Management Systems of Tesco Plc and British Telecommunications Plc - Assignment Example

Tesco Plc and British Telecommunications Plc number: Module BS4S04 Assignment 2 Table of Contents Question Users 3 Tesco and BT internal users 3 Tesco and BT external users 4 Question 2: Objectives 6 Primary objective 6 Secondary objective 9 Question 3: Ratio analysis 11 Financial solvency 11 Efficiency 12 Profitability 12 Investment returns 13 Question 4: Cash management and capital budgeting 14 Cash management 14 Capital budgeting 14 Reference list 16 Appendix 18 Question 1: Users Tesco and BT internal users Three prime internal users of financial information of Tesco and BT are employees, managers and owners or partners of the respective firms. Employees Tesco and BT are multinationals and for such kind of organisations, employees are considered as an asset as they share direct interaction with consumers. Employees mainly entail information regarding financial soundness of a corporation. In other words, profitability and financial position of the company is important for employees. The employees of BT and Tesco can access financial information regarding their respective firm from annual report of the company. Disclosure of financial information to employees empowers and motivates them and helps in building confidence and commitment towards the company. Additionally, key information regarding revenue and company’s overall performance help them in their regular decision making (Tesco, 2014a; BT, 2014a). Managers and executives Managers and executives operate at middle level and operational level within a corporation. They are essentially responsible for a variety of operational, strategic and investment related decision making on a regular basis. However, all these decisions require accurate, consistent, timely and reliable financial information regarding firm’s activities. For instance, managers at Tesco are responsible for sales forecasting and projections and for this purpose they need information such as past revenue data, sales volume and so on. Another illustration can be, if an operational manager wishes to minimise operational cost at BT, then the manager will require information related to various general and operational expenses. Such information can be obtained only from the financial statements of BT (Tesco, 2014a; BT, 2014a). Owners and Partners Owners and partners are ultimately held responsible for proper functioning of a business firm. Organisations such as BT and Tesco are public corporations that are managed by group of shareholders where primary decision making is done by board of directors and chairman of the company. Board of directors including the chairman are responsible for framing strategic decision such as merger and acquisition, expansion to new market, new product development and undertaking new projects. All these activities require capital and scope of future prospect for the firm. Board members generally evaluate capital structure of the company, returns on investment and overall financial position of the firm from financial prior taking long term strategic decision. Owners are mostly interested in liquidity and solvency of a firm so that they can pay off various creditors and investors (Tesco, 2014a; BT, 2014a). Tesco and BT external users Organisations such as Tesco and BT have a number of external users of financial statement namely, government and financial institutions, institutional investors and/or shareholders and creditor/suppliers. Government and financial institutions Government bodies include revenue and taxation departments who are responsible for collecting and accounting accurate tax from various corporate bodies. The government is primarily interested in information such as firm’s taxable income. In other word, the government seeks information regarding profit after financial interests which is taxable in nature. Financial institutions generally express interest in seeking information regarding working capital and cash management and long term and short term solvency. All these information can be availed from firm’s financial statements. Tesco and BT are global organisations with large scale business activities and consequently their revenue falls within the tax bracket. Additionally, these organisations do maintain business relationship with banks and other financial organisations, therefore their financial reports are of great importance to these parties (Martin & Petty, 2001). Shareholders and institutional investors Shareholders and investors are often considered as co-owners of a firm. They are mostly interested in firm’s profitability and prosperity. Information regarding firm’s growth and profitability can be obtained from financial reports hence these are important to investors and shareholders. Tesco’s primary shareholders include Harris Associates, Berkshire, Norges bank and Blackrock Inc while major shareholders of BT comprise a number of institutional investors. The financial reports of the companies help shareholders and investor in decisions such as buying, holding or selling shares of the firm by comparing and analysing share price, dividend yield and return on investment (Morningstar, 2014; Tesco, 2014b; Reuters, 2014). Creditors/Suppliers Tesco and BT, both the companies are currently operating in retail industry even though the segment or area of operation is different. Therefore, it can be conveniently assumed that they do have suppliers or creditors. Creditors will be interested in the financial condition of these firms so as to predict scope of insolvency. Financial statements are assessed by creditors to gain information regarding firm’s turnover with respect to revenue, payment from