Budget And Financial Management In Education - Myassignmenthelp.Com

Question: Discuss about the Budget And Financial Management In Education. Answer: Introduction: There are many ways to assess and analyze the financial statements of an entity. These include the normal assessment of revenues, profit losses, assets and liabilities from financial statements, ratio analyses which include calculation of different ratios such as gross profit margin, net profit margin, operating margin, current ratio, acid-test ratio, capital gaining ratio and efficiency ratio. In this document, an in-depth discussion shall be made on the financial performance and position of a practical entity from the information contained in the financial statements of the entity. Description of the company The organization was chosen for the purpose the research: The chosen organization for the purpose of the research in this document is J. Sainsbury PLC of United Kingdom. The financial statements of the entity provided in the annual reports of the company will be used to analyse the financial performance and financial position of the entity over the last few years (Petty et al. 2015). Also on the basis of the past performance and future expectations of the company an objective discussion shall be made on the future endeavours of the company. About the business of the company: Founded by John James Sainsbury in 1869 with a solitary shop in Drury Lane, London J Sainsbury Plc. is currently the second largest chain of supermarkets in the United Kingdom. At present the company supplies 16.9% of the market demand in the super market sector in the country. The company was the market leader, i.e. in grocery retailing business, from the year 1922 to 1995. The company first adopted self-retailing in the United Kingdom with introduction of the concept in its super markets chain across the country (Renz 2016). Thus, the company mainly operates in super market sector in the country however, the holding company J Sainsbury PLC has split the whole company into three different divisions, and they are as following: Sainsburys Supermarket Limited: The super market chain was the only business of the company till the holding company decided to split the company into three different divisions. This division is responsible to conduct the business of supermarkets chain in the whole country. As already mentioned that the company is currently running second largest super market chain in the country. The super markets chain is the chain of markets that the company operates in different parts of the country which provide the customers an opportunity to shop for their necessity requirements of daily lives. These include grocery items, kitchen utensils, vegetable, fish, meats, eggs, electronic goods, and other products. In short, a super market of the company generally have all the necessary goods required in the daily lives of common citizens of the country. Sainsburys Bank: Sainsburys Bank is a financial institution providing financial services in the country with the motive of providing the residents of the country with high quality financial and banking services. The bank started operation on February 19, 1997 to provide financial services like insurance, credit card, saving and loan accounts. Sainsburys Argos: This division is engaged in the business of digital retailing. The company currently provides more than 60,000 products in its store and through online. The company is a leading digital retailer in the United Kingdom with more than a billion visitors in its online portal every year and more than 29 million store customers. However, it must be mentioned that though the company has three different divisions as mentioned above but the identification of J Sainsbury PLC is mainly from the super market business of the company. The company which once was the leader in the super market business was pushed in third place by the rise of Tesco and Asda in 2003. However, with innovative and efficient business operations the company restored its second place in the market in the year 2014 by pushing Asda behind. In the super market sector J Sainsbury PLC is a well-known and well reputed company not only in the United Kingdom but all across the globe. Company gearing strategy: Gearing strategy of an organization is the strategy made by the executive management of the organization with the objective of strengthening the solvency position. The executive management of an organization not only have to decide about the business operations of the organization but also how to finance the business operations of the organization. In case of a corporate entity, the executive management will have to decide about the sources to be used to arrange the necessary finance for the entity (Finkler et al. 2016). A company has option to use the equity shares or preference shares to arrange the funds from owners contribution and to use borrowed funds. It is up to the management to decide a suitable gearing strategy to ensure that the solvency position of the company is strong and simultaneously the company should also be able to use the operating and financial leverage by using appropriate amount of borrowed funds to finance a particular part of the business. Maintaining a pro per balance between owners capital and borrowed capital is the main factor that is to be given utmost importance in the gearing strategy of the company. In case of a practical organization the gaining strategy