Accounting for Leaders assignment on Tesco leadership accounting strategies

Question

Task: How to assess Tesco leadership accounting strategies using Accounting for Leaders assignment techniques?

Answer

Introduction
This Accounting for Leaders assignmentwill assess tesco financial leadership strategy. The rapid growth in globalisation has increased the competition between companies operating in the international market. Increased competition in the global market makes it essential for these firms in improving their financial and operational performances. Financial and operational performances can be analysed with help of evaluating financial data and information retrieved from the annual reports of the companies (Saunila, 2014). This financial analysis determines the liquidity, debt, operational and overall performance of the company through different techniques. The purpose of the report is to undertake a critical evaluation of financial and management accounting principles and consequently, apply relevant knowledge for analysing overall business performance of a public listed corporation. The Accounting for Leaders assignment has selected Tesco as the case study organization that is publicly listed on the London Stock Exchange. Tesco Plc is a British multinational retailer of general merchandise carrying out its business operations through online and multi-format stores (Global Data, 2022). The corporation offers a wide variety of both food and non-food products to its customers with its business presence in the European and UK markets. The mission of Tesco Plc is to serve its customers everyday through its affordable, healthy and sustainable food and other products (Tesco Plc, 2022a). The vision of the company is to emerge as the world’s leading multinational retailer by letting customers enhance their quality of life and have an easier living way by using its products and services. This shows that the core purpose of Tesco is improving the lives of customers and communities by ensuring that the planet becomes a better place for living (Tesco Plc, 2022b). The planning strategies of Tesco revolves around its core purpose of putting customers at the heart of everything. In this regard, it focuses on six strategic drivers for ensuring effective planning and its implementation. These include creating a differentiated brand, reducing operating costs, generating significant cash from operations, maximizing value from property, maximizing group margin and innovation (Tesco Plc, 2017).Thus, these are used for enhancing financial and operational performance of the company. From the Accounting for Leadersassignment research it is observed that despite the uncertainties and business disruption caused by the COVID-19 pandemic in 2020 and 2021, Tesco has displayed implausible agility and resilience. Its group sales increased by 7.1% in 2021 than the previous year, whichshow its improved financial performance (Tesco Plc, 2021). This has been possible because of strong relationships with customers and robust business with shareholders.

Table 1: Profit/Loss for the year (£m)

Fig 1: Profit/Loss for the year (£m)

From the above figure, it is evident that the net profit for the year 2021 of Tesco Plc increased significantly than its previous year in 2020. While the company experienced difficulties in 2020 because of pandemic outbreak, it was successful in handling them in the next year. However, the company experienced a decrease in its operating profit in 2021by 28.1% as compared to 2020(Tesco Plc, 2021). The Accounting for Leadersassignment findings show this has been because of the excessive rise in operating expenses of discontinued operations and increased administrative expenses. Despite this, the overall financial and operational performances were good for the company.

Financial Principles and Bottom-Line Impact
Accounting Policies and Accounting Standard
Accounting standards refer to a common set of principles, procedures and standards for developing the basis of financial accounting policies or practices. It helps in organising accounting functions like bookkeeping across the firms over time (Weygandt, Kimmeland Kieso, 2018). Accounting standards encompass the entire financial picture of an entity, consisting of its assets, revenues, liabilities, expenses and shareholders’ equity. In this regard, different parties like investors, regulatory agencies and banks consider accounting standards for gaining relevant and accurate financial information about entities. Generally accepted accounting principles (GAAP) create a set of accounting standards for preparing financial statements of companies in the US. On the other hand, International Financial Reporting Standards (IFRS) are the international accounting guidelines for reporting of financial statements of multinational companies.Besides, accounting policies involve specific principles and procedures put forward by a company’s management for preparing its financial statements (Weygandt, Kimmeland Kieso, 2018). These Accounting for Leaders assignment set of standards governing the ways a company prepares financial information. These consist of different accounting methods, procedures and measurement systems for disclosing financial information. Thus, accounting policies are the company’s way of abiding by the rules presented by the accounting standards.

