1.1 Determine how to obtain financial data and assess it validity
Tesco is Britain’s leading retailer. We are one of the top three retailers in the world, operating over 2,711 stores globally and employing 366,000 people. Tesco operates in 11 countries outside the UK – Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey and Poland in Europe; China, Japan, Malaysia, South Korea and Thailand in Asia.
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Everyday life keeps changing and the Tesco team excels at responding to those changes. Tesco has grown from a market stall, set up by Jack Cohen in1919. The name Tesco first appeared above a shop in Edgware in 1929 and since then the company has grown and developed, responding to new opportunities and pioneering many innovations.
By the early 1990s we faced strong competitors and needed a new strategy. We were good at buying and selling goods but had begun to forget the customers. Sir Terry Leahy, who became Chief Executive in 1997, asked customers the simple question – “what are we doing wrong?” . We then invested in the things that matter to customers. For example, we launched our loyalty scheme Club card and Tesco.com, our internet home shopping service.
Going the extra mile for customers has been key to our growth. We want to make customers’ lives easier and better in any way we can.
Most plc’s have their Annual reports available from their own web sites .. look for ‘Investor Pages’ or ‘Corporate News’ etc.
Others can be downloaded as PDF’s from sites like FTSE, Yahoo Finance etc.
It is well known that high employee satisfaction contributes significantly to high customer satisfaction, which drives intent to return, and therefore, financial results. High employee satisfaction expresses itself as enthusiasm in one’s work, which directly impacts the experience of the customer. Likewise, high customer satisfaction expresses itself as enthusiasm toward a particular organization, its products or services, which directly impacts the intent to return rate. It is a short leap, then, to understand how a high intent to return rate among customers impacts financial results. But with so many variables affecting employee and customer satisfaction, how does one determine those of greatest importance, so that interventions aimed at increasing satisfaction are of maximum effectiveness? The answer is in the root cause analysis derived from employee and customer survey data, (West, S.J.DR, 2009).
1.2 Apply different types of analytical tools and techniques to a range of financial documents and formulate conclusions about performance levels and needs of stakeholders
When implementing human performance improvement, most organizations hope and expect that it will have an effect on the “bottom line” – that there will be a financial benefit that justifies the improvement effort. But human performance is a complex entity, and translating changes in performance into quantitative and financial results is often a daunting task. In the ideal, it is desirable to generate a causal chain of evidence from the intervention to the final financial impact.
For instance, consider a simple performance improvement intervention such as a training program. In order for the program to affect the financial bottom line of the organization, we must first assure that the training is in an area that is relevant to the bottom line. It is, after all, possible to do training on topics that are irrelevant to financial performance. Assuming that the training is relevant, we might expect that it first needs to affect the knowledge and skills of the learners. Even if it does, it will not be translated into human performance unless the learner is motivated to use the knowledge. Even if the learner wants to use the new knowledge, there are any number of factors that can prevent them from doing so, or cause them to try under less than optimal conditions. Even if the learner performs perfectly, this performance may not affect the overall performance of the business (e.g., how efficiently departments process products). And, even if there is an effect on business performance, there may not be a corresponding financial impact (depending on how relevant the business performance is to financial results). We see that in most performance improvement contexts, the causal chain from the program to final result is often a long and difficult one. The method described in this paper falls into the class of statistical estimation approaches to financial returns. It has several key advantages over other methods of estimating financial returns: It requires only a small investment of client participant time – typically less than one hour – to determine reasonable estimates of project-level financial benefits. It calculates boundaries on financial return estimates (i.e., lower and upper limits), rather than just a single value. It integrates financial return estimation with human performance measurement at all levels.
In this approach, project costs are estimated using traditional accounting procedures. Project-level financial benefits are estimated by a client participant group using an iterative Delphi methodology. These cost and benefit estimates are proportionally distributed across performance goals and objectives and weighted by observed performance. The performance-weighted financial returns (i.e., Benefit/cost ratio and ROI) can then be presented for each performance objective, performance goal, or the whole project.
