaluation could hinder the progress of the company.

Operating Profit Margin:

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Ratio 2013 2014 Tesco 2014
Operating Profit 3.78 4.21 4.14
Margin

Table 2: Showing the Operating Profit Margin of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From table 2, it can be evaluated that the Operating Profit Margin for Sainsbury Plc has
increased from 2013 to 2014. This indicates that the company has effectively increased its
sales to support cost of sales. Otley and Emmanuel (2013) opined that investors with the help
of operating profit can evaluated the extra expenditure conducted by the company on indirect
expenses. However, Zadek et al. (2013) argued that some companies use loophole in
accounting process to manipulate its financial balance sheet. In addition, continuous rise in
Operating profit margin indicates the rise in sales and customer base of the company.

Operating Profit Margin

4.3
4.21
4.2 4.14
4.1
4
3.9
3.78
3.8
3.7
3.6
3.5
Operating Profit Margin
2013 3.78
2014 4.21
Tesco 2014 4.14

Figure 2: Showing the Operating Profit Margin of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From figure 2, it could be analysed that Sainsbury’s Operating Profit Margin is more than
Tesco, which indicates that Sainsbury sales are greater than Tesco. In addition, it is could also
be evaluated that currently Sainsbury’s financial performance is better than its peers. Mulford

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and Comiskey (2011) argued that operating profits could only be derived after the company’s
financial report has been published. However, Zietlow et al. (2011) opined that operating
profit do not provide data for the actual profitability conducted by the company for the
current fiscal year. In addition, depending only on operating profit margin evaluation could
hinder the progress of the company.

Gross Profit Margin:

Ratio 2013 2014 Tesco 2014

Gross Profit Margin 5.48 5.79 6.31

Table 3: Showing the Gross Profit Margin of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From table 3, gross profit margin of Sainsbury is evaluated for 2013 and 2014. In addition,
the rise in gross profits margin for 2013 to 2014 indicates the rise in profit generation
capacity of the company. Saunders and Allen (2010) mentioned that gross profit margin helps
the company in effectively conducting future budgets to support its operational needs. On the
other hand, Bac (2013) gross profit margin does not help the company in evaluating all the
cost conducted to achieve its sales target. The rising gross profit indicates that the company’s
sales for the current fiscal year has risen compared to last year.

Gross Profit Margin

6.4 6.31

6.2

6
5.79
5.8

5.6 5.48
5.4

5.2

5
Gross Profit Margin
2013 5.48
2014 5.79
Tesco 2014 6.31

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 Figure 3: Showing the Gross Profit Margin of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From figure 3, it could be analysed that Sainsbury’s Gross Profit Margin is less than Tesco,
which indicates that sales of the company is not as compared to market leader. In addition,
the gap in gross profit margin indicates the effective reduction in cost of sales conducted by
Tesco. Bamber et al. (2010) stated that comparing gross profit margin among peers could be
helpful in evaluating its market share. Dechow et al. (2010) argued that with the help of gross
profit margin actual profitability and reach of the company is not evaluated. Moreover,
evaluating only the gross profit margin will not help the investors to analyse the financial
strength of the company.

Gearing Ratio:

Ratio 2013 2014 Tesco 2014

Gearing Ratio 0.48 0.46 0.76

Table 4: Showing the Gearing Ratio of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From table 4, it can be evaluated that the Gearing Ratio of Sainsbury Plc has decreased from
2013 to 2014. This indicates that the company’s debt compared to its equity has fallen. In
addition, the company with its current cash balance could effectively pay its debt and
continue with their operations. Garcia et al. (2010) cited that company is having lowest
gearing ratio indicates the effective cash and liability manage conducted by the management.
On the contrary, Agoglia et al. (2011) mentioned that company is having high gearing ratio,
low profit and cash inflows could struggle in paying their loan interest. Moreover, investors
are able in effectively deriving the current financial strength of the company by evaluating its
gearing ratio.

