Financial Resource Management - Essay Example

?Financial Resource Management Table of Contents Table of Contents 2 Component 3 About the Company 3 Component 2 6 SWOT Analysis 6 Performance Analysis 10 Financial Analysis 11 Component 3: 13 Investment Appraisal Techniques 14 Reference 17 Component 1 About the Company Tesco plc is a constituent of FTSE 100, a global grocery and merchandise retailer. Tesco being the second largest retailer by profit after Wal-Mart and third largest by revenues following Wal-Mart and Carrefour have stores worldwide in 14 countries like Asia, North America and Europe. Headquartered at Hertfordshire, Tesco plc is the grocery market leader of UK with over 30 % of the total market share. The company is also having its presence at Malaysia, Republic of Ireland and at Thailand. With around 2318 stores worldwide Tesco operates in 1878 stores within UK. Tesco was established with the amalgamation of T. E. Stockwell and Cohen with the success of the self-service grocery store and then it started expanding its business from small stores to large supermarkets. At a very fast pace it became a popular name on the mind of the households with the launch of the household goods and apparels. Then Tesco entered into the business of petrol stations selling fuels for competitive prices. With gradual revenue earning the company expanded even bigger with various other sectors like in Banking, Financial products and services (Data monitor, 2004, p.4). With the belief of a sustainable growth and well governed business the investors of the Tesco plc wants competitive returns of their investments or shareholdings. Transparency of the company’s operation plays a vital role in gaining the trust of the stakeholders and they expect the implementation of the robust strategies of the firm for a long-term progress. The major share holders of the company are Blackrock Inc who own 5.48% of the issued share capital and few others like Legal & General Investment Management Limited who owns 3.99 % and Berkshire Hathaway with 3.02 % of the total issued share capital of Tesco (Tesco Annual Report and Financial Statements 2011, 2011, p. 58). With the rapid growth of the company the company need to build its brand value by benefiting the stakeholders which includes its customers, staffs and shareholders. Tesco believe in maintaining its sustainable position in the market with quality service and increased customer value. The strong product line and the pillar brand name is the key to the success of the firm which help the company to differentiate itself with the competitors and helps the firm to meet the demand of the growing need of the customers. The gained trust by the company helps to understand the values of the firm by the customers which in turn help the company to diversify into new areas of services. The company is also involved in different benefiting community programs to attract more and more stakeholders being a responsible retailer. Tesco with a very responsible track record for its great values and customer services acts as the catalyst for the growth of the company. The brand building capability of and its increased emotional as well as the functional loyalty from the customers, staffs and shareholders contributed to a great extent for the profitability and the sustainable growth of the firm in the long run. The investments of the shareholders and other peoples provide a lot of support for building the opportunities and develop the brand which in turn allows the company to diversify for the benefits of the stakeholders (Tesco Annual Report and Financial Statements 2011, 2011, p. 40). Managing the stakeholders is one of the vital activities of the company that should be carried out to maintain a strong relation with the customers and other shareholders of the organization. Survey of the market situation and the present position of the firm are required to be carried out by the company for the sustainable growth of the firm. Engagement with the stakeholder helps the firm to identify the risk and opportunities that the firm could face in future. Though it’s not possible to satisfy all the people all the time but with proper engagement with the stakeholders the company engage in the best practice of balancing with the needs of the customers. The regular reports of the firm to the stakeholders including customers, investors, government, regulators and suppliers which help them to understand the business process in a more transparent way and gain trust for investment in long term on the company’s share. The company organize meetings and presentation for the customers in regular basis and discuss the different strategies that the company is going to implement in future processes. The Remuneration Committee Chairman occasionally meets with the major share holders for discussion on several critical issues like Social Responsible Investors and company’s several contracts. The Investor Relations report generated by the Board should consist of the feedbacks from the different investors and the company should analyze each and every suggestion to ensure a balanced perspective. All the stakeholders should be informed with the different price sensitivity issues. The company should encourage the stakeholders to participate in different meetings organized by the firm to get them know about the situational analysis and the prospect of the investments which will help the organization to manage the stakeholders in a more effective manner (Tesco Annual Report and Financial Statements 2011, 2011, p. 73). Component 2 SWOT Analysis Tesco plc food retailer mainly operates at United Kingdom with over 2291 supermarkets, stores and superstores at UK, Europe and also at Asia. Tesco also diversified its business in various other sectors like financial products, insurance services and telecom electrical sector. Strengths Weaknesses Market