Strategic Financial Management Essay On Tesco And Benedict Co.

Required:

Prepare a report for your manager which:

1) Using the Annual Report of Tesco.
a) Explains the term ‘stakeholder’ and identifies three types of stakeholder of Tesco. 15%
b) Analyses how the Environmental and Social Review and the Corporate Governance Report help Tesco demonstrate its performance in terms of its corporate and social responsibilities to two of the stakeholders identified in a)above.
2) Analyses and evaluates the financial position of Benedict Co. using a range of financial ratios to meet the requirements of potential customers, investors, lenders and suppliers. Your analysis should:
a) Explain the purpose and relevance of the chosen ratios.
b) Include the results for each chosen ratio and reasons for the movement between the two years.
c) Highlight any aspects of the performance of Benedict Co. which would give cause for concern.
d) Critically evaluate the application of financial ratios in interpreting and measuring the performance of a company.

Stakeholders and Environmental Sustainability of Tesco

Strategic financial management is considered as a specific planning process that shows the usage of the financial resources of the companies by the management with the aim to achieve the financial goals and objectives (McKinney 2015). Another major aim of this is the maximization of the value of the shareholders in the long run. Under the process of strategic financial management, the managements of the companies are needed to consider all the relevant aspects (Finkler et al. 2016). This report aims to achieve two specific objectives. The aim of the first part of the report is the analysis of the stakeholder along with environmental and sustainability aspects of Tesco. For this reason, this part involves in the analysis of the 2016 Annual Report of the company. The next part of the report involves in the analysis as well as evaluation of the financial position of Benedict Co. For this reason, the analysis of some of the ratios is performed with the aim to analyze the financial position of the company.  

In the modern business organizations, Stakeholder is considered as a major aspect for the managements of the companies. A stakeholder can be regarded as a person or group having an interest in the business operations of the companies. It needs to be mentioned that the support of the stakeholders is needed in order the business organizations to be successful. For this reason, the actions, objectives as well as policies of the business organizations have impacts on the interests of the stakeholders. The stakeholders can be internal or external to the business organizations (Bourne 2016).

A stake can be regarded as a crucial interest in the activities of the businesses and it may include property interest, ownership, legal interest, business obligations and moral rights. The examples of some of the key stakeholders of the businesses are employees, suppliers, creditors, directors, owners, government, union, communities and others (Mok, Shen and Yang 2015). In this context, it needs to be mentioned that all the stakeholders are not equal in the companies. For example, customers of the companies are entitles to fair trading, but they are not entitled to the same consideration as the employees of the companies. For this reason, it is needed for the managements of the companies to consider all these aspects in the process of stakeholder management (Verbeke and Tung 2013).  

It can be observed from the 2016 Annual Report of Tesco that the company has provided three stakeholders with most importance and they have considered them as the key stakeholders. These three key stakeholders are Customers, Suppliers and Colleagues.

Corporate Social Responsibility of Tesco

Customers: The 2016 Annual Report of Tesco states that the company has considered customers as one of their key stakeholders. Customers are the people and organizations that buy the products and services of the company. Tesco has made some major commitments for their customers. The main aim of the company is to take simple steps to make big difference for them (tescoplc.com 2018).

Suppliers: After the customers, Tesco has considered their suppliers as another key stakeholder of their business operations. In this context, the main aim of the company is to work with their suppliers by developing a cordial relationship with them (tescoplc.com 2018).

Colleagues: Among the three key stakeholders, Tesco has considered their colleagues one of them. According to Tesco, they can achieve the goals and objectives of their business with the skills, expertise and dedication of their colleagues all over the world (tescoplc.com 2018).

In the current business environment, the companies have to consider some major aspects at the time to conduct their business operations and one of them is their corporate and social responsibilities towards their key stakeholders. There is not any exception of this fact in case of Tesco as the company is also responsible for their corporate and social responsibilities. In this process, the business organizations have the option to select the ways to disclose the information about their corporate and social responsibilities (Schwartz 2017).

As per the first method, companies can publish their corporate and social responsibility report separately for every year that will contain the information about their performance in corporate and social responsibilities towards the key stakeholders (Tai and Chuang 2014). As per the second method, the companies can publish their integrated annual report where they will publish the information related to social and corporate responsibilities in the annual report. It can be observed from the 2016 Annual Report of Tesco that the company has provided the required information for their corporate and social responsibilities in one single report (Cheng, Ioannou and Serafeim 2014).

As per the 2016 Annual Report of Tesco, there are two parts in the report where the Tesco has provided the required information; they are Environmental and Social Review; and Corporate Governance. It has been discussed in the earlier section that there are customers, supplies and colleagues are the three key stakeholders for Tesco. The following discussion shows the performance of Tesco in terms of corporate and social responsibilities for customers and colleagues in the Environmental and Social Review and Corporate Governance report (Servaes and Tamayo 2013).

Financial Analysis of Benedict Co.