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 Gearing Ratio
0.8 0.76

0.7
0.6
0.48 0.46
0.5
0.4
0.3
0.2
0.1
0
Gearing Ratio
2013 0.48
2014 0.46
Tesco 2014 0.76

Figure 4: Showing the Gearing Ratio of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From figure 4, it can be derived that the Sainsbury’s Gearing Ratio is less than Tesco, which
indicates that Sainsbury’s financial strength is relatively higher than Tesco. In addition, it can
be seen that in the retail industry highest market shareowner Tesco, has huge liability
compared to its competitors. Chen et al. (2010) stated that comparing other companies
gearing ratios helps the investors to pick an effective investment opportunity. On the
contrary, Gow et al. (2010) citied that debt help companies to reduce their tax pay, which
could nullify the results obtained from gearing ratio.

Interest Cover:

Ratio 2013 2014 Tesco 2014

Interest Coverage 6.78 7.82 5.89

Table 5: Showing the Interest Coverage of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From table 5, it could be derived that the Interest Coverage for Sainsbury Plc has increased
from 2013 to 2014. In addition this increase in Interest converge ratio indicates that the

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company is more viable to pay interest charges on its debt. Moreover, the financial strength
of the company has become strong and it can effectively conduct it’s operations. Li (2010)
stated that investors effectively evaluate the interest coverage to indentify companies, which
could not be bankrupt due to its liabilities. On the other hand, Grabski et al. (2011) criticises
that some companies with the help of auditor’s use unethical measures in retaining more
money in the business. In addition, the rise in interest converge also indicates the full and
final repayment of loans conducted by the company.

Interest Coverage
9
7.82
8
6.78
7
5.89
6
5
4
3
2
1
0
Interest Coverage
2013 6.78
2014 7.82
Tesco 2014 5.89

Figure 5: Showing the Interest Coverage of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From figure 5, it could be derived that Sainsbury’s Interest coverage ratio is higher than
Tesco. In addition, it can be derived that interest coverage of Tesco is not high due to high
interest payment conducted by the company. Dyreng et al. (2010) opined that by comparing
interest coverage of two competitors, investors are able to derive the financial strong
company for their investment. On the other hand, Charles et al. (2010) criticises that
reduction in interest payment could also indicate that low capital of the company, which
negatively affects its operations. This interest coverage ratio does not accommodate the
different growth plans implemented by the company, which could lead to increased interest
payments.

Current Ratio:

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Ratio 2013 2014 Tesco 2014
Current Ratio 0.61 0.64 0.73

Table 6: Showing the Current Ratio of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From table 6, the current ratio of Sainsbury plc for 2013 to 2014 has increased, which
indicates the improvement of operations conducted by the company. Moreover, this increase
in current ratio also indicates the increase in current asset over current liabilities of the
company. Zeghal and Maaloul (2010) cited that with the help of current ratio investor are
able to evaluate current asset strength of the company. On the contrary, Lo et al. (2010)
mentioned that current ratio also includes inventory valuation, which reduces validated of the
outcome. Moreover, the evaluation of current ratio helps in focusing on the short-term
financial strength of the company.

Current Ratio
0.74 0.73
0.72
0.7
0.68
0.66 0.64
0.64
0.62 0.61
0.6
0.58
0.56
0.54
Current Ratio
2013 0.61
2014 0.64
Tesco 2014 0.73

Figure 6: Showing the Current Ratio of Sainsbury and its competitor

(Source: Financials.morningstar.com. 2016)

From figure 6, it can be evaluated that current ratio of Tesco Plc is more efficient than
Sainsbury Plc. Lisowsky (2010) cited that with the help of current ratio operating cycle of the
company is also evaluated. On the contrary, Guthrie et al. (2012) mentioned that current ratio

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does not sufficiently help the investor in analysing the liquidity of the company. In addition,
the current ratio of Tesco is closer to one, which indicates better management of current
assets conducted by the company. Moreover, Sainsbury plc could reduce its liabilities to
increase better cash management in the company. Aras et al. (2010) stated that during an
economic crises current ratio evaluation of the company does not help in deriving its actual
financial strength.