debtors and inventory management. This information assures creditors that their payments will be cleared on time. Overall, financial statements of Tesco and BT establish their creditworthiness to their suppliers (Martin & Petty, 2001). Question 2: Objectives Primary objective Business objective of a firm can be defined as statements regarding certain specific outcomes which the firm will be achieving in its future course of time. The primary objective of Tesco is to understand consumers and meet their needs before other competitors do and to be responsible towards the community. The primary objective of BT Plc is to create a well-communicated world by utilising power of best technologies, human expertise and networking facilities in an integrated manner. From the objective statement of both the companies, it can be ascertained that they are strongly consumer focused and their key aim is to deliver ultimate satisfaction to consumers (Greenbank, 2001). The primary objective of a business defines the ultimate reason behind the company’s existence. It inculcates a sense of direction among the management and the employees within the organisation. The key functions of primary objective are to provide direction, motivating employees and to control organisational functions to achieve the main goals. Primary objective is by nature highly diversified and is reflected through every activity of an organisation. For instance, resource procurement, allocation and task execution- all these activities are heavily dependent on the primary purpose of the firm as it direct towards profit and growth. Primary objective of a firm can be subdivided into a number of short term and long term goals and achievement of these goals will help in measuring achievement of the primary objective of the firm. Most business organisations are driven by the key objective of achieving growth and profitability (Greenbank, 2001). An organisation’s growth and profitability can be measured in terms of its dividend distribution and increase in share price. In this regard, growth and profitability of Tesco and BT have been measured using last three year data. Dividend growth Tesco: 2011: 14.46p 2012: 14.76p 2013: 14.76p 2014: 14.76p 2011 to 2012 = 1.02/14.46 = 7.06% 2012 to 2013 = 0/14.76 = 0% 2013 to 2014 = 0/14.76 = 0% Therefore, average growth in past three years as calculated is (7.06/3) = 2.35% BT: 2011: 7.4p 2012: 8.3p 2013: 9.5p 2014: 10.9p 2011 to 2012 = 0.9/7.4= 12.16% 2012 to 2013 = 1.2/8.3= 14.16% 2013 to 2014 = 1.4/9.5= 14.74% Therefore, average growth in past three years as calculated is (12.16+14.16+14.74/3)= 13.69% Growth or decline in dividend generally reflects health of an organisation. In Context of Tesco and BT, it was observed that Tesco has been paying same amount of dividend to its investors since 2012. The implications can be that either the company is earning low profit or is retaining maximum profit in the business. On the other hand, BT has observed an average growth of 13.69% in past three years which suggests that the company is probably adopting a long term strategy to maximise interest of its shareholders even when the company is not witnessing strong profit rise (Tesco Plc, 2012; 2014; BT Plc, 2012; 2014). Share Price growth (Since shares are traded on a regular basis, the adjusted closing price on opening day of the year of last four years (2011-2014) have been taken in consideration) Tesco: 2011: 341.75 2012: 281.33 2013: 328.55 2014: 321.02 2011 to 2012 = -17.68% 2012 to 2013 = 16.78% 2013 to 2014 = -2.29 Therefore, average growth in past three years as calculated is (-3.19/3) = -1.06% (Yahoo finance, 2014a) BT: 2011: 152.49 2012: 184.75 2013: 234.51 2014: 368.22 2011 to 2012 = 21.16% 2012 to 2013 = 26.93% 2013 to 2014 = 57.02% Therefore, average growth in past three years as calculated is (105.12/3) = 35.04% (Yahoo finance, 2014b) It can be observed from the assessment that Tesco’s market share is also being affected by worldwide economic downturn, growth of discount chains and changing habits of shoppers like that of other retail chains. Even though the recession has affected Tesco’s growth, it had little impact on BT Plc. The share review of BT Plc exhibit continuous growth. One of the reasons can be speculations associated with BT’s business expansion. The other reasons include rapid growth of communication industry and product and service diversification by BT Plc (Yahoo finance, 2014a; 2014b). Secondary objective Four secondary objectives of BT are: a) To create a consumer base that is considerably interested in availing broadband services b) To be the first choice for every small and medium enterprise in the UK as supplier of communication based services. c) To grow as a global leader in the communication industry having an omnipresence worldwide d) Business sustainability and corporate social responsibility (BT Plc, 2014) BT’s secondary objectives have contributed significantly towards its domestic and international growth. Unlike Tesco, BT’s customers are mostly commercial organisations that are either retailers or final consumers of communication services. In this regard, the company is pursuing its second objective in a very effective manner. About 48% of consumer base of BT Plc comprises corporate consumers while 18% of its services are delivered to various financial institutions. In every consumer sector of the industry, the company has established strong market presence. The strategic report of BT plc suggest in 2012 as a standalone company, BT had highest market share by revenue (18%) among its competitors such as FT-Orange, Deutsche Telekom, Telecom Italia and others. in last three years, the profit of the company has increased by 