Implications on Financial and Macro-Environment
It has been observed that there exist various differences between IFRS and domestic accounting standards as they vary in measurement rules, recognition rules and disclosure requirements. In this regard, international accounting standards and principles like IFRS have the capability of affecting financial and macro-environment (Florou, Kosiand Pope, 2017). It helps in improving the quality of financial reporting of firms through widespread and informative disclosures, greater comparability and better recognition and measurement rules. This generates various credit relevance effects arising from enhanced accounting comparability, improved recognition and better measurement. These credit ratings further inform various debt market participants in evaluating the borrowers’ ability of servicing future debt obligations (Florou, Kosiand Pope, 2017). Here, accounting standards like IFRS make financial statements useful for credit analysts and creditors in predicting future cash flows and reliable estimates of assets and liabilities from financial information. Thus, accounting standards help in generating positive implications for financial and macro-environment. Furthermore, it has been found that nations harmonizing their accounting standards with IFRS often face enhanced quality and comparability of their financial disclosures (Kim, Shiand Zhou, 2014). This further provides firms with the opportunity of gaining access to different international capital markets along with increased investment flows from cross-border interactions. In addition, IFRS adoption enhances the ability of reducing the cost of acquiring funds from these international capital markets.

It has also been observed on this Accounting for Leaders assignment that developing nations can improve their accountability and financial architecture through adoption of IFRS standards in various small and medium enterprises (Kayaand Koch, 2015). This switch to international accounting standards by encouraging SME firms can be beneficial for the developing countries. This is because they are able to attract more loans from international organizations like the International Monetary Fund and the World Bank (Kayaand Koch, 2015). Thus, this affects the macroeconomic environment through various endogenous political and institutional factors. Besides, IFRS also influence various other national standards, rules and regulations and organizations in the global market environment. Changes taking place over years have created a level of harmonization of different accounting standards (Albu, Albuand Alexander, 2014). Some results have pointed out the improved quality, transparency and comparability of financial reporting with the help of IFRS adoption. However, others have also argued this view by stating that only in few cases the accounting information under IFRS can be better than that of domestic standards (Albu, Albuand Alexander, 2014). Despite this, adopting IFRS has helped countries and firms in understand the logics and realities behind globalization for participating in the wealth generated by developing countries.

It has further been displayed on this Accounting for Leaders assignment that high quality accounting standards generate positive effects on the reporting quality of firms, thereby creating better value for the financial statement users (Zicke and Kiy, 2017). It helps in ensuring accounting transparency that enhances economic performance. Conforming to accounting standards alongside improved competence of external audits generate positive effects on corporate performance. This conformation with independence and competency of external audits also positively affects economic policies and their implementation (Lee, 2020).

Accounting for Leadersassignment -Use/Misuse of Financial Data
Financial data are derived from the financial statements of a company, which include the profit and loss statement, balance sheet and cash flow statement (Macintosh, 2013). These are written records conveying meaningful information about business activities and financial performance of the company. Financial data are used for attracting investors and financial analysts who evaluate the performance of the company for making predictions about the future direction of its stock price (Macintosh, 2013). Thus, annual report of a company is one of the most useful sources of providing reliable, authentic and audited financial data from the financial statements. On the other hand, firms also engage in abuse the financial data for making their financial statements more credible to gain more and cheaper credit facilities (Türkmen, 2016). These are misuse of financial data by manipulating the financial reports that are against the capital market rules. Thus, financial statements can consist of frequent errors and frauds with the misuse of financial data being represented in the annual report.

Competitive Financial Management
Effective financial planning and analysis involves activities like formulating plans, analysing financial statements, planning and budgeting, doing forecasting and financial modelling. This plan helps in determining how a company can efficiently allocate its resources for enhancing its chances of success (Petty et al., 2015). The plan involving budget should further consist of all firm priorities and tangible initiatives to be funded with the resources.Based on the financial planning and analysis of budgeting, forecasting and financial modelling, financial managers can undertake effective decisions. In this regard, financial planners and analysts also help the decision makers of the organization. Thus, this leads to an effective and competitive financial management.