1.3 Comparing Sainsbury Plc with its competitor:

Quick ratio:

Ratios Tesco 2014 Sainsbury 2014

Quick Ratio 0.43 0.49

Table 7: Comparing Quick ratio of Sainsbury with Tesco for 2014

(Source: Financials.morningstar.com. 2016)

From the above table, it can be evaluated that Sainsbury’s Quick ratio is higher than Tesco,
which indicates the actual financial strength of the company. Weibenberger and Angelkort
(2011) cited that quick ratio helps in removing the calculation of inventory, which
authenticate the actual financial strength of the company. On the contrary, Banos et al. (2010)
mentioned that quick ratio only accounts receivables of the company as liquid cash, which
could converted to bad debt.

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 Quick Ratio
0.5
0.49
0.49
0.48
0.47
0.46
0.45
0.44
0.43
0.43
0.42
0.41
0.4
Quick Ratio
Sainsbury 0.49
Tesco 0.43

Figure 7: Comparing Quick ratio of Sainsbury with Tesco for 2014

(Source: Financials.morningstar.com. 2016)

Part 2:

2. Sources of finance available for Sainsbury Plc

Sainsbury is current planning of purchasing Land and Building, which represents 20% of the
Net Assets employed by the company. In addition, the company is seeking different financial
sources, which could be helpful in delivering the acquisition of Land and building. Kaplan
(2011) stated that companies by evaluating different sources of finance could help in
improving the financial stability. On the other hand, Wilkin and Chenhall (2010) criticises
that sources of financial could also indicate the rise in interest payment and debt, which could
directly affect profit retention of the company.

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 Sources of
finance

Internal External
source of Sources of
finance finance

Working
Retained Ordinary Disposal
capital Debt Loans
earnings Shares assets
sources

Figure 8: Sources of finance available for Sainsbury Plc

(Source: Weibenberger and Angelkort (2011)

From figure 7, the available sources of finance for Sainsbury can be evaluated. In addition,
these sources of finance could directly help in compensating the growth plans of the
company. Ferreira et al. (2010) stated that excess accumulation of finance without proper
implementation plans could increase likability of the firm.

2.1 Internal source of finance:

Sainsbury could firstly use internal sources of finance to match its financial needs. In
addition, it is assumed internal source of finance could be helpful in delivering the short-term
financial needs of the company. Dalton and Dalton (2011) cited that by focusing only on
internal source of finance, owners are able to have more control in the organisation. On the
contrary, Elbashir et al. (2011) mentioned that without effective cash accumulation
conducted by the company, internal sources could not help in fulfilling its growth plans.

2.1.1 Retained earnings:

Retained earnings are effective measures, which could be used by the company to accumulate
profits for future investments. In addition, these higher amounts retained earnings
accumulation is also supported by IRS to promote growth prospects in the company.

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Brinckmann et al. (2011) stated that retaining more income in the business helps in
reinvestment strategies adopted by the company. However, Hillier et al. (2011) argued that
use of high accumulation of retained earning leads to overcapitalization and reduces growth
prospects of the company.

Moreover, Sainsbury’s current retained earnings are not adequate to support its financial
needs and helps in increasing its asset accumulation. Kaplan and Atkinson (2015) stated that
retained earnings also help in improving financial position of the company to support its
activities and operations. On the other hand, Brigham and Houston (2011) criticises that
increased retained earnings also reduces dividend payout of the company, which directly
affects its share prices.

2.1.2 Working capital sources:

Sainsbury Plc could also use working capital as an internal financial source, which could be
helpful in supporting the current financial needs of the company. In addition, the working
capital source could be more evaluated as follows.

Tight Customer credit policy:

The first financial source from working capital could be derived from tightening the customer
credit policy of the company. In addition, controlling the customer credit of the company
helps in increasing its cash inflow. Brigham and Ehrhardt (2013) opined that credit days to
customers could only be reduced when demand for the product is increasing. Nevertheless,
Chandra (2011) argued that companies with less credit days to customers suffer losses due to
high competition from its peers. Moreover, Sainsbury could effectively use this method in
reducing the blockage of capital delivered by credit sales.