22% from 2012 to 2014 (BT, 2014b; BT Plc, 2014). Four secondary objectives of Tesco are: a) Pursuing international growth in a disciplined manner by integrating internal and external stakeholders b) Establishment of multichannel leadership- physical and virtual retail store c) Gaining greater and stronger market share in the UK d) Corporate sustainability (Tesco, 2014b) Tesco is currently present in the UK, the US, Asia and Europe but the company is underperforming considering the ongoing recession and consumers’ reluctance towards spending disposable income. It is one of the most preferred and largest retail supermarkets in the UK. Market analysis by the company suggests that about 70% consumers prefer repurchasing from Tesco’s store while about 60% consumers enjoy using multichannel services of the firm. The annual report of the company reflects that the company has been successful in retaining majority of its consumer regardless of market slowdown. However, it was determined that the company’s revenue has declined by approximately 16% from 2012 to 2014 (Tesco, 2014c; Daily Mail, 2014; Telegraph, 2014). Question 3: Ratio analysis Ratio analysis discusses relationship between various constituents of financial statements for developing better understanding of a firm’s financial position. A number of ratios have been used in this paper to examine solvency position, efficiency, profitability and investment returns of Tesco and BT. Financial solvency The financial solvency of the companies has been evaluated using interest coverage ratio and debt equity ratio. Interest coverage ratio: The interest coverage ratio is also identified as debt service ratio as it highlights a firm’s ability to pay back various interest expenses associated with its long term debts using its earnings before interest and tax. Tesco: The interest coverage ratio at Tesco has declined from about 12% in 2011 to 6% in 2013 and 2014 due to decline in turnover of the company. However, benchmark suggest that EBIT should be atleast more that 5 or 6 times than that of the interest expenses. Therfore, it can be suggested that the firm is in a position to pay off all its long term interests. BT: In British Telecommunications the interest coverage ratio was observed to vary between 1.5% and 4% between 2011 and 2014. In this context, it is noteworthy that the company is capital intensive and therefore have limited margin of profit which is reflected in its ratios. The positive thing in this regard is that the company is in a stable position to pay off its interest expenses Tesco Plc, 2012; 2014; BT Plc, 2012; 2014). Debt equity ratio: The debt equity ratio establishes the gearing position of a corporation. A high geared is more dependent on debt financing while low geared firms are equity financed. Tesco: The D/E ratio of Tesco has increased from 0.77:1 in 2011 to 0.95:1 in 2014 and the reason can be attributed to growing uncertainty among investors as a result of market recessions. Due to which, a number of shareholders are selling off their shares resulting to greater dependency on debt services. BT: It was ascertained in the fiancial analysis that BT is a high geared firm as it has more debt financing compared to equity. Additionally, in 2013 and 2014 the firm had to buyback large amount of shares resulting to significant fluctuation in debt equity ratio (Tesco Plc, 2012; 2014; BT Plc, 2012; 2014). Efficiency Asset and inventory tunrover ratios have been used for analysing operational efficiency of BT Plc and Tesco Plc. Asset turnover ratio: Asset turnover ratio denotes effectiveness of an organsiation to utilise its assets in increasing its revenue. It was observed in the analysis that Tesco has been significantly involved in overutilisation of asset in last 4 years. It is recommended in this regard that the company must manage its assets so as to prevent early signs of depreciation. Contrastingly, BT’s performance is worth appreciated as the company has maintained balance in appropriate utilisation of resources for increasing revenue. Inventory turnover ratio: Inventory turnover ratio establishes capability of a firm to convert its inventory into sales as rapidly as possible. It was calculated that inventory turnover ratio for BT has been exceptionally high in past four years. The figures are way above 100 and it can be determined thereof that the company is more involved in selling service instead of physical products. However, Tesco’s financial data suggest that the company has a satisfactory level of inventory turnover ratio owing to the nature of its business (retail). Profitability Every organization aims at earning maximum profit. Profitability ratios are of great importance for internal as well external stakeholders, it is mainly reflected by means of gross profit and net profit margin. These margins are determined by comparing gross profit and net profit with respect to net sales. Tesco has witnessed considerable market instability in recent years in terms of product demand and purchasing pattern. Declining demand as a result of recession and shift in consumer purchasing behavior has affected its gross profit and net profit significantly. Owning to the continuously evolving communication industry, BT has been successful in weathering the ongoing recession and economic slowdown. Consequently, the company has witnessed slow yet positive profit growth (Tesco Plc, 2012; 2014; BT Plc, 2012; 2014). Investment returns In this paper, return on equity and return on capital employed has been calculated so as to determine Tesco’s and BT’s investment returns. It was observed that Tesco’s returns have declined from 2011 to 2013 but it has improved in 2014, and the firm is optimistic