For example on this Accounting for Leaders assignment it is observed that, Tesco formulates and executes plan based on its strategic priorities. These include redefining value for becoming customers’ favourite, increasing loyalty through Tesco Clubcard for accessing new revenue sources, aiming towards incremental capital-light growth and becoming a cost-efficient retailer (Tesco Plc, 2022c). It also uses six key performance indicators for evaluating the performance of its plan. These are growing sales, delivering profits, improving operating cash flow, achieving customers’ recommendation, colleagues’ recommendations and building trusted partnerships.

Ratio Analysis and Financial Interpretations
In this section, ratio analysis has been undertaken for gaining detailed insight about the liquidity position, profitability, growth and operational efficiency of Tesco Plc (Babalolaand Abiola, 2013). Here, financial statements have been analysed for computing various ratios against that of the competitors, Sainsbury’s. These data have been compared to better understand the performance of Tesco Plc in the retail industry.

Accounting for Leaders assignment Liquidity Ratios

Table 2: Current Ratio

Current ratio refers to the ability of a company in repaying back its short-term debts and obligations within a year (Crossonand Needles, 2014). It is evident from the table that Tesco has better performance in current ratio as compared to its competitor Sainsbury’s in both the financial years of 2020 and 2021. This shows that the company has better capability of paying back its short-term debts within one year. It also represents that Tesco can maximize its current assets effectively for satisfying its current debts and other payables, thereby attracting more investors than its competitor.

Table 3: Cash Ratio

Cash ratio is another tool of measuring liquidity position of a company by comparing its cash and cash equivalents to its current liabilities(Crosson and Needles, 2014). From the table, it is evident that Tesco has better cash ratio than Sainsbury’s in 2020 and almost same in the year 2021. In the year 2020, Tesco displayed better capability of repaying its short-term debts because of the presence of its adequate cash reserves. However,its has also been observed on this Accounting for Leaders assignment that these resources significantly decreased in 2021 for both Tesco and Sainsbury’s, which resulted in their decrease in cash ratios. Thus, both their performances were similar in terms of liquidity in 2021.

Profitability Ratios

Table 4: Net Profit

Net profit margin is one of the most widely used profitability ratios that help in determining how much profit or income a company has generated with respect to its total revenue (Weygandt, Kimmeland Kieso, 2018). In 2020, the net profit margins were almost similar for both the companies Tesco and Sainsbury’s. However, in the year 2021, Tesco was successful in generating a significantly increasing amount of net income while Sainsbury’s suffered from huge losses. This shows that Tesco performed far better in reaching its profitability in the year 2021 as compared to Sainsbury’s.

Table 5: Return on Assets

Return on assets is a financial ratio that determines profitability of a company with respect to its total assets (Weygandt, Kimmel and Kieso, 2018). From the above table, it is evident that the ratio was almost same for Tesco and Sainsbury’s in the year 2020. This shows that both the company were similar in their efficiency in using their assets for generating profits in this year. However, in 2021, Tesco performed significantly better in handling its assets for gaining more profits and income than Sainsbury’s. Instead, Sainsbury’s suffered losses and it was incapable of gaining incomes through its assets.

Activity Ratios

Table 6: Inventory Turnover Ratio

Inventory turnover ratio used on this Accounting for Leaders assignment analysis displays the number of times a company is capable of selling and replacing its inventory during a given period. It determines the days it takes for selling inventory on hand (Weygandt, Kimmel and Kieso, 2018). From the above table, it is evident that Tesco takes more number of days than its competitor Sainsbury’s in selling its inventories on hand. In both the financial years, Sainsbury’s has low inventory turnover ratio, which shows the weak revenues and excess inventory in its stock. However, Tesco also has high turnover ratio, implying its strong sales in both years but presence of insufficient inventory.