Reduce Inventories:

The second financial source generated from working capital is reduction in inventories. In
addition, this reduced inventory could directly affect working capital of the company and
increase cash flow in its operations. Moreover, reduction in inventory could also be achieved
with the helps in increases sales generation capacity of the company. Chua et al. (2015)
stated that reduction in inventory directly reduces cost of storage and positively affects profits
of the company. On the other hand, Otley and Emmanuel (2013) criticises that excess
reduction in inventory could give rise to unsatisfied customers and in turn raise competition

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level in the market. Moreover, Sainsbury could not effectively reduce its inventories, as it
will directly affect its operations.

Delay supplier payment:

The third financial source generated from working capital is by increasing the supplier
payment time. Moreover, the increase in supplier payment time could be help in reducing the
cash outflow of the company. Zadek et al. (2013) stated that effectively managing the
supplier payment helps the company in increasing the credit days to the customer. On the
other hand, Mulford and Comiskey (2011) criticises that some suppliers have fixed
repayment dates, which could hinder working capital management of the company.
Moreover, Sainsbury could not increase the payment period of its suppliers because of the
limited suppliers in the industry.

2.1.3 Disposal assets:

Disposable assets are also effective measure from which companies are able to fulfil their
financial needs. In addition, the company disposes any assets, which are not contributing to
its operational needs and strengthen its financial stability. Zietlow et al. (2011) cited that by
reducing the non-usable assets, companies are able to accumulate sufficient finance, which
could be used in fulfilling its growth plans. On the contrary, Saunders and Allen (2010) stated
that reducing the assets could directly affect the operational capabilities of the company.
Moreover, currently Sainsbury plc disposable assets are limited due to its focus on opening
new stores across Europe to improve its operations. According to Bac (2013), asset
accumulation without proper financial backup could directly impact operations of the
company.

2.2 External Sources of finance:

Excluding the internal financing sources the company could also uses external finance
sources to help in improving its operations and profitability. Bamber et al. (2010) opined that
using external source helps company to satisfy its growth needs and increase its profit
generation captivity. However, Dechow et al. (2010) argued that excess use of external
source of finance could lead to reduction in profit retention capacity of the firm.

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2.2.1 Debt:
One of the major methods used by companies to accumulate external sources of finance is
debt collection. In addition, to support major growth plans companions are forced to use
external sources of finance. Garcia et al. (2010) stated that by accumulating excess debt
companies are able to reduce its tax pay and retain more profits in the organisation. On the
other hand, Agoglia et al. (2011) criticises that excess debt accumulation could directly affect
in companies decision-making process.

Bank Borrowing:

The company could effectively use bank-borrowing methods to support its investment plans
and improve its revenue generation capacity. In addition, the company could use long-term
borrowing and short-term borrowing to support its financial needs. Chen et al. (2010) stated
that companies with the help of bank overdraft are able to supports its working capital
requirements and maintain its productivity. On the other hand, Gow et al. (2010) criticises
that increased accumulation of bank loans could directly affect on profitability of the
company.

The different types of bank borrowing which could be useful for improving operations of the
company are as follows.

Short-term loans it an effective way from which companies are able to support its short-term
financial needs. Li (2010) cited that effectively fulfilling the short-term financial need helps
in improving long-term growth perspective of the company.

Long-term loans it an effective way from which companies are able to fulfil its changing
operations and expansion plans. Grabski et al. (2011) stated that long term loans have low
interest rates and long repayment time, which is helpful in improving operations of the
company.

Overdraft facilities it an effective way from which companies is able to support its current
working capital needs. Dyreng et al. (2010) argued that overdraft facilities have huge interest
payment, which could negatively affect short-term profit generations capacity of the firm.

Corporate Bonds:

Corporate bonds are also an effective measure from which companies are able to raise long-
term loans from investors. In addition, the company only introduces corporate bonds to

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support its growth and expansion plans. Charles et al. (2010) stated that an increase in
corporate bonds sale could only be achieved by analysing performance of the company over
the years. On the other hand, Zeghal and Maaloul (2010) criticises that during an economic
crises the sales of corporate bonds reduces its friction and hampers capital generation
capacity of the company. Moreover, Sainsbury could issue corporate bonds to supports its
current acquisition of land and building. In addition, this bond issue could directly increase its
debt and hamper gearing ratio of the firm.