that it will witness further growth in near future as the economic downturn subsides. On the other hand, return on capital employed has been moderate for BT but its equity returns witnessed significant fluctuation owning to share buyback and retained loss in 2013 and 2014 (Tesco Plc, 2012; 2014; BT Plc, 2012; 2014). Question 4: Cash management and capital budgeting Cash management Liquid cash is very essential for a company’s short term survival as it enhances firm’s liquidity and helps it in appropriate management of working capital. Poor cash management has often resulted in business failure despite long term financial stability. Cash management is essential for retail giants such as Tesco because such organizations are driven by regular transaction of inventories and require large amount of working capital for management of resources, payment of bills and suppliers. The cash flow statement reflects Tesco’s cash management and suggests that the company is significantly involved in operating, financing and investment activities. Therefore, they should maintain appropriate record of cash investment in order to meet various future exigencies. For BT Plc, Cash management is very important because it reflects the firm’s financial performance and its progress towards immediate priorities. Cash management helps in maintaining appropriate liquidity in the business of BT and support firm’s long term growth. Additionally, operating and financing activities in the cash flow statement of the company reveals its capability regarding global consumer management while investing activities denotes its growth (Tesco, 2014a; BT, 2014a). Capital budgeting Capital budgeting is also referred as long term investment appraisal which suggests that it is a process of planning and evaluating every long term investment project in the light of its opportunities, drawbacks, cost associated and return thereof. Capital budgeting techniques are adopted by managers when a project is long term in nature and require heavy investment. Managers adopt a number of techniques such as net present value, internal rate of return and payback period as per the requirements of the project to determine its feasibility (Romano, Tanewski and Smyrnios, 2001). BT Plc is a capital intensive firm and requires capital budgeting techniques for evaluating its projects in different geographical locations. Responsible investment practices within the firm is favored largely with respect to its objectives and consequently capital budgeting will make significant contribution in various decision making therein. Master budgeting is another tool that management of BT Plc must adopt, primarily because it will help the firm to monitor its investments and to manage and minimize cost involve. In context of Tesco, capital budgeting and master budgeting is essential for achieving its long-term and short-term objectives respectively. Market budgeting will help the managers to reduce cost associated with daily activities and enhance working capital management while capital budgeting will support the firm’s international expansion program by helping the management to evaluate various locations and projects worldwide (Brewer, 2000; Cooper, Cornick and Redmon, 2011; Tesco, 2014a; BT, 2014a). Reference list Brewer, P. C., 2000. An approach to organizing a management accounting curriculum. Issues in accounting education, 15(2), pp. 211-235. BT Plc, 2012. Annual report 2012. [pdf] BT. Available at: [accessed 27 November 2014]. BT Plc, 2014. Annual report 2014. [pdf] BT. Available at: [accessed 27 November 2014]. BT, 2014a. About BT Group. [online] Available at: [accessed 27 November 2014]. BT, 2014b. BTs strategy. [online] Available at: [accessed 27 November 2014]. Cooper, W.D., Cornick, M.F. and Redmon, A., 2011. Capital budgeting: A 1990 study of Fortune 500 company practices. Journal of Applied Business Research (JABR), 8(3), pp. 20-23. Daily Mail, 2014. Are supermarket shares an unloved investing opportunity or set to suffer from a deadly spiral of price cuts? [online] Available at: [accessed 27 November 2014]. Greenbank, P., 2001. Objective setting in the micro-business. International Journal of Entrepreneurial Behaviour & Research, 7(3), pp.108-127. Martin, J. D. & Petty, J. W., 2001. Value based management: the corporate response to the shareholder revolution. Oxford: Oxford University Press. Morningstar, 2014. BT Group PLC ADR: major shareholders. [online] Available at: [accessed 27 November 2014]. Reuters, 2014. Major Tesco shareholder cuts stake by two thirds – report. [online] Available at: [accessed 27 November 2014]. Romano, C. A., Tanewski, G. A. and Smyrnios, K. X., 2001. Capital structure decision making: A model for family business. Journal of Business Venturing, 16(3), 285-310. Telegraph, 2014. Billionaire Buffett slashes Tesco stake by a quarter. [online] Available at: [accessed 27 November 2014]. Tesco Plc, 2012. Annual report 2012. [pdf] Tesco. Available at: Tesco Plc, 2014. Annual report 2014. [pdf] Tesco. Available at: [accessed 27 November 2014]. Tesco, 2014a. About us. [online] Available at: [accessed 27 November 2014]. Tesco, 2014b. Major shareholders. [online] Available at: [accessed 27 November 2014]. Tesco, 2014c. Corporate objectives. [online] Available at: [accessed 27 November 2014]. Tesco, 2014d. Core Purpose and Values. [online] Available at: [accessed 27 November 2014]. Yahoo finance, 2014a. Tesco historical share prices. [online] Available at: [accessed 27 November 2014]. Yahoo finance, 2014b. BT historical share prices. [online] Available at: [accessed 27 November 2014]. Appendix Tesco ratio analysis: graphical representation BT ratio analysis: graphical representation Read More