Table 7: Working Capital Turnover Ratio

Working capital turnover ratio is beneficial in determining the efficiency of a company in using its working capital for supporting its sales and growth (Crossonand Needles, 2014). It displays the funds the company uses for its operations and its revenues for continuing its business operations. From the above table, it is evident that both Tesco and Sainsbury’s incurred negative working capital ratio because of its current liabilities being more than their current assets. This shows that both these companies have been facing difficulties in the last two years in effectively utilizing their working capital.

Capital Structure

Table 8: Debt to Equity Ratio

Debt to equity ratio helps in assessing the financial leverage of a company by comparing its total liabilities with its total shareholders’ equity(Weygandt, Kimmel and Kieso, 2018). From the table, it is evident that Tesco has higher debt to equity ratio than Sainsbury’s in both the years. This indicates that the company might be relying primarily om debt financing more than its competitor. From the Accounting for Leadersassignment findings it is also observed that Tesco takes more risk, it shows that Sainsbury’s has not been taking enough advantage of debt financing for its expansion.

Growth Ratios

Table 9: Return on Equity

Return on equity helps in measuring the financial performance of a company by comparing net income with the shareholders’ equity. In both the years, Tesco shows more return on equity as compared to its competitor Sainsbury’s. While in 2020, this return was particularly lower in cases of both the companies, in 2021, Tesco has performed significantly better. On the other hand, Sainsbury’s has incurred losses in 2021. Thus, it shows that Tesco has been more efficient in generating profits as compared to its competitor.

External Operating Environment
Various environmental conditions increase perceived complexity faced by the organizations. These mainly include dynamism, uncertainty, hostility, competition and interpersonal relations. Such factors mainly arise from the external environment of the companies because of different economic, political, demographic, technological and other trends (Akpoviroroand Owotutu, 2018). Here, organizations Tesco generally experiences rapidly changing environment, turbulent conditions, downturn in economic situations or delays in their availability of resources. These affect organizational processes differently, thereby influencing the financial and operational performances of companies. It has also been observed that external environmental factors generate significant impact on different indicators of financial performance (Mohsin, Ahmedand Streimikiene, 2020).Tesco conductsits business operations and activities in the external environment, thereby being exposed to various changes and occurrences taking place there. These changes generate both positive and negative impact on the financial performance of the organization. This is because Tesco has to depend for acquiring its resources from the environment. Here, the pattern of linkages taking place amongst different organizations operating in the industry and their extent of power and authority influence the external environment (Mohsin, Ahmedand Streimikiene, 2020). The Accounting for Leadersassignment research shows this often creates abundancy, interconnectedness and benevolence factors, affecting the availability of resources for the firm. In this way, it also impacts the financial performance of Tesco.

Future Strategies
Based on the financial ratio analysis, it has been observed that Tesco has been performing relatively well as compared to its competitor Sainsbury’s. However, it still needs to formulate some specific strategies for ensuring its long-term survival and growth in the future. The firm needs to focus on attracting more investors instead of depending extensively on debt financing for funding its business operations. Furthermore, it should also emphasize on increasing its current assets for successfully paying off short-term debts incurred in a year. Tesco has higher inventory turnover ratio; thus, it should try to increase its inventory as compared to the competitors. The firm operates in a highly competitive, uncertain global business environment. This makes it essential to conduct extensive market research for being aware about competitors’ offerings, current market trends, rise in advanced technologies and changing consumer behaviour. Besides, Tesco should also analyse political, demographic, economic and legal factors for identifying potential threats and opportunities present in the external environment. Thus, these strategies of market research and analysing external environment can be beneficial for responding efficiently to environmental challenges.