Put options:

The company could also use put option and trade in the capital market to increase cash
availability. In addition, using the put option could also lead to increase in investment
conducted by the company. Lo et al. (2010) cited that with the help of put option companies
are able to protect their profit and improve its underlying price of the asset. On the contrary,
Lisowsky (2010) mentioned that there is a possibility of 100% loss of premium amount paid
for put options. Moreover, Sainsbury could use the current market scenario and implement
put options to accumulate finance, which could help in supporting its endeavour.

2.2.2 Shares:
Preference Shares:

Preference shares are also an effective way for gathering finance for the company. In
addition, preference shares are an effective way for attracting more investors in the company.
Guthrie et al. (2012) cited that with the help preference shares investors are given share for
the profit before retaining income in the business. However, Weibenberger and Angelkort
(2011) argued that increased preference shares could directly increase debt of the company.

Ordinary Shares:

Companies are able to generate finance by increasing issuing shares in the market. In
addition, these sharers help the company to fulfil the requirements of finance needed to
supports is venture. Banos et al. (2010) cited that issuing of ordinary shares could only be
helpful by analysing the financial performance of the company. On the other hand, Wilkin
and henhall (2010) criticises that increased issuance of shares could also increase dividend
payout of the company and in turn hamper its profit retention.

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2.3 Justifying the most accurate source of finance for Sainsbury:
From the above sources of finance, that is could help Sainsbury plc in accumulation of Land
and Building are Issuance of shares, Taking long term loans and using corporate bonds. The
financial requirement needed by the company is high, which could only be accumulated by
using three different type of financing sources. In addition, the company could take 50% of
the amount as long-term banks loans. Moreover, the other 50% could be divided among
corporate bonds and ordinary share issues. Hillier et al. (2011) stated that using mixed
financial sources helps in reducing the debt collection of the company. On the contrary,
Kaplan and Atkinson (2015) mentioned that sources of finance are only supported by an
effective financial performance of the company.

Moreover, Sainsbury could effectively purchase Land and Building, which represents 20% of
its Net Assets Employed. Furthermore, major of the sources of finance identified for the
company only supports its short-term needs. Brigham and Houston (2011) mentioned that
with effective use of shares issuance, owner is reducing chances of repayment if the business
fails. Nevertheless, Brigham and Ehrhardt (2013) argued that increased issuance of shares
could relinquish control of the owner over its business.

Part 3:

3.1 The importance budgeting process in current era:

Budgeting plays a vital role in effectively delivering goals and objectives of the company. In
addition, with the help of budgeting process companies are able to maintain its productivity
and profitability. Chandra (2011) cited that the company effectively manages its cash
availability in operations by using the budgeting process. On the other hand, Chua et al.
(2015) criticises that budgeting process does not accommodate the external factors, which
could directly impacts on the operations of the company and reduce its productivity.
Furthermore, the significance of budgeting process could be analysed by the following
measures.

Tracking expenditure of the company:

With the help of budgeting process, companies effectively track expenditure conducted in
operations. In addition, with the help of budgeting process companies are able to analyse its
past performance and accordingly make adjustments in its operations. Otley and Emmanuel

Page | 20
(2013) cited that budgeting process helps companies to effectively manage its cash and
improve profit generation capacity. On the contrary, Zadek et al. (2013) argued that
budgeting process only accommodates the evaluation of past performance and does not
predict the actual monetary requirements needed in business operations. Moreover, keeping
the required cash flow in operations helps the company to maintain its productivity level.

Effective communication process:

Budgeting process also accommodates an effective communication process, which could be

helpful in delivering accurate budgeting process. In addition, with the help of communication
process management are able to evaluate its operational needs. Mulford and Comiskey (2011)
stated that communicating with production department helps the management to develop an
effective budget for the company. On the other hand, Zietlow et al. (2011) criticises that
budgeting process does not include the negative impact of an economic crises, which could
directly affect operations of the company. Moreover, companies with the help of
communication process are able to affectively distributing the budgeting plan to other
departments.