of the organization can be understood from the financial statements of the company over a period of time. The use of borrowed capital and owners capital in the overall capital structure of the company will help us to assess the use of different sources of finance by the organization to arrange necessary funds to finance its business. The capital gearing ratio and debt to equity ratio are two main ratios which can be calculated from the financial statements to strategically analyse the gearing strategy of an organization over a period of time (Barr and McClellan 2017). The calculation are provided in the Appendix 1. In case of Sainsbury PLC, the capital structure of the company over the last three years have made one thing amply clear and that is the fact that the management of the company is continuously reducing the proportion of debt in its overall capital in the business. In the financial year ending on March 31, 2015 the company had a total long term debt including capital leases of GBP 2506.00 million; in the succeeding year ending on 31st March, 2016 the company reduced that to GBP 2190.00 million. In the year ending on March 31, 2017 the total amount of long term debt reduced considerably to GBP 625.00 million. Thus, the gearing strategy of the company can be ascertained to certain extent from the fact that the management had decided to reduce its debt capital to a substantial extent in recent years (Schaeck and Cihk 2014). Thus, the management has decided to strengthen the solvency position of the company by increasing the proportion of owners capital to the overall capital of the compa ny. The strengthening of the solvency position of the company will reduce the possibility of bankruptcy even in the remote future as the overwhelming proportion of total capital is represented by the owners funds in the form of common stock and retained earnings. The total contribution of debt capital in the overall capital of the company in 2015 was about 31.15% that have reduced significantly to 8.34% in the year ending of 31st March 2017 to clearly indicate a significant aspect of the gearing strategy of J Sainsbury PLC. The debt to equity ratio of the company in the year 2015 was 0.45:1 that reduced to 0.34: 1 in the year ending on 31st March 2016 and further to 0.09: 1 in the succeeding year ending on 31st March 2017. This again indicates the ever increasing reliance of the company on owners capital. The company has made it a point to reduce the usage of debt funds to finance the business of the company. This has certainly strengthen the solvency position of the company and has reduced the chances of bankruptcy (Pauw et al. 2015). Again the capital gearing ratio also indicates the ever increasing reliance of the company on shareholders funds to finance the business operations of the company. In the year ending on March 31, 2015 the capital gearing ratio which indicates the proportion of shareholders equity to the borrowed funds, was 2.21: 1 which has increased to 11: 1 in the year ending on March 31, 2017. Thus, the gearing strategy of the company is clear from the financial statements of the compa ny and it is the strategy to use more and more shareholders' funds to finance the projects of the company. The strengthening of the solvency position to reduce the chances of bankruptcy is the main factor deriving the gearing strategy of the company. The above strategy is commented upon taking into consideration the financial statements of the company for the last three years (Smith et al. 2014). Evolution of the dividend policy of the company: The dividend policy of an entity is the policy to determine the amount of profit it wants to retain in the business for expansion of the business in the future and the amount of profit it wants to distribute to satisfy the interests of the shareholders and owners of the entity. The dividend policy has a huge influence on the share prices of an entity, especially if the entity is a listed company and its shares are listed on a recognized stock exchange. The shareholders of an entity influenced by the amount of dividend that the entity distributes to them thus, the higher the dividend the better it is for the shareholders (Karadag 2015). Hence, with the increase in earnings the shareholders of an entity also expect higher amount of dividend. In case an entity is paying dividend in accordance with the expectation of the shareholders the share prices will reflect the positive confidence of the shareholders on the company and its management. However, if the dividend is not in accordance w ith the expectations of the shareholders then the share prices of the entity generally drops as the shareholders show lack of confidence on the entity and its shares. Thus, the management of an organization will have to consider all necessary factors before deciding the dividend policy of an organization to ensure that the interests of all the stakeholders of the company are given necessary importance as well as the interests of the shareholders have also been respected (Cheema et al. 2015). The dividend policy of an organization should maintain a proper balance between retaining enough funds for the expansion strategy of the company. It helps to ensure that the expectations of the shareholders are also satisfied. The calculations are provided in Appendix 2, Appendix 3 and Appendix 4. In case of J Sainsbury PLC, the dividend policy of the company can be ascertained from the appraisal