share Increasing Tesco online Brand value Insurance Leadership of UK market reinforced Dependent on the UK market Debt Reduction Signs point to serial acquisitions Opportunities Threats Non-food Retail Health and beauty Further growth internationally UK structural change can lead to price war Overseas returns fall International expansion Strengths Market share Increasing Growth and the ROI shows great growth prospect for the company. It holds a total share of 13% at UK retail market. The high share from the food industry contributes also to the non food sector of the company. With the constant plan of expansion the company also steadily approaching towards the international market in diversified sectors. Insurance The food retailer also approached to the insurance sectors and reached a million customers milestone for its motor insurance and over 330,000 insurance for pets and also received the award for the Competitive Life Insurance Provider. Tesco Online The online portal Tesco.com for the company drives a huge sale for the company and it increases the sales for about 29 % for the retail sector. Brand Value The strong brand image along with the quality service and product for the customers helped Tesco innovate new products and services and expand on daily basis and represent excellent value for the firm (Data monitor, 2004, p.15). Weaknesses Dependent on the UK market The company though growing internationally but Tesco plc highly dependent on UK market for its main sale share and thus any changes in the UK economy can affect the firm in a very bad manner and it can be very difficult for Tesco to recover when it is mainly concentrating on one market. Though it’s not weakness in short term but it can be difficult for the firm if it continues in ling run in the economy of the country. Debt reduction The company with a very aggressive expansion strategy is not likely to reduce its debt which can lead to a very little cash which are free for the company (Data monitor, 2004, p.16). Opportunities Non-food Retail The growth prospect of the non-food retail sector for Tesco is booming at UK as well as outside the country. It increases the earning and sales of the firm and it is expected to grow even at double rate for the coming years. Health and Beauty The Health and Beauty retail store of Tesco is the fastest growing segment of Tesco and it’s one of the market leaders in toiletries and health care market. The company is expanding its range of stores for health care division and it can act as a great source of revenue for Tesco plc. Further International Growth Tesco operating at various countries are constantly expanding its geographical reach to different countries and it’s increasing its sales profit also in large extent from its expansion plans internationally (Data monitor, 2004, p.17). Threats UK structural change can lead to price war The price strategies of different market leader can act as a threat for Tesco as it might affect the price strategy of the company. Since Tesco mainly believes in quality rather than price it can affect the customer in a wrong way in the price war with the competitors. Overseas Return fall Due to the different economic condition at different countries the overseas return could not be the same all the time as expected and even the competitors’ strategies overseas can affect the firms strategy or its existing business model. International Expansion International expansion always incurs a huge investment and building brand image at new market is also a difficult task for a new entrants. Distribution cost and other extra expenses are also required which might increase the debt for Tesco in long run (Data monitor, 2004, p.18). Performance Analysis The Remuneration Committee of Tesco plc believes that the remuneration should be performance based and the majority of the remuneration should deliver to great extent to the shares of the firm. The performances are analyzed by the committee in two ways. Short term performances are measured based on one year performance of the where the salary of the employees are increased to huge extent to the percentage of the base salary. The percentages are calculated based on the performance according to the profit performance of the firm and also based on the strategic performance measures of the company. The elements of the short term performance analysis are Cash bonus and Deferred share bonus. The performance is also analyzed in long term a performance measure which is calculated for the period of three years which Tesco believes to be the best way to enhance the value of the shareholders and maintain a sustainable growth in the level of return on the capital. The committee believes that the combination of the EPS and the ROCE performance is attached with the strategic objectives of the firm and also reflects the long term shareholders values. Performance share plan is the major element of long term performance. The current remuneration plans of Tesco are mainly targeted towards the long term growth of the firm and making the customer loyal to the company with the plans and strategies. Financial Analysis The financial analysis is mainly carried out in order to understand the company’s efficiency and performance. To analyse the financial condition it is necessary to know the earning capacity and the profitability of the firm. It also depends on the comparative positions and the efficiency of the management. Ratio Analysis is a very important technique often used for the financial analysis of the company. It gives a picture of the financial condition of the business. It determines the firm’s solvency, profitability and its liquidity through the analysis (Nos, n.d. p.826). Ratio Analysis can be classified into three categories- Short term Solvency To meet the financial obligations of the firm the short term solvency is required. The widely used techniques