Customers: In case of the customers, the main aim of Tesco is to create a big difference for their customers with the help of small steps. The aim of the company is to make the customers choose the healthier products with reduction in wastes. In addition, the tendency of the company is to respect the human rights of their customers according to the UN Universal Declaration of Human Rights. It can be seen that the company has addressed the issue of the customers with the help of their Risk Management Framework (tescoplc.com 2018). For example, Tesco is facing the issue to loss the market share as they are unable to consolidate loyalty and rebuild trust among the customers. As a corrective measure, Tesco has updated their Brand guidelines for providing group-wide consistency for their customers so that they can use the brand name of Tesco. In addition, the company has also introduced new Performance Share Plan (PSP) for their key stakeholders like customers with a 20% weighting (tescoplc.com 2018).   

Suppliers: In case of the suppliers, the main aim of Tesco is to work collaboratively with their suppliers with the aim to source responsibly so that sustainable supply chain can be developed. The company is on the process to develop a range of methods for forecasting and ordering from the suppliers with the aim to reduce waste (tescoplc.com 2018). Apart from this, like the customers, the company has also introduced new PSP in order to build more effective relationship with their suppliers. According to the new Code of Conduct launched by the company in 2015, it is now required for the company to deal with their suppliers in more fairly and lawful manner. This code also contains some specific provisions related to the payment to the suppliers that include retailer obligation to pay the suppliers without any delay and others (tescoplc.com 2018).

It can be seen from the above discussion that Tesco has disclosed the information about their corporate and social performance towards their key stakeholders like customers and suppliers. Most importantly, it needs to be mentioned that Tesco has developed six simple key business performance metrics with the aim to measure their performance in both the financial and non-financial aspects (tescoplc.com 2018). Two of them are Customers and Partnership. As per these KPIs, there an 1.2% growth in the customers loyalty for the company and the supplies satisfaction has increased to 70% with a boost to 12% (tescoplc.com 2018). All these aspects indicate towards the fact that Tesco has been able in disclosing the information about their performance in corporate and social responsibilities. Hence, on the basis of the above discussion, it can be said that Tesco has been able in providing their corporate and social responsibilities in a well manner with the assistance of Environmental and Social Review and Corporate Governance (tescoplc.com 2018)

Gross profit ratio is a profitability metric for assessing the financial health of the companies by assessing the money left over from revenue after the cost of goods sold. It is relevant as it expresses whether there is sufficient revenue to cover the costs.Net profit ratio helps in assessing the remaining profit after the deduction of all kinds of costs (Delen, Kuzey and Uyar 2013).

Current ratio is considered as a tool to measure the company’s ability for paying the current business obligations. It is relevant as it helps in identifying the weaknesses in the liquidity position. Quick ratio expresses the ability of the companies to pay off the current liabilities with liquid or quick assets. For this reason, inventory in removed from the equation. This company is relevant as it assesses whether the companies heavily rely on inventory or other assets to pay the current obligations (Weil, Schipper and Francis 2013).

The main aim to use interest coverage ratio is to assess how easily a company can pay their expenses related to interest on the outstanding debts and this aspect makes this ratio relevant to the businesses. The debt-to-equity ratio helps in measuring the company’s financial leverage that is the amount of debt financing to the amount of equity financing. This ratio is considered as relevant as it helps in measuring the ability of the companies to repay the long-term business obligations (Baños-Caballero, García-Teruel and Martínez-Solano 2014).

Inventory turnover days help the companies in assessing the average number of days they hold the inventors before selling them. This ratio is relevant as it shows how much money a business is carrying with the inventories. Trade receivable days show the number of days per year the companies collect their average accounts receivable. This ratio is important as it shows the ability of the companies to effectively issue credits to the customers and to collect funds from them on timely manner. Trade payable days help in assessing the average time the companies take to pay their current business obligations to the trade creditors that are vendors, suppliers and other companies (Gitman, Juchau and Flanagan 2015).  

According to table 1 in appendix, there is an increase in the gross profit of Benedict Co. in 20X1 from 20X0 that is from 41.77% to 48.05%. Increase in both the sales and gross profit in 20X1 is the main reason for the increase in gross profit ratio. The same table shows opposite result in net profit ratio as there this ratio decreased in 20X1 from 20X0 that is 21.43% from 28.11%. It can be observed that net profit of the company decreased in 20X1 from 20X0; and it is the main reason for the decrease in this ratio (Dahmen and Rodríguez 2014).

As per table 2 in appendix, Benedict Co. witnessed decrease in the current ratio in 20X1 as compared to 20X0 that is from 1.25 to 1.19. The main reason behind the decrease in current ratio is the increase in current liabilities in 20X1 from 20X0. At the same time, the proportion in the increase in current liabilities is bigger than the increase portion in the current assets. The same table shows decrease in quick ratio in 20X1 from 20X0 that is from 0.75 to 0.70. Increase in inventory in 20X1 from 20X0 can be considered as the main reason for this (Vodová 2013).