Involvement of the management:

Budgeting process also involves management of the company to authenticate the needs of
financial resources in its operations. In addition, with the help of active evaluation conducted
by the management could develop accurate budget for the company. Saunders and Allen
(2010) mentioned that with involvement for the management in the budgeting process helps
in creating an effective budget for the company. On the other hand, Bac (2013) argued that
management only focuses on improving profitability of the company, which might reduce
cash flow in its operations. Moreover, management evaluates the financial need of each
department and allocates finance to maintain its productivity.

Effectively coordinating operations of the company:

With the help of budgeting process companies are able to effective coordinate their
operations. In addition, the budgeting process helps the company in meeting deadlines.
Moreover, the budgets helps the company in effectively coordination its activities, which
could help in achieving its targeted goals. Bamber et al. (2010) cited that budgeting process
allows the company to manage its resources effectively and minimise the slack time of its
employees. On the contrary, Dechow et al. (2010) mentioned that external factors like change

Page | 21
in major laws, which could directly affect operations of the company are not included in the
budgeting process.

Reporting actual performance of the company:

Companies could only improve its operations by effectively designing budgets, which could
support its activities. In addition, budgets could only be effective if actual performance of the
company is analysed in the report. Moreover, companies are able to improve its operations
only by analysing its actual financial report. Garcia et al. (2010) cited that budgeting process
helps the company to improve its operations and profitability. On the other hand, Agoglia et
al. (2011) criticised that some company uses unethical practise, which could neglect the
results obtained from budgeting process.

Minimise the effect of Inflations:

With the help of budgeting process in the current era, companies are able to evaluate the
change in inflation rate. In addition, the budgeting process also helps in deriving the change
in cost price and selling price to supports profitability of the company. Chen et al. (2010)
cited that the budgeting process conducted by companies, supports changing rate of inflation.
On the contrary, Gow et al. (2010) argued that sudden increase in rate of change in inflation
rate is not accommodate in the budgeting process and could negatively affect its profit
generation capacity.

3.2 Analysing the current budgetary process used in industrial environment:

As per increasing market competition and changing market scenario, different activities are
involved in business. Towards the development of business activities and increasing
profitability, companies has engaged more product line and extended service processes for
customers. Therefore, traditional budgeting system has changed into activity based budgeting
system and incremental budgeting system, which are denoted as modern budgeting system.
As per comment of Brinckmann et al. (2011), through the modern budgeting system
companies can determine and allocate necessary financial supports for each activities within
business. On the other hand, rolling budgeting system is also effective in current business
environment.

Here, company Sainsbury implements activity based budgeting system for their business
level activities. Through the implementation of activity based budgeting system, company

Page | 22
Sainsbury has reduced their overhead costs, packaging costs etcetera. Charles et al. (2010)
commented that through the activity based budgeting system, companies will be able to
control overall operational costs for better profitability, as it will reduce the cost of revenue.
However, Dyreng et al. (2010) stated that in activity based budgeting process, companies
might not able to allocate ten responsibilities for executing the business level activities.
Nevertheless, through activity based budgeting process, company Sainsbury has controlled
their total quality management process and controlled their operational activities.

Advantages of current budgeting system in industrial environment:

As the retail industries are engaged in production and packaging process, activities based
budgeting system is appropriate for companies, because through this, companies can allocate
necessary costs for each activity and control the unnecessary costs in operational level
(Grabski et al. 2011). The company Sainsbury has implemented activity based budgeting
system, for determining the costs of production towards the maintaining the quality of
products. Through this process, company has controlled their supply chain management
process for timely and efficient delivery in market.

Along with this, cost drivers have been controlled through this activity based budgeting
process. In the words of Gow et al. (2010), activity based budgeting process focuses on the
activity in business rather than the departments. Therefore, divisions of costs are become
possible in units and controlling process becomes easier for company. Manufacturing
companies use this budgeting process, because batch production process and mass production
process are controlled through activity based budgeting process. In regards to this, Agoglia et
al. (2011) stated that activity based budgeting process is helpful for structuring the master
budgeting process. Along with this, the records of activity based budgeting process can be
analysed for next year’s budgeting process. That means activity based budgeting process is
helpful for future decision-making process.