There are several key assumptions in this approach:
Because all financial estimation methods are fallible, it makes more sense to estimate a range of financial return values within which the true value is likely to fall. In statistical terminology, rather than doing a point estimate, it is desirable to do an interval estimate. Following common statistical practice, for each financial return estimate, the 95% confidence interval will be calculated. With this interval, the odds are 95 out of 100 that the true estimate falls within the range. All financial estimates are calculated for a fixed period of time. Typically, returns are estimated on an annual basis. However, for many performance interventions, it is reasonable to expect that the major effects will accrue over time periods longer than one year. If this is the case, it will usually be desirable to estimate the returns for multiple years. Since the costs of interventions are not likely to be distributed evenly over time, it is also necessary to estimate costs for the same time periods. Depending on the situation, it may be reasonable to amortize some of the first year costs over a several year period.
It is actually quite simple to implement in practice, assuming you have taken the time to develop a performance hierarchy. Once a hierarchy exists, all that’s needed is an estimate of total costs and benefits for the project. Total costs should be relatively easy to obtain. Before implementation, one could use the budgeted amount for the program as an estimate. After the program is implemented, one simply uses the accounted costs for the project. To estimate benefits requires the Delphi procedure described earlier. This is a relatively simple process that should be easy to accomplish in less than an hour of participant time.
The “bottom line” here is that a good performance measurement system will enable relatively easy estimation of financial results – there is little additional marginal cost to estimating financial outcomes, assuming you have a well-constructed measurement system. The Concept System approach is designed so that the performance hierarchy is correctly constructed. Adding in the estimation of financial returns is then a relatively simple and inexpensive addition that yields critical information about the financial impacts of the performance improvement project, (Trochim .M.K.W, 2009).
1.3 Conduct comparative analysis of financial data
Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project.
It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may:
Continue or discontinue its main operation or part of its business
Make or purchase certain materials in the manufacture of its product;
Acquire or rent/lease certain machineries and equipment in the production of its goods;
Issue stocks or negotiate for a bank loan to increase its working capital;
Make decisions regarding investing or lending capital;
Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.
Financial analysts often assess the firm’s:
1. Profitability – its ability to earn income and sustain growth in both short-term and long-term. A company’s degree of profitability is usually based on the income statement, which reports on the company’s results of operations;
2. Solvency – its ability to pay its obligation to creditors and other third parties in the long-term;
3. Liquidity – its ability to maintain positive cash flow, while satisfying immediate obligations;
Both 2 and 3 are based on the company’s balance sheet, which indicates the financial condition of a business as of a given point in time.
4. Stability- the firm’s ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company’s stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators.
Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.):
Past Performance – Across historical time periods for the same firm (the last 5 years for example),
Future Performance – Using historical figures and certain mathematical and statistical techniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects.
Comparative Performance – Comparison between similar firms.
These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example :
n / equity = return on equity
Net income / total assets = return on assets
Stock price / earnings per share = P/E-ratio
Comparing financial ratios are merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:
They say little about the firm’s prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms.
One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm’s performance.
Seasonal factors may prevent year-end values from being representative. A ratio’s values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.
Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values,( Web 1, 2009).
1.4 Review and question financial data
In November 2007 the Panel identified the areas in the economy considered to be under most strain as the banking, retail, travel, commercial property and house-building industries. The Panel’s selection of accounts for review in 2008/09 has been biased towards these sectors as annual financial statements and half-yearly accounts have become available. These reviews are continuing and the Panel is in correspondence with a number of companies. The Financial Reporting Council (FRC) has also taken a closer look at impairment and liquidity – two aspects of reporting that are of increased significance given the pressure from the restricted availability of credit and reduced expectations for growth in the economy. The FRC is reviewing the
