Evaluate Sainsbury plc's Financial Strategy - Essay Example

 Sainsbury Plc is one of the top grocery store chains of stores within the confines of the United Kingdom. The research delves on the company’s historical financial statements. The company’s head office is strategically located in Holborn, United Kingdom. The research delves on finding the appropriate types and amount of funds needed to increase compliance with the government’s business and other related laws (Sainsbury 2012). The financial statements of Sainsbury Plc persuade the loan companies to eagerly approve the Sainsbury Plc loan requests. The same financial statements easily encourage the current and future stock investors to put more funds into the Sainsbury Plc coffers. Evaluation of Sainsbury plc’s financial strategy. 1. Evaluation of Sainsbury’s choice of sources of funds using appropriate theory: Accounting theory dictates that there are several sources of funds (Nikolai 222). In layman’s terms, the sources of funds include all amounts that flow into the coffers of the company, Sainsbury Plc. The sources of funds include the amounts paid by the customers for purchasing Sainsbury Plc’s products and services. The sources of funds include the amounts received from loans and other liabilities. The sources of funds include the amounts invested by the Sainsbury Plc’s current and future stock investors. The other sources of funds include the amount received for selling the company’s assets. The Sainsbury Plc assets include all other non-cash and cash equivalent properties. The noncurrent assets include the property, plant, and equipment, intangible assets, inventories, and derivative financial instruments (Sainsbury 51). Sainsbury’s acquires several sources of funds. In terms of cash flow from operating activities, the cash inflow from operating activities amounting to £1,291 m during 2012 (Sainsbury 71), £1,138 m during 2011 (Sainsbury 71), and £1,206 m during 2010 (Sainsbury 53). The company’s cash flow from operations included cash and cash equivalents amounting to £ 739 m in 2012 (Sainsbury 98), £ 501 m in 2011 (Sainsbury 98), and £ 837 m during 2010 (Sainsbury 83). In addition, cash inflow from operations also include amounts received from increase in trade and other payables amounting to £ 182 m in 2012 (Sainsbury 98), £ 105 m in 2011 (Sainsbury 98), and £ 101 during 2010 (Sainsbury 98). The company also generated cash inflows from proceeds from the disposals of the J Sainsbury Plc’s property, plant, and equipment activities amounting to £314 m for 2012 (Sainsbury 71), £282 m for 2011 (Sainsbury 71), and £139 m for 2010 (Sainsbury 53). The disposals are classified as sources of funds under the investing activities. The company also generated cash inflows from disposal of 2012 financial assets £ 40 m. The also generated cash inflows from interest received £ 18 m during 2012 (Sainsbury 71), £ 19 m during 2011 (Sainsbury 71), and £ 18 m during 2010. The company also generated cash inflows from dividends received £ 1 m during 2011 and £ 2m during 2010 (Sainsbury 53). Further, the company generated cash inflows from the proceeds of issuance of ordinary shares of stocks distributed to the company’s current and new stock investors. The stock investments amounted to £ 14 m during 2012 (Sainsbury 71), £ 17 m during 2011 (Sainsbury 71), and £250 m during 2010 (Sainsbury 53). Furthermore, the company generated cash inflows from the proceeds of long term borrowing (Fortune 22). The long term borrowings include long term bank loans. The loans amounted to £ 391 m during 2012 (Sainsbury 71), £ 45 m during 2011 (Sainsbury 71), and £ 235 m during 2010 (Sainsbury 53). 2. Evaluation of Sainsbury’s dividend policy by using appropriate theory: Sainsbury Plc distributed dividends during the 2010 to 2012 accounting periods. The stockholders generate dividends from their stock investments (Needles 639). The company paid £ 285 m dividends to its stockholders on record during 2012, £ 269 m during 2011, and £ 241 m during 2010. The company paid its stockholders an amount equal to 32.0 pence per share during 2012 (Sainsbury 71), 34.40 pence per share during 2011 (Sainsbury 51), and 32.10 pence per share during 2010 (Sainsbury 51). 3. Recommendation of an appropriate financial strategy for Sainsbury to be followed over the next 3 years. Based on the above historical financial statement data, finance theory dictates that it is highly recommended that investors and loan entities infuse funds in to the Sainsbury Plc coffers in exchange for loan interest payments and stock dividends, maximizing the scarce Sainsbury Plc fund resources (Sainsbury 2012). It is highly recommended that Sainsbury Plc should continue its current fund management priorities. Continuing with the current fund schemes will generate the same or higher forecasted future revenues and profits. For example, the Sainsbury Plc’s 2011 revenue, £21,102 m and 2012 revenue, £ 22,294 m, creates a trend that the company will generate revenues higher that £ 22,294 during 2013. In the same manner, the Sainsbury Plc’s 2011 cost of sales, £19,942 m and 2012 cost of sales, £ 21,083 m, creates a trend that the company will generate cost of sales that is higher that £ 21,083 during 2013. Likewise, the Sainsbury Plc’s 2011 gross