Disadvantages of current budgeting system in industrial environment:

In activity based budgeting process, the companies cannot allocate the responsibilities of
team members. Therefore, information for executing the tasks cannot be provided through
activity based budgeting process. Through activity based budgeting process, the individuals
cannot provide their responsibilities towards the completion of business level activities. On
the other hand, Dechow et al. (2010) stated that preparation of activity based budgeting

Page | 23
process is cost effective for the company, because companies will need to allocate each level
costs with particular allocation.

Activity based budgeting process is more time consuming. Sainsbury has implemented this
budgeting process proper cost controlling and profitability maximisation. Through
complexity of this budgeting process, financial experts are required for allocating necessary
costs while executing business level activities.

Recommendation to zero based budgeting process:

Here, it can be recommended that, company Sainsbury can implement zero based budgeting
process for better result and control. Trough the zero based budgeting process, companies can
minimise the inefficient operational activities within business. Along with this, Sainsbury can
change their business environment with positive responsive manner. On the other hand, the
necessary resources for executing business activities can be allocated effectively through zero
based budgeting process. The cost behaviour patterns can be determined through zero based
budgeting process.

3.3 Weakness of traditional budgeting processes:

The weaknesses of traditional budgeting process are discussed below:

 Traditional budgeting process is time consuming, because traditional budgeting

system starts with the lists of income level within business. Based on the cash flows in
business, companies can allocate necessary financial supports for business activities.
Through the traditional budgeting system, company cannot allocate future cash flows
within business as income level changes with the time (Bamber et al. 2010).
 In traditional budgeting system, companies might have the flexibility for changing it
between the working processes. Through the budgeting process, extra income level
cannot be added for further business financing. That means, companies will need to
execute the activities with the allocated financial supports. Based on the traditional
budgeting process, companies can determine the year ending position of the company,
but next year’s forecast might not be possible (Brigham and Ehrhardt, 2013).
 Lack of flexibility is crux weakness of traditional budgeting system. That means,
company cannot add extra income and activities in traditional budgeting system.
Along with this, during the formation of traditional budgeting process, companies will

Page | 24
 need to maintain lots of management resources and therefore, it takes maximum time
rather than other budgeting processes. Therefore, extra addition within the prepared
traditional budget will create more efforts on financial executives (Brigham and
Houston, 2011).
 The chances of changing of data and relevant information are high. Therefore, firms
might face problems with the prepared budgeted figures and financial supports,
because in real market scenario, companies might have another scenario. In this case,
rolling budget is appropriate for company. Through the rolling budgeting process,
companies can allocate extra activities with extended financial supports (Kaplan and
Atkinson, 2015).
 Through the budgeting process, companies cannot allocate the responsibilities to their
subordinates. Along with this, motivation level and work force level cannot be
provided to the employees. This will lead to create a disconnection area from the
actual strategic plan in business. On the other hand, uncertainties might influence the
budgeting process. The framework framed the traditional budgeting process might not
meet the business objectives fully due to its less flexibility (Hillier et al. 2011).

Conclusion and Recommendation:

The study provides details on the current financial strength of Sainsbury for 2013 and 2014.
The report also accommodates the evolution of different type of ratios, which is used in
deriving the financial statues of the company. In addition, the study compares two years
financial performance of Sainsbury Plc. Moreover, the novice also evaluates different type of
sources of finance, which could be helpful in accommodating the financial needs of the
company. Moreover, the study also describes the important of budgeting process in the
current market scenario. In addition, the report also evaluates the strength and weakness of
current budgeting process. Moreover, the weakness of traditional budgeting process is also
evaluated in the report.

With the help of Return on Capital Employed, Operating Profit Margin, Gross Profit Margin,
Gearing Ratio, Interest Coverage, Quick Ratio and Current Ratio the current financial
strength of the company is evaluated. Moreover, the company could improve its assets and
reduce its liabilities. In addition, the current ratio of Sainsbury is not financially strong as
Tesco. Furthermore, the company could increase its operations to support its expenditure.
After analysing Sainsbury yearly performance it be evaluated that the company’s financial

Page | 25
strength has improved. Nevertheless, the performance of the company is not appropriate if
compared with its competitor Tesco. The current ratio, quick ratio, and gross profit margin
are not according to the industry standard and could be improved. In addition, the company
might increase its sales to improve gross profit margin.

