Concept of financial planning
In the modern era managers have to take financial decisions linked with firm in effective manner. Further, it is required by them to undertake large number of variables so that financial performance of the enterprise can be well maintained with the help of this. Finance is regarded as the life blood of the business and plays most crucial role in the organization (Jappell & Padula 2013). Without appropriate finance no business can survive in the market and its inadequacy has adverse impact on the overall operations of the company. Proper planning in relation with the financial resources leads to effective utilization of resources and in turn acts as development tool for the business.
In the present scenario, financial planning has become one of the most crucial aspects for businesses. Nowadays, manager of companies emphasizes on analyzing financial statements and carrying out financial planning to ensure long-term growth and sustainability of organizations.It can be expressed that managers are able to carry out an effective forecast of cash flows through the development of financial plans (Gray 2014). The planning also plays a vital role in managing the day to day operational cost of a business enterprise.
On the other side of this, it can be stated that financial planning and analysis of financial statement is important because it helps managers to identify the key and potential sources from where finances for a company can be raised. It also supports in ensuring that adequate money will be there to satisfy the future financial needs of an organization. In the modern era, financial planning and evaluation of a company’s financial statements are also carried out by managers with an objective to carry out the best and most effective utilization of all available financial resources.
The decision-making becomes more calculative and well informed when managers conduct financial planning at regular intervals. On the other side of this, it can be asserted that such type of planning and evaluation of a company’s financial statement is crucial in terms of identifying the overall cost of operations (Fleischmann, Meyr & Wagner 2015).
It assists managers to calculate and analyze major cost including cost of production, material, factory overhead, cost of sales, administration etc. On the basis of information collected, managers can develop appropriate strategies for controlling the operational cost and enhancing the profit margins. Another significance of financial planning is that it assists managers to measure the return on investment or a particular project. Thus, a sound decision can be taken by managers in terms of whether a company should invest finances in a particular project or not.
Financial statements are undertaken which takes into consideration balance sheet, income statement, cash flow statement, etc (Lusardi & Mitchell 2014). By analyzing all these statements, it is possible for the manager to know an overall position of the company in the market. Income statement helps in identifying all the sources of revenues and expenses. Further, in case if all the major expenditures of the enterprise are high then the manager can quickly take corrective action so that income level can be enhanced and this, in turn, can prove to be beneficial for the enterprise in every possible manner.
Significance of financial planning and analysis
Capital budgeting is also one of the most significant aspects which are also undertaken by managers working in the organization (Fernandes, Lynch Jr & Netemeyer 2014). This concept is associated with taking investment decision where the manager has to make a decision in which project to allocate funds to obtain the higher return. Different capital investment techniques are present which takes into consideration net present value, internal rate of return, the average rate of return, payback period, etc.
All these methods undertake the investment amount for instance with the help of payback period method it is possible for a manager to know how much time the invested amount can be recovered. So, this directly provides the base to the manager in utilizing the financial resources, and in turn, all the financial decisions can be taken quickly for the overall benefit of the business.
Apart from this concept of financial control is also undertaken which is all about taking corrective actions well in advance to avoid wastage of financial resource (Adewuyi 2016). Through this managers search for the areas where they can have control over the financial resource and in turn it directly allows in an accomplishment of the desired objectives of the enterprise. Therefore, in this way managers take the financial decision after considering the various critical aspects of the finance which involves financial planning and control, capital budgeting, analyzing the financial statements. In short, taking financial decisions are linked with the success of the business, and its long-term performance is associated with the same in the market.
Ratio analysis
Liquidity ratio
Current ratio = current assets / current liabilities
= 13085 / 20206 = 0.64
Interpretation
Liquidity ratio supports in knowing about the cash position of the business. Further, higher ratio allows a company in knowing that adequate amount of cash is available that can be utilized in various areas. Tesco liquidity ratio is 0.64 which is indicating that company will face issues to pay back its current liabilities. The company does not have enough cash to carry out its overall operations, and this can surely act as the disadvantage for the enterprise. Liquidity ratio of 1 is acceptable for the company and in case if this ratio is less than one then it directly indicates that adequate amount of funds are not present in the business for conducting overall operations smoothly and it directly acts as the hurdle.
Market value ratio
Price/ Earnings ratio
Market price per share / Earnings per share
= 364.85/ 12.07p
= 30.22
PE ratio is considered to be most effective especially at the time of stock selection. Further, it is calculated by dividing current market price of the stock with the earnings per share. Higher PE ratio supports in knowing that investors are expecting higher return in the near future as compared with the lower PE ratio. In short, this ratio supports in knowing the overall efficiency of the business in meeting expectations of the shareholders which is necessary for the enterprise. Generally to operate efficiently in the market it is required for business to satisfy need of its investors as long term performance of the enterprise in linked with the same.
Capital budgeting
Considering the case of Tesco its PE ratio is 30.22 and it is indicating that business is capable enough in delivering high return to its investors. Investors prefer to invest in the stock of the business and this is surely beneficial for the enterprise in every possible manner. Apart from this, investment decisions are favorable for the business and with the higher profits and returns Tesco can easily attract large number of investors.