Accounting for Leaders assignmentBudgeting Practices
Budgeting Process
This is one of the most important concepts of accounting that involves planning and forecasting, implementing, tracking and controlling and assessing the performance of a budget (Bogsnes, 2016). A budget is essential for firms in monitoring the incomes and expenditures for any given period. It helps in ensuring that the business money is being utilized efficiently for making investments and achieving the financial goals of the company. With the help of budgeting, corrective actions are undertaken in a timely manner where under-achievement or excessive expenditure takes places in a period. Thus, budgeting is required for proper funding, setting priorities and controlled expenditure.

Traditional v/s Modern Budgeting Procedures
Traditional budgeting process depends on setting strategic goals and objectives, forecasting for revenues, expenses, production, costs and cash flows and other factors. Here, the budget is prepared through the several rounds of dialogue process between top and lower levels of management (Cardo, 2014). Factors such as nature and intricacy of internal operations, management philosophy and organizational structure help in formulating the traditional budgeting procedure. There are various advantages associated with this process of budgeting. It enables managers in forming specific goals and undertaking plans of actions for achieving them, thereby helping them to think ahead. Traditional budgeting process also fosters coordination, effective communication and collaboration (Cardo, 2014). It helps in effective performance evaluation based on the set objectives. Lastly, this process improves employee motivation by encouraging them to strive for best results and achieve desired goals.However, it has been observed on this Accounting for Leaders assignment that traditional budgeting is considered as a relic of the past accounting practices. This is because it does not respond to changes taking place in the market (Réka, tefan and Daniel, 2014). The inability of coping with such changes and requirements of the marketplace makes it ineffective for business management. Thus, this has led to the development of systematic and alternative budgeting concepts for meeting the changing business requirements.

Activity-based budgeting has emerged as a new approach capable of providing relevant cost information along with determining valuable activities included in the process of cost management (Cardo, 2014). This process emphasizes on preparing the budget based on various activities instead of units. Thus, it focuses on determining cost of various planned activities depending on their consumed resources and expected size. Another new budgeting approach is participatory budgeting process. It is a democratic process of preparing a budget where community members often get to decide the expenses part of a public budget (Heinle, Rossand Saouma, 2014). Participatory budgeting is often considered as an annual management cycle being included in a regular process of preparing budgets. It also occurs in organizations where lower management levels get involved in the budget preparation. Instead of imposing the process, here, responsibility is shared across lower managers for providing them with a sense of ownership, power and belongingness in the business.

Furthermore, zero-based budgeting is another modern budgeting practice where all expenses are calculated for each new period. This process is followed by Tesco for achieving its savings targets (Trentmann, 2017). Here, the process starts from a zero-base to analyse organizational functions for determining the needs and costs (Coyte, Messner and Zhou, 2020). From this step, the budgets are prepared based on the requirements of the upcoming period irrespective of whether it is higher or lower than the previous budget. Thus, this is a useful technique for enabling managers in handling lower costs within a company. Besides, performance-based budgeting focuses on identifying and scoring performances based on achievement of specific outcomes is another important point observed on this Accounting for Leaders assignment. Generally, government bodies and agencies use this budgeting technique for forming a link between outcome of services provided by different levels of government and taxpayer funds.

Improved Operational Performance
Business budgeting is a dynamic and financial plan that can be used for anticipating revenues and expenses of a company for an upcoming period. Tesco also follows budgeting procedure for adjusting itself to the business plans and environmental changes. Business budgeting helps in evaluating the financial health a company by identifying its ability of achieving the desired goals (Brighamand Houston, 2021). It also provides opportunity of strategic planning that helps in answering issues of expansion and growth. It helps in obtaining debt financing and attracting investors. This process of determining every source of income, revenue and other expenses through anticipation can help the firm in improving its operational performance. Here, essential information associated to operating within resource means, turning profits and managing unexpected challenges is gained from budgeting (Brighamand Houston, 2021). This identification of available capital, estimating expenditures and anticipating revenues help the business managers. Thus, they are able to undertake efficient financial and operational decisions, resulting in improved operational performance.