of the annual reports of the company for the last few years. In this case, the annual reports of the company containing the financial statements of financial year ending on 31st of March of 2015, 2016 and 2017 have been considered for assessing the dividend policy of the company. The total amount of dividend paid by the company to its shareholders in the year 2015 was GBP 330 million. This amount has reduced to GBP 238 million in 2016 and GBP 253 million in the year 2017. The total amount of dividend has reduced whereas the total number of ordinary shares outstanding in these years have increased (Bengtsson and Dai 2014). This clearly indicates that the companys dividend per share has reduced significantly over the last three years. The company paid dividend of GBP 0.16583 per share in the year ending on 31st March, 2015 to its shareholders only to reduce it to GBP 0.1129 per share in the subsequent year ending o 31st March, 2016 and further to GBP 0.1110 per share in the current year ending on 31st March, 2017. The dividend per share of the company declined by 31.92% in the year ending on March 31, 2016 and by 1.72% in the current year ending on 31st March, 2017. The normal dividend per share though suggest that the company has reduced its dividend payment h owever it would be unfair to assess the payment of dividend without taking into consideration the earnings of the company. Thus, it would important to jointly assess the dividend per share and earnings per share of the company to comment on the dividend policy of the company (Dunham-Taylor and Pinczuk 2014). The earnings per share of the company in the preceding year of 2015, i.e. for the financial year ending on 31st March, 2014 was GBP 0.38 which declined to GBP (0.08) in the year 2015. Thus, despite negative earnings per share the company maintained a suitable dividend per share by paying a dividend of 0.16583 per share. In the year 2014 the companys pay-out ratio was 42.77%. Since the companys earnings were in negative in the subsequent year 2015, the dividend pay-out ratio of 2015 is inconsequential to the assessment of dividend policy of the company (Guo et al. 2015). In 2016 the company increased its pay-out ratio to 49.09% to pay a dividend of GBP 0.1129 per share. In the year 2017 the companys pay-out ratio was even higher than at 65.27% as the company paid a dividend of GBP 0.1110 per share in the year 2017. Thus, the divide payout ratio of the company over the last four year suggests that the company is continuously increasing the portion of earnings to be paid out to the shar eholders to ensure that the shareholders of the company are satisfied to ensure no major drop in share prices of the company. Despite the deteriorated earnings of the company, the fact that the management has increased the pay-out ratio to give preference to the interests of the shareholders over and above the interests of the company is very much clear. This is even clearer in the year 2015 when the companys earnings were in negative and still the company maintain high amount of dividend per share (Shirley and Stark 2016). The distribution of profit is certainly essential to the success of an entity however; if the entity is unable to maintain a proper balance between the distribution of profit and retaining the profit then the growth of the company will be adversely affected. In case of Sainsbury PLC the divided policy of the company is far in the interests of its shareholders than in the balance. Thus, the last three years dividend policy has certainly influenced the growth of the company negatively (Hong et al. 2014). The company has followed the higher pay-out policy which is not an ideal dividend poli cy as with progress of each year the company started to shrink the margin of retained earnings which significantly influences the growth strategy of the company. The reduction in profits of the company in last few years could also be attributed to the lack of growth of the company as the company was almost left with nothing since the year 2015 to finance its expansion projects. Weighted average cost of capital: The weighted average cost of capital of the company using the capital asset pricing model is 4.094%. The calculation of the WACC is provided in the Appendix 7. The calculation of cost of debt is provided in Appendix 5 and the cost of equity in Appendix 6. The cost of debt is calculated based on the average cost of debt that is used in the business. The cost of equity is calculated using the Capital Assets Priding model. The 30-year bond is used for determining the risk free rate. The average market return of London stock index is used as the market premium (Attig and Cleary 2014). Key risks and Performance of the company The key risk the company is facing: At present taking into consideration the financial performance and financial position of the company over the last three years, i.e. from the financial year 2014-15 to the financial year 2016-17 the key risks that the company is currently facing are as following: The ever-increasing reliance on the equity capital: The companys reliance on equity shareholders funds to finance the business has an adverse effect on the leverage of the company. There is no doubt that the solvency position of the company has improved due to concentration on the equity shareholders; funds however, this has resulted in adverse leverage position of the company since the company started reducing the proportion of debt