Asset management ratio
Average inventory turnover period = Average inventories held / Cost of sales * 365
Average inventory = opening + closing /2 = 2957 + 3576 / 2 = 3266.6
3266.5 / 59547 * 100 = 5.48 times
Interpretation
Inventory turnover ratio represents the efficiency of the business and is calculated by comparing the cost of goods sold with the average inventory. It represents the inventory available with the company is adequately utilized and in turn indicates the business efficiency (Peavler 2017). High inventory ratio is considered to be beneficial for the firm as it represents that more sales are generated in a certain amount of stocks. It is the ultimate objective of every business to utilize its inventory efficiently, and this is possible through efficient management of resources present with the enterprise.
This ratio is considered to be most significant as it relies on two components of performance. First one is stock purchase and the second one is sales. Considering the case of Tesco its average inventory turnover period is 5.48 times which is quite high. It represents that business is efficiently utilizing its inventory and no such overspending is present. Wastage of resources is very less, and Tesco is effectively selling the inventory that it has purchased. So, in this way, this ratio has supported in knowing the overall efficiency of Tesco in conducting its overall operations in the market.
Debt management ratio
Interest coverage ratio = operating profit / interest payable
2631 / 68 = 38.69 times
Interpretation
Interest coverage ratio supports in knowing how quickly the firm can pay its interest expenses on the outstanding debt. Interest coverage ratio below 1 represents that business is not able to generate adequate funds to meet its interest expenses. Lower the ratio the firm is more burdened by the debt expense. It directly leads to difficulty in meeting the interest expenses, and this has an adverse impact on the entire business in every possible manner. Considering the interest coverage ratio of Tesco plc it has been found that ratio of 38.69 is beneficial for the firm.
It is indicating the efficiency of the business where Tesco can easily pay its interest expenses on the outstanding debt. The company will not face any difficulty, and no such burden is present on the firm. On the continuous basis, Tesco must try to maintain this ratio so that its long-term performance can be well maintained with the help of this. Moreover, on long-term basis interest expenses can be easily paid by the enterprise. In short higher the ratio the better it is for the business. Overall operating profit of Tesco is capable enough in covering the interest expenses of the enterprise, and this is beneficial for the firm.
Financial control
Gearing ratio = long term liabilities (non current ) / share capital + Reserves + Long term liabilities * 100
14043 / 405 + 498 + 14043 * 100
14043 / 14946 * 100
93.95%
Interpretation
Gearing ratio supports in comparing some form of owner’s equity to funds borrowed by the firm. Further, it helps in measuring the financial leverage of the business and the range of activities that are supported by the owner’s funds versus creditor’s capital. High gearing ratio indicates a high degree of leverage and is more prone to risk in the business cycle.
Gearing ratio of more than 50 percent is considered to be high. In short, it allows business in knowing its financial fitness, and by same, it is possible to take corrective actions so that company can operate efficiently. Firms that have high gearing ratio possess increased risk as even a brief period of reduced profits can have the unfavorable impact on the enterprise in the form of loan default and bankruptcy. Considering the case of Tesco its gearing ratio is 93.95%, and this is deemed to be risky for the business as the chances of bankruptcy are high. It is representing the high proportion of debt to equity which is required to be managed by enterprise properly. The company has borrowed the high amount which is considered to be the risk, and it is required for Tesco to handle this situation.
Profitability ratio
Operating profit margin = Operating profit / Sales revenue * 100
2631 / 63557 *100 = 4.13%
Interpretation
Operating profit margin supports in knowing about the proportion of company’s revenue that is left with the business after paying all the expenses (Peavler 2017). Tesco’s operating profit margin ratio of 4.13% is high, and this is indicating that company can satisfy its creditors and is generating value for its shareholders. Business is less financially risky, and this reflects the efficiency of Tesco. Gross profit margin = Gross profit / sales revenue * 100
4010 / 63557 * 100 = 6.30%
Interpretation
Gross profit margin helps in knowing the financial health of the business. Tesco’s gross profit ratio is 6.30%, and this is indicating that company can meet its operating expenses properly. Therefore, shortly also it is required for the business to maintain this ratio so that all the major expenses can be recovered and this can surely build the internal strength of the enterprise in every possible manner.
References
Books and Journals
Adewuyi, AW 2016, ‘Ratio Analysis of Tesco Plc Financial Performance between 2010 and 2014 in Comparison to Both Sainsbury and Morrisons. ‘, Open Journal of Accounting, vol 5, no. 3, p. 45.
Fernandes, D, Lynch Jr, JG & Netemeyer, RG 2014, ‘Financial literacy, financial education, and downstream financial behaviors’, Management Science, vol 60, no. 8, pp. 1861-1883.
Fleischmann, B, Meyr, H & Wagner, M 2015, Advanced planning. In Supply chain management and advanced planning, Springer Berlin Heidelberg., Berlin.
Gray, SJ 2014, International accounting and transnational decisions, Butterworth-Heinemann, United Kingdom.
Jappell, T & Padula, M 2013, ‘Investment in financial literacy and saving decisions’, Journal of Banking & Finance, vol 37, no. 8, pp. 2779-2792.
Lusardi, A & Mitchell, OS 2014, ‘The economic importance of financial literacy: Theory and evidence’, Journal of Economic Literature, vol 52, no. 1, pp. 5-44.
Peavler, R 2017, Use Asset Management Ratios in Financial Ratio Analysis, viewed 22 August 2017, <https://www.thebalance.com/use-asset-management-ratios-in-financial-ratio-analysis-393187>.
Peavler, R 2017, What Is a Profitability Ratio Analysis?, viewed 22 August 2017, <https://www.thebalance.com/profitability-ratio-analysis-393185>
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