goodwill and related impairment disclosures of 30 listed companies with significant goodwill balances at 31 December 2007 and the liquidity disclosures of 30 listed companies that have announced profit warnings or rescue fund raisings in the first half of 2008. The FRC will publish brief reports on its findings later in October. In 2007/08, the Panel reviewed 300 sets of accounts (2006/07: 311) and wrote letters to 138 companies (2006/07: 135) asking for further information about areas of possible non-compliance with the accounting requirements of the Companies Act 1985 (the Act) or the Financial Services Authority’s (FSA’s) Listing Rules. At the time of writing this report, all but 17 cases are concluded. On the basis of accounts reviewed to March 2008, the Panel has concluded that the current standard of corporate reporting in the UK is good. The areas of reporting that prompted most questions were those dealing with more complex accounting issues or where the exercise of judgement by management is most critical. The Panel did not identify any systemic issues requiring immediate remedial action. The Panel does not ask questions about reports and accounts in order to test its judgement against that of management. Directors, with the assistance of their professional advisers, are best placed to apply corporate reporting requirements to the particular circumstances of their companies. The Panel asks directors for additional information or explanations when it needs to clarify the facts and circumstances attaching to specific events, transactions or conditions reflected in reports and accounts. Once these are available the Panel is better placed to consider the thought processes applied to the reporting requirements, particularly the extent to which management has relied on working assumptions that are supported by a realistic appraisal of past performance and experience and future expectations, taking account of risks and uncertainties. It is the Panel’s experience that reports which clearly set out the company’s business model are those which are easiest to understand. The Panel continues to be pleased by the way in which directors co-operate
openly and constructively with the Panel and by their willingness to volunteer undertakings to improve the quality of their future annual and halfyearly reports. Company responses to the Panel’s letters of enquiry continued to be well considered. Directors who answered the questions they were asked, who presented well analysed and comprehensive replies, and who involved audit committees and external auditors in the process will usually have found that
the Panel was able to conclude its enquiries after minimal exchanges of correspondence. The Panel published two press notices in the year in respect of companies that had failed to comply with the requirements of the Act. These companies restated comparative amounts in their next set of annual and half-yearly financial statements. UK companies with securities traded on a regulated market have been required since 2005 to prepare their consolidated financial statements in accordance with IFRS. From January 2007, AIM quoted companies have also
prepared their accounts in accordance with IFRS as required by the Stock Exchange.
The Panel’s experience is that there has been good progress and that the overall quality of financial statements has improved since 2005. The areas referred to below represent those where there is room for further advances in quality, particularly in the context of the difficult current
conditions in the financial markets. Disclosure points that were frequently raised with companies during the period under review are noted at the end of the section. During the year to March 2008, the Panel reviewed the accounts of 10 retail and investment banks reporting under IFRS. The Panel considered compliance with all applicable reporting standards. The Panel identified banks as a priority sector in its accounts selection for 2008/09. Reviews conducted in the current year have concentrated on disclosures of financial risks as required by IFRS 7, the results of which will be reflected in the 2009 Panel Report. Issues raised varied between banks and there was no evidence of systemic reporting weaknesses. Most of the points raised indicated a need for
refinement of certain disclosures rather than significant changes in recognition or measurement policies. The Panel’s remit was extended during the year to cover directors’ reports, including the business review, for periods commencing on or after 1 April 2006; effectively 31 March 2007 year ends. The following summarised findings therefore relate only to a minority of accounts reviewed in the period to March 2008. Comments on business reviews now feature regularly in the Panel’s correspondence with companies. The Panel’s approach to the business review was set out in a press notice published in September 2007 and also in a paper made available on the FRRP website, (Web 2, 2009).
2: Be able to assess budgets based on financial data to support organizational objectives.
2.1 Identify how a budget can be produced taking into account financial constraints and achievement of targets, legal requirements and accounting conventions
The modern U.S. budget process dates from the Budget and Accounting act of 1921,
which required that federal agencies request their funds from Congress only through the
president’s budget. This act reflected in the view that the budget is a financial plan for
the government, which has become among the most common ways of characterizing it.
Equally frequent is the statement that the budget is ultimately a political document or that
the budget process is ultimately a political one. Perhaps because they are stated so
frequently, these phrases tend to be passed over, as if their implications were obvious. On
reflection, however, the combination of a comprehensive financial plan that becomes a
reality with a political process driven by the structure of the US governmental system
hardly seems to be a formula for rationally driven, clear and effective budget. That there are shortcomings is not so surprising. The budget is a financial plan, but it is one of extraordinary scope and detail. Modern budgetary practice recognizes three major levels which the budget addresses:
Macro economic (concerning the degree to which the budget affects
national savings consumption investment and output),
Major sector choices or national needs Karen including considerations of
both expenditure policy and tax policy), and
Detailed program design and execution.
Simply put, the budget attempts to cope with this dilemma: people want individual pieces
of the budget to be larger but for the total to be smaller.