of accounting liquidity are quick ratio and current ratio (Jaffe, 2004, p.34). Current Ratio Current Ratio is calculated by the relation between the current assets and the current liabilities of the firm. It is represented by the formula Current Ratio= Current Assets/Current Liabilities (Stickney, Weil, Schipper, 2009, p.266). In the year 2011 Tesco plc has a Current Ratio of 0.645085 which represents that the company’s financial condition is not in a very good stage. For the last five years the company’s current ratio has never gone above 1 which is not a good sign about the financial condition of the company. Quick Ratio The Quick Ratio of the firm is calculated by dividing the Quick assets with the Total Current Liabilities. It can be represented as Quick Ratio= Quick Asset/Total Current Liabilities (Schreiber, Stroik, 2010, p.94). For the last 5 years Tesco’s Quick Ratio are as follows- Financial Leverage Financial Leverage shows the firms dependency on debt rather than its equity. With more and more debt the firm will be unable to fulfil its obligation of contracts. Too much debt is not a good sign for the firm’s long term success (Jaffe, 2004, p.37). Debt Ratio Debt ratio is represented by dividing the Total debt divided by Total assets. The formula can be written as Debt Ratio= Total debt/Total Assets (Carlberg, Carlberg, 2002, p.165). Profitability Profitability analysis is one of the most important factors that are needed to be analyzed by the firm in order to understand its performance and earning of revenue and the cost incurred for the process. But it is very difficult for the firm to understand and set a benchmark for the current or future profit (Jaffe, 2004, p.38). Net Profit Margin The Net Profit margin is calculated by dividing Net Income with the Total Operating Revenue (Gitman, 2007, p.52). It can be represented as Net Profit Margin = Net Income/Total Operating Revenue Gross Profit Margin The gross profit margin is the obtained by dividing the Earning before interest and tax with the Total operating revenues (Webster, 2003, p. 76). Formulae can be represented as Gross Profit Margin = Earnings before interest and tax/Total Operating Revenue Component 3: Investment Appraisal Techniques The Investment Appraisal Techniques has a number of stages which are carried out. Origination of Proposals This is the idea generation stage where some are rejected while some are accepted for later screening process. Project Screening The Qualitative evaluation process is carried out in this stage and the proper fit are analyzed by evaluating the different long term objectives of the firm and the ideas are screened according to the objectives. Analysis and acceptance Using the firm’s financial investment appraisal techniques the ideas are analyzed and then accepted for proper implementation at later stages. Monitoring and Review Technique The implementation process, capital spending and different benefits are monitored in this stage to get optimum result. The Investment Techniques can be carried out using several methods- The Payback Method It is the first screening method used. It is the cash inflows from investment to equal the cash outflows. Accounting Rate of Return The ARR calculates the rate of return percentage by using the average profit of the project life along with the capital outlay (Pogue, 2010, p.25) Net Present Value Method NPV is the difference between the present value of inflowing cash from the present value of the cash Outflows from the business. Internal Rate of Return Method IRR is the discounted rate when the NPV is equal to zero. It is a type of discounted cash flow techniques capital project appraisal. For the current problem given Net Present Value method is used. NPV can be represented as-   2011 2012 2013 2014 2015 2016 Discount Rate 0.10 10% 10% 10% 10% 10% Expected Revenues 0 700 700 700 700 700 Running Expenses -210 210 210 210 210 210 Approval Fee -22 22 22 22 22 22 Cost of Machinery -350           Residual Value           150 Cash Flow -582 468 468 468 468 618 NPV 1285.23           Here the expected Revenue for the 1st year is zero and for the next 5years is given 700. The expenses and the other cost results to the cash outflow of 582 in the first year. Then the cash flow is continued for the next 5 years. After 5 years there is a residual value of 150 for the machinery which is added with the Cash Flow and it results to ?618 as on 2016. Then the NPV is calculated using the above stated formula which comes to 1285.23. The positive NPV value represents that the cash inflow for the 123 LTD will yield an excess return of the cost of capital. It is favourable condition for undertaking a project for the firm. Reference 1. Carlberg, C., Carlberg, G., (2002). Business analysis with Microsoft Excel. Que Publishing. 2. Datamonitor, (2004). Company Overview. [Pdf]. Available at: http://people.exeter.ac.uk/wl203/BEAM011/Materials/Lecture%204/TESCO%20Company%20Profile.pdf. Accessed on: June 2nd 2011. 3. Gitman, (2007). Principles Of Managerial Finance, 11/E. Pearson Education India. 4. Jaffe, R., (2004). Financial Statement Analysis. Tata McGraw-Hill Education. 5. Nos, (No date). Introduction and Ratio Analysis. [Online]. Available at: http://nos.org/320courseE/L30%20INTRODUCTION%20AND%20RATIO%20ANALYSIS.pdf. Accessed on: June 2nd 2011. 6. Pogue, M., (2010). Investment Appraisal. Business Expert Press. 7. Schreiber, D., Stroik, G., (2010). All About Dividend Investing, Second Edition. McGraw-Hill Professional. 8. Stickney, C., Weil, R., Schipper, K., (2009). Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning. 9. Tesco Annual Report and Financial Statements 2011, (2011). General Information. [Pdf]. Available at: http://ar2011.tescoplc.com/pdfs/tesco_annual_report_2011.pdf. Accessed on: June 2nd 2011. 10. Webster, W., (2003). Accounting for managers. McGraw-Hill Professional. Read More