Investment decisions are the most important for businesses and directly affect profitability, business organizations must make them properly. These decisions also involve significant financial resources. To choose a feasible choice for investment, commercial enterprises must appropriately assess the options that are accessible. Organizational management must take both internal and external issues into account for this reason. Financial tools and techniques should be used to assess the data gathered from these aspects. The evaluation of the effect of exploring new market prospects on Sainsbury Plc’s financial performance forms the basis of the current project report (Sainsbury, 2015).

One of the biggest retailers in the world, Sainsbury’s employs over 161,000 people across 1312 locations. The influence of Sainsbury’s acquisition of new market prospects in developing countries on the company’s financial performance is examined in the current paper. Ratio calculations, the rationale behind entering emerging markets, cost data to aid in decision-making, and other relevant aspects are among the review areas. Entering emerging markets offers fantastic chances to expand market share and boost profitability. Furthermore, it helps to improve one’s reputation internationally and fortify one’s financial situation.

Corporate Overview of Sainsbury

In 1869, John James Sainsbury created Sainsbury. With a 16.9% market share, the cited company is the second-largest grocery chain in the United Kingdom. Currently, the corporation primarily operates its supermarkets and convenience stores. Additionally, they work in the financial sector, in phone networks, in online retail, and in gas stations. The company’s management achieved a 282% growth rate between 1990 and 2010. According to the CACI analysis, Sainsbury’s market dominance is steadily growing in eight postcode areas. In the retail and non-retail sectors, Sainsbury’s offers a wide range of goods and services (Broadbent and Cullen, 2012).

Sainsbury’s management is constantly working to increase their market shares in developing countries like China in order to create new commercial prospects. The reason for this is that, as compared to developed nations, developing economies have the potential for rapid economic expansion (Herman, 2011). Additionally, because the corporation was able to obtain new funding, this method had given Sainsbury’s several cost advantages. Sainsbury has used the generated funds to expand both domestically and internationally.

Task 1: Financial Implications of Sainsbury’s Expansion into Emerging Markets

Investment Strategy Objective

Sainsbury’s primary goal in entering new markets was to increase their worldwide market share and fortify their financial position. In November 2010, Sainsbury Plc’s directors said that the company would think about entering two or three emerging markets. In order to scope out the Chinese retail sector, the company established a sourcing office in Shanghai with approximately 100 employees and a staff of six managers. In this regard, the company’s board of directors had declared that part of their long-term business goal was to expand in China. The corporation had to forgo several investment possibilities in established nations, like Europe, in order to take advantage of this market potential.

The net profit of the company has increased by 37% as a result of its operations in China, according to the financial prospects of the company’s directors. Property sales and an increase in the company’s overall turnover have contributed to this expansion (Nickels, McHugh, and McHugh, 2010). Sainsbury’s primary goal with this investment plan was to increase their overall market share in the retail sector. They also intended to take advantage of China’s economy’s rising growth rate, which is a result of consumers’ steadily rising spending power. In order to increase revenue and profitability, the company has also extended its operations into other sectors, including the banking sector, phone networks, online commerce, and petrol forecourts. Over the last five years, the company’s revenues have increased because of these investment tactics (Siano, Kitchen, and Confetto, 2010).

Sainsbury’s Expansion into China: Implications for Financial Performance

By doing an intra-company comparison of Sainsbury’s financial statistics, it is possible to evaluate the effect of the company’s development into China on its overall financial performance. Ratio analysis can be used to identify changes in Sainsbury’s financial performance. The efficacy of the investment choices can be evaluated based on these variables. It is evident from the company’s financial measures that the financial performance has improved in a number of ways. Nevertheless, investment techniques also have a detrimental effect on the company’s financial worth. From 2010 to 2014, the company’s turnover increased steadily through its development into emerging countries; however, in 2015, this growth turned negative.

Furthermore, turnover is rising at a slower rate of growth (Swayne, Duncan, and Ginter, 2012). This element demonstrates that while investment techniques initially helped the organization achieve expansion, their effectiveness has since decreased. According to Sainsbury’s efficiency ratios, or return on invested capital, profitability throughout the preceding five years has been consistent, but in 2015, negative returns were produced. This feature illustrates how an increase in sales is equal to an increase in assets, which keeps their efficiency unchanged (Conway, 2013). This feature illustrates how Sainsbury’s investment strategy prioritizes capital profitability over working capital management effectiveness. Sainsbury’s investment ratios demonstrate that the company is giving its stockholders a respectable return. Based on statistics from 2010 to 2014, ROE and EPS remained stable over that time. Nevertheless, it was lowered in 2015.