Steps in the Evolution of the Budget Process
Budget and accounting act of 1921 — established a single federal budget proposed by the president to Congress
Post-World War II evolution of fiscal policy — incorporated the budget as a factor in
determining the direction of the economy
Budget and deficit control act of 1973 — created a congressional budget process and
provided for specific measures for the president to propose and the Congress to act on
reductions in approved appropriations.
Graham Rodman Hollings — provided for automatic cuts in budget outlays in the event
deficit targets were exceeded
Budget enforcement act — provided specific limits for annual appropriations and created
“zero sum” rules for changes to an entitlement programs and revenue measures.
A major purpose of Budget concepts is to create a level playing field on which advocates
for using the public treasury may meet in fair and open competition. Continuing the
familiar analogy, the budget process provides the rules of the game. However, the game
may be played by five- year-olds, and there can be as many referees yelling from the
sidelines as there are players — maybe more. Five-year-olds understand cheating, which
is not to be condoned, but they also understand that changing the rules of the game,
redefining what constitutes winning and getting a referee to rule in your favor are all
excellent substitutes. It is not a coincidence that insiders discuss budget “scorekeeping”
as something that is malleable, (Mathiasen.D,2009).
2.2 Analyse the budget outcomes against organization objectives and identify alternatives.
1. An operating budget is a formal, written plan that aligns the operating requirements with
the funding sources of an organization. An operating budget reflects the missions and specific
command objectives of the organization, as well as any limitations and controls (e.g.,
constraining targets, available funds) imposed upon it. An operating budget provides one the
means to control obligations and expenditures against approved funding levels.
2. The objective of the operating budget is to provide managers with the ability to plan,
organize, staff, and control the operations to accomplish the mission for the fiscal year.
3. There are several factors that are critical to the success of an operating budget. The
following is a synopsis of those factors that need to be present to create a positive effect on the
a. Management Support. Managers at all levels must support the operating budget
concept not only in the formulation stage but through the execution stage.
b. Guidelines. Guidance must be issued early to allow sufficient time for logical thought
processes to take place, and to allow time for establishing milestone dates, specifying targets
and limitations, defining terms, formats, and cost categories.
c. Periodic Review. Operating budgets must be reviewed periodically to determine that
the budget is properly executed. Appropriate adjustments can be made after these reviews.
d. Level of Control. The responsibility for budget preparation and execution must be
assigned to the level of management that has the responsibility and authority to control costs.
Managers should not delegate this responsibility to personnel who do not have the skills and
knowledge needed to prepare the organization’s operating budget. Budget formulation and
execution responsibilities should be incorporated into each appropriate manager’s performance
standards to ensure accountability.
Operating Budgeting Process
The operating budget process consists of seven phases. Following is a brief description of
Phase 1. Formulation
This is the initial phase of the operating budget process. Budget Officers identify policies and
guidance from HQUSACE and local areas of concern. Budget Officers will also determine the
workload (income and expense), identify targets and limitations (planning and design,
supervision and administration, overtime, travel, training, awards, etc.), income estimating
guidelines and budget milestones.
Phase 2. Review and Analysis
Budget Officers review the initial input from the organizations for reasonableness, accuracy,
valid assumptions, and past performance. They are also responsible for ensuring rates for
departmental overhead, general and administrative overhead, facility accounts and plant
accounts are appropriate and reasonable. Budget Officers prepare a proposed budget, identify
the impact of alternatives to the proposed budget, make recommendations, and present the
proposed budget to the PBAC (Program and Budget Advisory Committee).
Phase 3. PBAC Review and Consensus
The PBAC will review the proposed budget and alternatives and will determine a
recommended budget for submission to the Commander. The PBAC may identify unfinanced
requirements, showing their dollar amounts and justifications. Significant changes will be
approved by the PBAC and the Commander.
Phase 4. Approval
The Budget Officer submits the PBAC recommended budget and alternatives for final
Command approval. The approved operating budget is made available for execution.
Phase 5. Execution
Managers obligate and expend funds in accordance with the approved operating budget.
Phase 6. Monitoring
Operating budgets should be monitored on a monthly basis. Feedback reports are available to
managers for monitoring actual performance compared to budgeted amounts. The Budget
Officer provides periodic execution reports and analysis to the PBAC and the Commander. As a
minimum, mid-year review will be completed.
Phase 7. Adjustments
Significant operating budget changes identified during the monitoring stage will be summarized
and presented to the PBAC and the Commander for approval, (Genetti.A.JR, 1998).