profit, £1,160 m, and 2012 gross profit, £ 1,211 m, creates a trend that the company will generate gross profit that is higher that £ 1,211 m during 2013. Lastly, the Sainsbury Plc’s 2011 net profit, £640 m, and 2012 net profit, £ 598 m, creates a trend that the company will generate net profit that is higher that £ 598 m during 2013 (Sainsbury 68). Further, the Sainsbury Plc company’s financial statements show that the company performed favorably during 2012 (Sainsbury 123). The company’s 2012 income statement shows that the company generated revenues amounting to £ 22,294 m, Cost of sales £ 21,083, Gross profit of £ 1,211, Operating profit £874 m, and net profit £ 598 (Sainsbury 71). The company’s 2011 income statement shows that the company generated revenues amounting to £ 21,102 m, Cost of sales £ 19,942, Gross profit of £ 1,160, Operating profit £851 m, and net profit £ 640 (Sainsbury 51). The company’s 2010 income statement shows that the company generated revenues amounting to £ 19,964 m, Cost of sales £ 18,882, Gross profit of £ £1,082 m, Operating profit £710 m, and net profit £ 585 (Sainsbury 51). Table 1 Accounting Equation: Sainsbury Plc 2011 to 2012       2012     2011           Percent     Percent   Assets   12,340.00 100.00   11,399.00 100.00   Liabilities   6,711.00 54.00   5,975.00 52.00   Capital   5,629.00 46.00   5,424.00 48.00                 The above table shows that company’s 2011 fund management scheme includes funds generated from liabilities amounting to 52 percent, £ 5,975 m (Sainsbury 2012). The funds generated from investments and other stockholders’ equity sources only account for 48 percent of the company’s funds, £ 5,424. The percentage complies with the leverage financial theory indicating that there should be a one to one relationship between borrowed funds and stockholders’ investments (Schroeder 22). During 2012, the company’s liabilities represented a higher 54 percent of the total Sainsbury Plc funds, £ 6,711. Correspondingly, the company’s investments and other stockholders’ equity amounts represent a lower 46 percent, £ 5,629. Table 2 Accounting Equation: Sainsbury Plc 2010 to 2011 2010 2011 Percent Percent Assets 10,855.00 100.00 12,340.00 100.00 Liabilities 5,889.00 54.00 6,711.00 54.00 Capital 4,966.00 46.00 5,629.00 46.00 The above table shows that company’s 2011 fund management scheme includes funds generated from liabilities that amount to 54 percent is similar to the prior year’s liability to total assets’ 54 percent ratio (Sainsbury 2011). The funds generated the 2011 investments and other stockholders’ equity ratio. The ratio outcome is equal to the prior 2010’s 46 percent liabilities to total assets ratio. During 2010, the company’s liabilities represented a higher 54 percent of the total Sainsbury Plc funds, £ 5,889. Correspondingly, the company’s 2010 investments and other stockholders’ equity amounts represent a lower 46 percent, £ 4,996. The percentage ratio is a good financial statement analysis tool. The tool shows the relationship between two different accounts. However, the best liabilities-to-stockholders’ equity ratio is characterized by a one to one relationship (Warren 335). Normally, the banks and other loan institutions use the company’s historical financial statements as a basis for approving or disapproving the loan applicant’s request for loans (McLean 61). However, Sainsbury Plc can prefer to generate funds from investments alone, saving on interest charges (Mayo 285). Dividends are generated from the company’s net profit operations. The company can offer either dividends on preferred stocks or dividends on common stocks (Brigham 72). The basic formula for computing the dividends is to divide the company’s net income divided by the total number of outstanding shares that are on record. The result is the amount that each stockholder will receive as dividends per share. Further, Sainsbury Plc’s financial statements show that the company did profitably well during the 2012 and 2011 accounting periods. The company continued to generate net profits during 2012 [£ 598 m], 2011 [640 m], and 2010[£ 585 m]. Consequently, the banks and other loan facilities can fearlessly and confidently grant the Sainsbury Plc’s huge long term loan application. Focusing only on loans as fund source will reduce the company’s capacity to serve the needs and wants of the company’s current and future customers by one half. If the company refuses to accept stock investments from the company’s current and future investors, the company generates a decline in the company’s grocery products and services by 50 percent (Sainsbury, 68). Using the above fund theory, the investors will only receive dividends if the company generates profits (Gerver 51). For this reason, many current and future investors request a copy of the company’s financial historical statements. The financial statements will show the trend analysis indicating that the company either generated profits or losses during the past two or more years. The trend is used to forecast future profits and customer demands. In the same light, the same trend analysis will predict that the company that generated net loss figures during the past two or more year is expected to similarly generating net loss amounts during the next year