funds in the overall capital structure of the company (Haque et al. 2015). The expansion of the company has been halted: Due to increase in dividend pay-out ratio of the company in recent past and in fact the company also paid significant amount of dividend in the year 2015 despite incurring operating losses in the year have influenced the ability of the company to finance its expansion project adversely (Engel et al. 2016). Thus, the company has failed to materialize few of its expansion projects due to lack of internal funds. Deteriorated financial performance: As the company has struggled to expand the business of the company in recent past the financial performance of the company has taken a beating in the last few years. It is important that the company should invest on expansion to improve the financial performance in the future. Discussion on the financial performance: The financial performance of an organization can be ascertained from the income statement of the organization. In case the objective is to assess the financial performance of an organization only for the current period then assessment of current income statements is more than enough. However, in order to expand the analysis on the financial performance of an organization the income statement of the company over the last few years should be thoroughly assessed. The financial performance of J Sainsbury PLC has certainly deteriorated in the recent past. Despite significant increase in the gross revenue of the company in recent past the profitability of the company has certainly taken a downward turn in last four years. In the year 2014 the net profit attributable to the common shareholders of the company was GBP 716 million on gross turnover of GBP 23949 million where as the same reduced to negative, i.e. GBP (166) million in the very next year on a gross turnover of GBP 23775 million. However, the company recovered to earn a net profit for the equity shareholders of the company of GBP 471 million in the very next year (Bodie et al. 2014). The gross turnover of the company was GBP 23506 million but in the current year, again the net profit available to the equity shareholders of the company has further reduced to GBP 377 million on a gross turnover of GBP 26224 million. Thus, the financial performance of the company has certainly declined sub stantially in the recent past. The net profit margin of the company has declined to 1.43% in the year 2017 compare to 2.99% of 2014 which shows that the operating efficiency of the company in the last few years have declined significantly. The future prospect of the company: The annual report 2017 of the company has mentioned that there are number of projects in the pipeline which will be seriously pursued by the management to improve the financial performance of the company. The company will review its operational policy to ensure that the operating efficiency is improved in the future. The management will also critically analyse its dividend pay-out policy to make necessary changes in the future to ensure that the expansion projects of the company are not delayed. According to the Boards report the company is considering huge amount of investment in the countries like China and India in Asia. Both these countries have huge potential, as these are two most populated countries in the globe and present a huge opportunity to the company to expand its market in Asian continent (Cavusgil et al. 2014). If the strategy to expand its business in this part of the world is successful then the company is looking to gain a huge growth within a relatively short peri od of time as both the countries, i.e. India and China, have huge markets with more than a billion people in both the countries. The company is also looking to make further expansion of its digital retailing business with a huge proposed investment to add other products in its offering range. The management looks set to enter into a new era of growth with huge potential provided the strategy is implemented efficiently in the future. Thus, the future prospects of the company looks very bright (Barnard et al. 2017). Conclusion: Taking into consideration the discussion above it can be summarized that J Sainsbury despite being one of the largest operators of supermarket chains in the United Kingdom and other parts of the world have struggled in recent past with lack of growth in its business operations and profitability. Though the financial performance of the company has certainly deteriorated in the recent past but the strengthening solvency position of the company certainly infuse enough confidence on the shareholders both existing and prospective to invest in the shares of the company. Recommendation: The investors should certainly be concerned with the lack of growth and deteriorated financial performance of the company however, considering the stable financial position of the company and bright future prospective there is no reason to suggest that the investors should not invest in the shares of the company. Thus, the existing investors should not be panicked about their existing investment in the company and the prospective investors should also be recommended to invest in the shares of the company. Reference Attig, N. and Cleary, S., 2014. Organizational Capital and Investment?Cash Flow Sensitivity: The Effect of Management Quality Practices.Financial Management,43(3), pp.473-504. 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