3: Be able to evaluate financial proposals for expenditure submitted by others
3.1 Identify criteria by which proposals are judged
The Sustain our Nation experts will be judging proposals using the following criteria:
Identifying a Need
Does the proposal address one or more of the five key themes?
Does the proposal identify a genuine social need without creating issues or problems?
Have the relevant target individuals and groups been fully consulted in order to identify a legitimate issue?
Does the designer fully understand the lifestyle and attitudes of the end user/stakeholders?
Has the designer considered the ‘triple bottom line’: economic, social and environmental factors?
Does the proposal demonstrate a breadth of innovation and creativity?
Are the business/enterprise, its objectives, strategies and market credible?
Does the application include viable financial forecasts?
Quality of presentation
Is the presentation of a professional standard with cohesive narrative and appropriate visuals? (Web 3, 2009).
3.2 Analyse the viability of a proposal for expenditure
Calculation of Financial and Economic Viability
Financial and economic appraisal is an important component of any project without which it is incomplete. Increasing awareness about the use of scare resources and the returns obtainable from it makes the issue more important. Financial analysis is used to describe the commercial viability of the project and shows its strength from financial angle. The concept of economic analysis can be considered as an extension of the financial analysis. In economic analysis the concern is on the developmental effect on the society/economy as a whole as against the financial analysis that bothers the interest of the specific entity. In the present report, financial analysis has been done for each market and of each category.
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In the absence of past trends and its proper records it is necessary to make certain assumptions based on the reality of situations for assessing the true viability of any project. For this master plan, following assumptions have been taken:
i) Economic Life of the Project
The horizon is important for calculation of benefit and cost of a project. Generally, 20-25 years period is considered proper as economic life of the project. In present case, calculations have been made assuming the economic life of the markets as 20years ending at 2020 A.D.
ii) Growth Period
Proposed proposals for market development in Chhatishgarh is very simple. In number of markets, already minimum necessary requirement of construction has been met out and only a small addition or change will take place. In other cases markets would come up in a reasonable time. Therefore, it has been assumed that three-years period will be sufficient for completion of the proposed construction to make the new market yard fully operational. The full revenue in the form of ground rent is expected to flow after a gestation period of three years only.
While making calculations, it has been assumed that all sellers operating in the market at present will shift and occupy space in new market, as they would get better trading facilities. Therefore, 100% space occupancy along with zero leakage of revenue has been considered. Occupancy of space in godown has been estimated for three to six months only in a year since space in godown may be utilized or in demand during harvesting and peak marketing season of different commodities.
iv) Income and Expenditure
The main source of income of markets is market fee, leased rent and other sources of income. The income from market fee is assumed and computed at the rate of 1.5% of the value of arrivals expected with the implicit assumption that all the markets will be regulated and there will be a market committee to supervise the market operations and collect the market fee. The growth rate, which has been used for projecting the arrivals, is used for projecting income from this source for next 20 years i.e. up to 2018. Base year value is based on the actual value of arrival for the year 1998-99.
The other main source of income is rent chargeable on buildings. Rent has been assumed at 14% of the cost of construction of trading section and non-trading sections. No change rental has been proposed. While projecting income from this source it would get generate after the gestation period of three years is over. Usually, rent can be increased @10% after every 3 years, which would be, beneficial to the markets. Other income includes fines, sale of forms etc. that has been assumed £.20,000 per annum and has been kept constant.
Various kinds of expenditure items like establishment cost, repair and maintenance, cost of land, capital cost etc. have to be looked into before preparing cash-flow statement. Establishment cost has been assumed @30% of the market fee expected, as the present staffing plan and expenditure was not available. Repair and maintenance cost has been estimated at 1% of the total cost. A lump sum amount of £.5000 has been kept as miscellaneous expenditure to meet any contingency. Each market committee has to contribute Marketing Board Fund out of its income. Accordingly, it has been proposed that each market will contribute 10% of its market fee to this fund and the same has been kept as one of the component of operating expenditure.
Gross benefits have been worked out for 26 years by deducting total operating expenditure from total income. Net benefits are net of interest payment and depreciation.
Depreciation has been estimated by the straight-line method i.e. total capital cost divided by the life of the project assumed a
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