Impact of Smarter Technologies
The budgeting process is now experiencing integration of analytical methods with the rising process automation and digitization. It is clear from the Accounting for Leadersassignment research these current advances in information technology have been making differences in various accounting procedures with budgeting in particular (Bergmann, et al., 2020). The use of business analytics has resulted in time savings and increased convenience, thereby enhancing satisfaction with the budgeting process. It improves the planning function of budgeting by enabling companies to make better future predictions and simplifying scenarios. Here, the predicted forecasts further display actual outcomes in a more precise manner, thereby helping firms and financial managers in formulating accurate plans and improving their decision-making (Bergmann, et al., 2020). Various ICT applications, introduction of artificial intelligence and other smart technologies have been transforming the budgeting process. It has given rise to the concept of e-budgeting that indicates the digitalization of different budgetary procedures like planning, programming, control, appropriations and evaluation of other financial resources. It also involves the sharing of open data and Big Data for generating better accountability of the institutions (Valle-Cruz, Fernandez-Cortezand Gil-Garcia, 2022). In addition, smart budgeting has also emerged as a systematic process for collecting relevant information and consequently using algorithmic models for preparing a budget. Thus, this budgeting technique helps in making valuable predictions by using historical data and intelligent algorithms for supporting decision-making in firms.

Investment Appraisal Techniques
Investment appraisal techniques or capital budgeting techniques are essential for a firm in determining the attractiveness of an investment opportunity in terms of its expected returns in the long-run. These techniques are helpful for companies to selecting the best option while facing a choice between two or more projects (Balarabe, 2020). There are various types of investment appraisal methods available. Here, Tesco needs to allocate its resources to capital expenditure in an efficient way through these methods. In this regard, the company management should consider various aspects before making any investment. These include risks and uncertainties, project length, data sources, investment size, economic and market environments, experience of management team and quantitative influences on investment appraisal.

Accounting for Leaders assignmentNon-Discounted Analysis
Two investment appraisal techniques that can be evaluated for Tesco based on their strengths and limitations of application are payback period and net present value. Payback period is one of the simplest and popular methods of assessing an investment proposal by determining the length of time that will be required for the investment to get paid back (Al Ani, 2015). This payback occurs through revenue streams or savings of the company. At this payback period, the cash outflows of the company become equal to the cash inflows. The Accounting for Leaders assignment method states that the preferred investment is the one having a shorter payback time. Here, the recovery time is calculated by accumulation of cash inflows every year until it is equal to that of the initial investment made (Jiambalvo, 2019). It is a simple and easy to understand method for identifying the time period to recover cost of investment.Payback period method can be used by Tesco for letting the investors know about when their investments will get repaid and it is most suitable to be undertaken in uncertain situations. Firms experiencing liquidity constraints find this method to be beneficial in ranking projects based on their ability to repay investments. However, the major fault in this method is that it ignores cash generation after the payback period (Jiambalvo, 2019). This shows that it determines liquidity instead of profitability of an investment. Thus, payback period method also disregards the timing of returns and cost of capital of an investment as it does not consider the entire lifetime of a project.

Discounted Analysis
Net present value is another method of investment appraisal. This can be used by Tesco for focusing on the phenomenon of creating wealth through higher inflows as compared to present value of anticipated cash outflows (Žižlavský, 2014).This value is obtained after discounting the cash outflows and inflows of a capital investment project with the help of the entity’s weighted average cost of capital.Net present value method can be selected because it emphasizes on time value of money, helps in choosing from mutually exclusive projects and focuses on maximization of shareholders’ wealth (Jiambalvo, 2019). However, this Accounting for Leaders assignment method is more difficult in calculation and understand as compared to payback period. Here, calculating the desired rates of returns also becomes cumbersome as cost of capital needs to be ascertained from this. In addition, it is an absolute measure favouring the project having higher NPV.

Conclusion
The Accounting for Leaders assignmentused various managerial accounting techniques and procedures for understanding the performance of the chosen company Tesco. These include analysing accounting procedures and principles, conducting ratio analysis, reviewing budgeting practices and evaluating investment appraisal techniques.

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