Task 2: Evaluating Costing Methods to Support the Decision-Making Process

Rather than focusing on a single source, Sainsbury’s management integrates with a range of providers. The corporation is cutting back on capital expenditures to increase cost reductions because of the significant findings. Sainsbury’s management is sourcing ethically in this regard (Lusardi, 2011). To achieve this, they guarantee that their cost of production model pays suppliers so that improved relationships may be maintained. Additionally, Sainsbury’s is still addressing the sustainability of its products by working with their suppliers. According to the company’s director’s remark, supply chain tactics are being used to improve the network. They are increasing their profitability by effectively utilizing the resources at their disposal by venturing into new markets.

To achieve total cost advantage, they are also shifting these sources to their operating countries (Farmer et al., 2012). The client directly benefits from these cost reductions. It is evident from Sainsbury’s recent statistics that the corporation has lowered the pricing of 1,100 products. Additionally, they offer their products at lower costs than their rivals without compromising on quality. To make sound business investment decisions, Sainsbury’s management use the following cost strategies in their accounting system:

  • Cost audit: To keep an eye on all capital and revenue expenditures, Sainsbury’s has a clause requiring cost audits to be carried out every accounting year. By using this method, the firm can determine how money is allocated throughout the corporation to determine areas that require development (Aras, Aybars, and Kutlu, 2010).
  • Costing methods: Sainsbury use a number of methods, including department costing and product costing, to ascertain reasonable cost estimates. Individual profitability can be ascertained for subsequent decisions through the cost accounting of several departments. Likewise, this method can be applied to the nations to ascertain the returns that they have supplied. Future investment decisions are made with these findings in mind, with the goal of increasing sales and profitability (McElroy and Van Engelen, 2012).

Task 3: Using Strategic Costing and Activity-Based Costing for Business Decisions

Appropriate company decisions require comparing department costs and profits, which is made easier with the use of financial analysis. The complexity of Sainsbury’s actual operational activities necessitates a logical approach to costing so that the business may address inherent costing concerns. Sainsbury’s management can reduce direct costs and increase profits by implementing an activity-based approach (Shields et al., 2015). Sainsbury will be able to uncover hidden waste cost consumption under the guise of overhead with the help of activity-based costing. Furthermore, it will determine how each country’s costs are allocated in relation to the returns produced. In this way, management evaluates investment decisions effectively. In contrast to Sainsbury’s cost allocation in China, it can be said that the company has made significant capital investments for expansion and has produced good returns on those investments throughout the first five years. The 2015 financial data, however, does not demonstrate an efficient use of cash.

The reason for this is that the business had a negative return (Garcia-Castro, Ariño, and Canela, 2010). Taking this into account, Sainsbury’s management must reallocate their sources and tactics in order to generate healthy earnings. Sainsbury’s can employ strategic management accounting for this. Strategic management accounting considers the company’s internal and external aspect to make sound decisions. Sainsbury has taken these factors into account for efficient cost allocation when creating budgets and performing break-even analyses in order to make capital investments in new market prospects. A corporation can accomplish its goals and objectives through good financial planning that takes into account information from external elements (Epstein, Buhovac, and Yuthas, 2015).

Sainsbury’s management must budget for operating expenses in order to make wise investment choices if the company is to develop and succeed in the future. Sainsbury’s managers had established the budgets based on operational operations by taking this factor into account. Since corporate headquarters can analyze the costs of various activities in various countries and allocate overheads based on actual resource consumption, this element is supported by the activity-based costing technique. Activity-based costing is used by a number of Sainsbury’s subsidiaries. In this regard, the organization’s expenses are distributed according to appropriate cost drivers. According to a study by Faems et al. (2010), the two most crucial methods for assessing the decision-making process are strategic management accounting and activity-based costing. The reason for this is that these techniques aid in the proper assessment of business data so that sound decisions can be made.

Conclusion

The current analysis leads to the conclusion that business organizations’ performance depends on their investment choices. Sainsbury’s increasing productivity and profitability can be attributed to their investment in growth plans. Effective financial planning helps close the gap between needed and accessible financial resources. Additionally, management uses strategic management accounting to estimate future market demand and assess economic and trend aspects. They had developed more effective plans and tactics based on this information. The business must, however, change these tactics because they yielded a negative return the previous year. It is therefore advised that Sainsbury change its investment plans in order to increase profitability.

References

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