or years of business transactions. Trend analysis shows that Sainsbury Plc is an established retail or grocery establishment in the United Kingdom (Randall 76). However, generating funds exclusively from the current and future stock investors would not be favorable (Albrecht 685). There is a limit to the number of willing investors. Focusing only on the investors to fund the company’s business operations would violate the leverage theory of finance. The leverage theory dictates that the optimum fund source should be a one to one relationship between the loans and stock investments. Focusing only the stock investment fund source would reduce the company’s capacity to sell more products and services to the company’s current and future customers by 50 percent or even higher. The life cycle theory states that businesses will come and go. Some businesses close shop after a few months or years (Burke 161). Other better managed establishments last for more than ten years. Sainsbury Plc’s life cycle will last more than ten years because there is a continuing need for grocery products. The people often go to grocery stores to buy food, and other personal necessity products. Consequently, Sainsbury Plc’s financial strategy of maximizing loans and stockholders’ investments to generate revenues will catapult the Sainsbury chain of retail grocery stores’ life well beyond ten years from today. The company’s financial strategy complies with Lintner’s financial theory (Lim 128). The company optimizes dividends and corporate growth under uncertainty by selling fast moving or very popular products within the Sainsbury Plc’s stores. Fast sales generate higher revenues. Consequently, higher revenues precipitate to higher net profits and higher dividend incomes (Stevenson 138). Using current economic factors in the United Kingdom retail grocery market segment, Sainsbury Plc is a recognized retail industry standard. With the United Kingdom population growing in size, there is a corresponding increase in the demand for grocery and retail store products and services. In 2011 alone, the United Kingdom grocery business generated a combined sales increase from 2007’s 133 billion, 2008’s 140 billion, 2009’s 2010’s 146 billion to 157 billion in 2011(http://www.igd.com). The competitors of Sainsbury Plc in the United Kingdom market segment include the Tesco retail group of grocery chains. Tesco generated a market price to earnings of 939.54 stock market price to earnings per share ratio during 2011. Similarly, another competitor, Morrison group of retail grocery U.K. chain of stores generated a higher 950.55 stock market price to earnings per share ratio. J. Sainsbury Plc was able to generate the higher 1,016.47 stock market price to earnings per share ratio for Sainsbury 2012 financial report. In addition, Greggs Plc generated the highest 1,225.71 stock market price to earnings per share ratio during 2012 (Sainsbury 2012). Consequently, Sainsbury Plc is one of the top retail grocery store chains of stores within the confines of the United Kingdom (Berry 131). Sainsbury Plc sells grocery and other related items, as shown as in the company’s historical financial statements. The company’s head office is strategically located in Holborn, United Kingdom. The financial statements of Sainsbury Plc persuade the loan companies to eagerly approve the Sainsbury Plc loan requests. The same profit-labeled Sainsbury Plc financial statements easily encourage the current and future stock investors to put more funds into the Sainsbury Plc coffers. Evidently, the above discussion indicates that both loan entities and stock investors will profitably generate favorable outcomes from their infusing funds into the Sainsbury Plc grocery chain of United Kingdom stores, with Sainsbury Plc filling the increasing needs for grocery retail products and services. Works Cited Albrecht, Steve. Accounting: Concepts and Applications. London: Cengage Learning Press, 2010. Print. Berry, Aidan. Accounting in Business Context. London: Cengage Learning Press, 2005. Print. Brigham, Eugene. Financial Management: Theory and Practice. London: Cengage Learning Press, 2011. Print. Burke, Warner. Organisation Change: Theory and Practice. London: Sage Press, 2010. Print. Fortune, Peter. Security Loans at Banks and Nonbanks. London: Diane Press, 2009. Print. Gerver, Robert. Financial Algebra. London: Cengage Learning Press, 2010. Print. Igd. U.K. Grocery Market Performance. Retrieved November 20, 2012 from Lim, Kian. Probability and Finance Theory. London: World Scientific Press, 2011. Print. Mayo, Herbert. Investments: An Introduction. London: Cengage Learning Press, 2010. Print. McLean, Robert. Financial Management. London: Cengage Learning Press, 2003. Print. Needles, Belverd. Financial and Managerial Accounting. London: Cengage Learning Press, 2010. Print. Nikolai, Loren. Intermediate Accounting. London: Cengage Learning Press, 2009. Print. Randall, Geogfrey. The Grocers:The Rise and Fall of Grocery Chains. London: Kogan Press, 2011. Print. Sainsbury Plc. 2012Sainsbury Financial Statements, retrieved November 19, 2012 from Sainsbury, Plc.2012 Sainsbury Financial Statements, retrieved November 19, 2012 from Sainsbury Plc, Income Statement. 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