Finance in Tesco free essay sample

Liquidity plays an important role in the success or failure of business. In UK, 75-80% businesses collapse not because they are unprofitable but because of liquidity. For running a business successfully, plans have to be prepared to cope with the changing needs and these must be capable of modification. It is not good to wait until the end of the financial year to discover that the plan started to go wrong 11 months ago. For this purpose managers need information quickly, accurately and this information must reach to the concerned persons directly.They require financial analysis carried out weekly or monthly at least. Availability of funds is prerequisite to start any business. Most important sources of funds available to the organization are, * Equity capital- owner’s own saving * Long-term Loan, borrowed for period of five years or more * Short-term loan, borrowed for (1-4) years 1. Sources of Finance There are various sources of Finance for a business which can be categorized as External and Internal sources of Finance. 1. 1 Internal sources of Finance:These sources do not require the agreement of any other person, party or organization formally such as retained profits. The directors can use those profits in the company without the permission of shareholders. 1. 2 External sources of Finance: These financial sources require the agreement of some outsiders or beyond the Directors and company management. This type of finance adopts the shape of new share in which they require the agreement of potential shareholders. 1. 3 Permanent source of Finance:To get a good understanding of External sources of Finance, it is probably helpful to explain Long Term and Short Term External sources of Finance. Long term Finance can be explained as a source of income which is due for repayment after approximately one year. On the other hand, short term finance is due for repayment only within a year. Permanent capital is the funds obtained from the owners of the business either from their own resources or form the profits retained in the business instead of distributing them as dividends. Long Term capital is the borrowed money from either individuals or from the financial institutions that will have to be repaid at some time. It can be raised by the issue of different shares such as: * Ordinary Shares These shares can be defined as business risk capital which acts as the financial structure of a business. They are usually the owners of the business and appoint directors to act on their behalf. These shares have no fixed rate of dividends and they can be repaid after others or preferred shareholders being paid.They receive dividends if the profits are available to be divided. They are entitled to receive any return in the case of Business wound up after the others have been paid. Owing to the high risks associated with this form of sources of Finance, high rate of return is required. The potential returns of Ordinary shareholders are unlimited in the sense the after paying Preference shares remaining goes to Ordinary shares and they also enjoy the voting right to interfere directly in the election of directors and company governors. * Preference SharesThese shares have the fixed rate of dividends and usually they are given a dividend each year. In case of business wound up they are paid before Ordinary shareholders and they also have the right to claim over the Ordinary Shares. Preference share holders do not have the voting right to directly affect the company decisions * Long Term Capital Long-term capital is raised by borrowing from the money market such as: * Loans and Debentures Loan is another source of finance for a business. Long term loan can be obtained by banks and other financial institutions according to the Business needs.This source of finance is useful in the way that the amount of loan, term period and repayment terms and interests are ope n to negotiation. For instance, if the business does not need the whole payment immediately so it can take some of the total amount when it needs and interest will be due from that date and on that borrowed money only. So these term loans can be quite reasonable and flexible as to conditions. Long term loan can be achieved in the form of debenture which is in fact a document stating the number of units and due dates to be repaid. * Loan notesThese are the form of Loans as they are divided into units usually to be traded on Exchange. Their values change according to the business promotion and change in interest rates. In UK and USA these are known as bonds. Tesco Plc For the current assignment I am going to select Tesco Plc. That small business started in 1919 is become Europe’s largest grocery known as TESCO Plc. Tesco stores (holdings) were re-established in 1981 known as Tesco Plc. They popularized their slogan ‘Every little helps’ and they introduced a new value range in after 1991 (Tesco 2010).With the start of new Century, with the increasing trend of online shopping Tesco started its website and provided its customers with online shopping facilities and expanded its business on international level such as United States, China, India, South Korea, Japan, Turkey, and Czech Republic. Company provided a variety of products to get more popularity, for example, Tesco broadband, personal finance, clothing, Tesco Direct involving home furnishing and products, and music download industry (Tesco 2010). 2. 1 A Rationale for Choice of Tesco The reasons for the selection of Tesco are recent expansions.Over the last decade Tesco is expanding its business despite recession and downfall of share price in the grocery market. Tesco is known as one of the fastest growing retail giant over the last decade. According to Microsoft 2011, the sale growth of Tesco is slowed from 3. 5% in 2008 to 3% in 2009, 2. 6% in 2010 and just 1. 2% in the first few weeks of 2011. The expansion in Tesco business and minor downfall in sales growth despite recession are interesting factors that forced me to select Tesco Plc for the said assignment Financial Analysis of Tesco plc 3. 1 Economic Growth of TescoThe worldwide economic conditions have directly influenced the Tesco performance. But UK’s economic condition has played the principal and major role in its slowed down growth of sale that is indicated by the growth of GDP (Gross domestic product) that has fallen continuously in the years 2008 and 2009 with a slight recovery in 2009. 3. 2 Operational Performance of Tesco Any company’s operational performance is usually measured by its financials. By looking at its Grocery market share which has been decreased recently in the UK. In 2010 it was 31% last year there was no increase in this growth.According to Kaplan publishing UK F9, 2009 Earnings per share   indicates a companys profitability The following formula is used for its calculation EPS (? ) = Net profit Total number of Ordinary shares outstanding Graph 7: Earning per share of Tesco The financial statement of the company has been used to extract the data for the calculation of its earning per share. It is clear from the above graph that Tesco’s ratio was improving in the three year period. In 2008 Tesco’s ratio was 26. 95 pence per share that could be attributed to ordinary shareholders.Tesco’s ratio increased further and its earning per share ratio is 27. 14 p. Whereas Tesco profit increased as well as its share but it maintained its ratio to attract investors. Looking at Tesco’s 2010 performance, it did its best level in managing its operations. G. Asset Management According to Connexions 2010, for analyzing the speed of company’s resources being used as sales or converted to cash how quickly a companys resources (Connexions 2010) the Asset management is the best method of calculation. For example, Fixed assets turnover = Sales Net fixed assets Graph 8: Asset Management of TescoThe asset management ratio was fluctuating in both companies as shown in the above graph. By looking at the scenario, In 2008 Tesco’s assets management ratio was 1. 98 in 2008 In 2009 Tesco ratio decreased to 1. 68 in contrast Sainsbury ratio 2. 24 which is better than previous year. Moving forward to 2010 performance Tesco ratio decrease further to 1. 66 and Sainsbury ratio also fall at 2. 21 which was due to increase in asset which generate fewer sales. (Financial Statements 2008/09/10). Over all in asset management, Sainsbury was performing better than Tesco and was best utilizing its assets to generate sales as compare to Tesco.H. Liquidity Liquidity is another financial term meaning the rate of efficiency that an asset can be converted into cash to fulfil the business obligations. This can be measured by two types of ratios as: a. Current ratio = current assets ? current liabilities b. Quick ratio = current assets – closing inventory ? current liabilities Graph 9: Current ratio of Tesco Tesco’s he current ratio is described in the above graph. In 2008, 2009 and 2010 the current ratio of Tesco was 0. 61, 0. 71 and 0. 73 showing slightly increase in the performance of Tesco over the last three years.