There are three different sources of finance, which is proposed to help the company in
attaining the Assets. Moreover, the rise in assets could be helpful in improving its operations
and in turn raise profitability of the company. In addition, the investment on Land and
Building represents 20% of the Net Assets employed by the company. In addition, Issuing
shares, corporate bonds, and Long-term loans could be helpful for the company to
accumulate the required funding for the investment. Moreover, distributing the debt in three
different finance type could be helpful in minimising the negative impact of debt
accumulation.

The different types of budgeting process is also analysed in the study. Moreover, the
importance of budgeting process in the current market scenario is also disused in the report.
The novice also suggests Zero Based Budgeting method for Sainsbury to improve its
operational activities and reduce expenditure.

Page | 26
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Appendices:
Appendix 1:

INCOME STATEMENT
Fiscal year ends in March. SAINSBURY SAINSBURY (J) TESCO PLC
(J) PLC 2013 PLC 2014 2014
Revenue
23,303,000,000 23,949,000,000 63,557,000,00
0
Cost of revenue
22,026,000,000 22,562,000,000 59,547,000,00
0
Gross profit
1,277,000,000 1,387,000,000 4,010,000,000
Operating expenses
Sales, General and administrative
457,000,000 444,000,000 1,657,000,000
Other operating expenses -
278,000,000
Total operating expenses
457,000,000 444,000,000 1,379,000,000
Operating income
820,000,000 943,000,000 2,631,000,000
Interest Expense
128,000,000 131,000,000 447,000,000
Other income (expense)
96,000,000 86,000,000 75,000,000
Income before income taxes
788,000,000 898,000,000 2,259,000,000
Provision for income taxes
174,000,000 182,000,000 347,000,000
Net income from continuing operations -
614,000,000 716,000,000 4,000,000
Other -
4,000,000
Net income

Page | 31
 614,000,000 716,000,000 1,912,000,000
Net income available to common -
shareholders 614,000,000 716,000,000 942,000,000
Earnings per share
4,000,000
Basic
0 0 0
Diluted
0 0 0
Weighted average shares outstanding
Basic
1,881,500,000 1,896,800,000 8,068,000,000
Diluted
1,948,000,000 1,968,500,000 8,078,000,000
EBITDA
1,433,000,000 1,580,000,000 4,971,000,000

Appendix 2:

Ratios Sainsbury 2014

Return on Capital Employed Return on Capital Employed = [Net Profit / (Total Long term Loan +
(ROCE): Capital)]
Return on Capital Employed = [1676.08 * (1-20.27%)/ (12082.96 +
11870.43)]
Return on Capital Employed = 11.16%

Operating Profit Margin: Operating Profit Margin = Operating Income / Revenue

Operating Profit Margin = 1679.0797 / 39782.3720
Operating Profit Margin = 4.21%
Gross Margins: Gross Margin = Gross Profit / Sales
Gross Margin = (2304 / 39782.39) * 100
Gross Margin = 5.79%

Gearing Ratio: Gearing Ratio = Total Debt / Total Equity

Gearing Ratio = (Current Portion of long-term debt + Long-term
debt) / Total Equity

Page | 32
 Gearing Ratio = (887.043 + 3737.54) / 9971.76
Gearing Ratio = 0.46
Interest Coverage: Interest Coverage = -1 * Operating Income / Interest expense
Interest Coverage = -1 * 1676.0797 / -214.286
Interest Coverage = 7.82
Current Ratio: Current Ratio = Total Current Asset / Total Current Liability
Current Ratio = 7245.85 / 11237.54
Current Ratio = 0.64
Quick Ratio: Quick Ratio = (Total Current Asset - Inventory) / Total Current
Liability
Quick Ratio = (7245.85 – 1669.44) / 11237.54
Quick Ratio = 0.50

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