According to table 3 in appendix, major decrease in the interest coverage ratio can be seen for Benedict Co. in 20X1 from 20X0 that is 7.38 from 18.40. The reason is that the proportion of increase in interest expenses is more than the proportion in the increase in EBIT. As per the same table, increase in debt-to-equity ratio of the company can be seen in 20X1 from 20X0 that is 0.81 from 0.51. It can be seen from the provided information that there is increase in the non-current liabilities of the company in 20X1 from 20X0 and it is the reason for the increase in this ratio (Damodaran 2016).

According to table 4 in appendix, Benedict Co. has witnessed an increase in inventory turnover days in 20X1 from 20X0; that is from 65.45 days to 118.63 days. Increase in the amount of inventory in 20X1 can be considered as a major reason for this increase in this ratio. As per the same table, there is also increase in the trade payable days in 20X1 from 20X0; that is 155.13 days from 108.24 days. Increase in the amounts of total purchase as well as accounts payable can be considered as the reason for this difference. The same table also states that the company has registered increase in trade receivable days in 20X1 from 20X0; that is 90.06 days from 55.70 days. It can be seen that there is increase in both the credit sales and accounts receivable in 20X1 from 20X0; and it is one reason for the difference (Persson and Remling 2014).

The first aspect of concern for Benedict Co. is the decrease in their net profit margin in 20X1 from 20X0. Profitability is considered as a major mean for ensuring the survival of the companies. Thus, the decrease in net profit as well as net profit ratio can cause harm for the company (Selfano, Peninah and Sarah 2014).

The next area of concern for Benedict Co. is decrease in current ratio in 20X1 due to increase in current liabilities. In addition, the current ratios in both the years are less than the industry standards that is 1.6. At the same time, the quick ratios of Benedict Co. for both the years are less than the industry standards that is 1.0. All these aspects imply that the liquidity position of the company is not as effective as it requires to be. In this situation, it will not be possible for Benedict Co. to compete with the other companies in the same industry (Hong, Huseynov and Zhang 2014).

After that, another area of concern for the company is the decrease in power to make interest payment in a year as decrease in this ratio can be seen in 20X1 from 20X0. It will increase the burden of interest payment on the company. In 20X1, increase in debt-to-equity ratio can be seen for Benedict Co. It implies that the capital structure of Benedict Co. consists of 81% of long-term debts and 20% of equity. This is a major concern for the company as it makes Benedict Co. highly leveraged and increases the amount of interest payment in a year (Dener and Young 2013).

Massive increase in the inventory turnover days is a matter of concern for the company as it can be seen that the inventory turnover days of Benedict Co. are more than the inventory standards that is 60 days. It implies that the company is holding inventory for longer time before selling it. Another area of concern for the company is trade payable days as this is also higher than the industry standard that is 90 days (Mien and Thao 2015). It implies that the company is holding the money for more time before making the payment to the creditors. The last area of concern for Benedict Co. is the trade receivable days. The industry standard for this is 55 days while the company has 90.06 days in present. It implies that the company has not been able in recovering the money from their trade debtors on speedy basis. All these are the areas of concern for Benedict Co..

The analysis of financial ratios is majorly helpful in the interpretation as well as measurement of the performance of the business organizations. The analysis of different kinds of financial rations is regarded as a major tool to analyze and evaluate various components of financial statements. For example, the liquidity ratios are concerned with the current assets and current liabilities in the financial statements (Zeitun, R. and Tian 2014). This analysis leads to gain understanding about the financial position of the companies. For this reason, various users like investors and creditors use ratio analysis to assess the financial position of the companies. In addition, with the application of the financial ratios, the users can judge the efficiency of the management and operations of the companies. It helps them acquiring knowledge on the fact that how well the companies are utilizing their assets in order to earn profits (Zeitun, R. and Tian 2014).

With the application of the analysis of different ratios, the users like investors and creditors can know about the weaknesses in the financial performance of the companies; it is also helpful in establishing the future trend of the financial performance of the business organizations (Chandra 2017). After that, the users become able in the interpretation of the financial performance of the business organizations in different segments; such as profitability, liquidity, efficiency, investment, working capital and others. Thus, on the basis of the above discussion, it can be said that the users can analyze the financial performance of the companies in an effective manner with the help of ratio analysis (Chandra 2017).

Conclusion

The above discussion indicates towards the fact that the companies are needed to take into consideration the interests of the key stakeholders of their business. For the business operations of Tesco, the key stakeholders are customers, suppliers and colleagues. The above discussion indicates towards the fact that the company has been able in disclosing the information in the areas of their corporate and social responsibilities with the help of the Environment and Social Review and Corporate Governance sections in their financial statements. The second part of the report indicates towards the fact that each of the chosen ratios has own purpose as well as relevance in the financial interpretation. The ratio analysis part shows that there are certain differences in the ratios between these two companies; and certain aspects can be held responsible for these differences; like increase in liabilities, decrease in net profits and others. In addition, it can also be seen that some of the major ratios are less than the industry average; and all these aspects create concern for the company.

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