The Importance of Cash Flow Management

An understanding of effective cash flow statement and its further management is vital tool for the long term survival of an entity`s cash flows. It is also a key factor in planning and in the competent performance of all aspects of operations. The phrase revenue is “sanity”, profit is “vanity” but “cash is king” is an appropriate phenomenon that companies have to consider and embedded in their cash management strategy. It should be noted that “profits” are not an acceptable means of measuring and ensuring good cash flow, since it is not a major piece of cash flow management. Once cash inflows and outflows are received and money paid out are not effectively considered and monitored, corporations may possibly not be able to settle their employees and vendors on time. Hence, lack of good cash flow management could lead to companies’ inability to pay their bills as and when they fall due but yet these companies may have huge “profits” in their annual financial statements.

1.0 Background of the study

Discounted cash flow analysis is widely used in investment finance, real estate development, and corporate financial management. Indeed, “a manager’s primary goal is to maximise the value of his or her firm’s stock. Value is based on the firm’s future cash flow.” (F.Houston 2007 ,p.10). How does bank estimate that cash flow and how that cash flow will be used in future investment? The answers to both questions lie in a study of financial statement and risk related to transactions concerned with. Analysts describe the activities of a business in either operating or financial terms. Usually, to evaluate its operating profit, a business firm buys raw materials and combine them with actor as capital and labour to produce goods and services. Later on, the company will sell these goods or services to others at a higher price enough to yield return above the cost of the raw material, capital and labour used. In financial terms, the business obtains funds through creditors and owners, and spends them for raw material, labour and fixed assets. To see if a firm’s management has achieved its objectives, we must analyse the company’s return and risk measures. Measuring returns consist of calculating profitability and risk measurement for the bank.

1.1 Overview of the company

The creation of the UK largest retailer goes back to 1919, when John Edward (Jack) Cohen a retailer’s product line started selling surplus groceries from a stall in the East End of London. The name Tesco originated in 1924 when he bought a shipment of tea from a Mr T. E Stockwell, from whom the initials TES come from and CO from Jack’s surname. In 1929 Mr Cohen opened a flagship Tesco store in Burnt Oak, North London and founded in 1939 Tesco stores limited. Today the company is a public limited and employs 470,000 people in more than 14 countries, and is the UK largest grocery retailer and the third worldwide.

In the UK: Over the next decade following its creation, Tesco opened more than 100 small stores, mainly in the London area. The company expanded rapidly across the United Kingdom. Started with the acquisition of smaller grocery chains including the nineteen stores Burnards chain in 1955, and has now, 2362 stores ranging from superstores to express and petrol stations. Since the 1990s Tesco has developed an aggressive marketing campaign in an attempt to overtake Sainsbury’s and become the UK’s leading retailer since 1995. In 1992, the company launched is slogan “every little helps” followed by the Tesco Value range in 1993 and the launch of his loyalty scheme, clubcard in 1995. Today Tesco is the first retailer in the UK with a group’s sales of £62,537 billion, a rise of 6.8% and £3,412 billion group trading profit (12.3% growth)

Abroad: The Company is now present in more than thirteen countries since 1995 when it first expanded to Tesco Hungary to, the USA in 2007.

Strategy: The Company’s strategy has been revised since 1997, the year Terry Leahy was named chief executive officer. Tesco has developed a growth strategy, the one that was ambitious in its design. In the coming years, the company directed its expansion efforts on its core U.K. business, retailing services, international operations, and non food business.

Store types: Tesco has Extra, Superstore, Metro, Express, Tesco.com.

Store offerings: Food retail, Non food retail, Petrol stations, Home living range.

Tesco personal finance: life insurance, pet insurance, home insurance, travel insurance, motor insurance, saving account, personal loans, secure investment bonds, online mortgage finder

The company aims:

This dissertation was dedicated to the financial area, especially to financial management and risk involved. The proposed title of this dissertation is as follow:

How important is for manager to have a good understanding of cash flow statement in a retailing industry.

1.2 Aims and objectives

The aim of this research was to evaluate the overall performance of retailing sector a case study of Tesco Plc being chosen by taking into consideration its cash flows and risk involved. The researcher aims to understand the issues related to cash flow statement and relate it to risk involved and how to improve the management cash flow. Furthermore setting some aims and objectives are of a high importance as they outline some targets, tasks, guide and thus facilitate the research process.

Objectives

Identification of the key factors included in a cash flow statement

Establishment of the straight relationship between the cash inflow and cash outflow

Identification of the element that affect (risk) the successful cash flow

The areas in need of cash flow

What are the advantages of good knowledge of cash flow analysis

Recommendation of new strategies and techniques to improve organization’s overall cash flow performance

Rationale of the Study

The essence of commissioning this research was to establish the need for the company managers to have a good and a deeper understanding of the cash flow statement. After having considered the rate at which corporations are faced with liquidations as a result of going concern problems. The dependencies of profit/ income statement for financing decision making by most businesses over the years have result to these corporations failing to meet the expectations of their long term objectives. With this study the managers would realise the importance of the role the cash flow statement plays in the organisations cash flows management status. The other annual financial statements do not through more light on the financing needs/ requirement and management of the entities. However, the cash flow statement provides more and strong indicators that assist corporations to know the strength and weaknesses of their cash flow generation approaches.

1.4 Significance of the study

Cash flows information of a company is very significant element in providing users of financial statements with a basis to measure the capability of the business to generate cash and cash equivalents and the desires of the business to make use of those cash flows. The financial decisions that users (both shareholders and stakeholders) make depends an appraisal of the strength of the business to generate cash and cash equivalents by having regard to the certainty and their ability to generate those cash (Ramachandran, 2007). The cash flow statement deals with the consideration of information concerning the historical changes in cash and cash equivalents of a company and categories cash flows in to certain groups. This research will no doubt be a significant tool in financing decisions for managers, shareholders and stakeholders at large.

1.5 The Research problem

In recent years so many businesses have had to depend on excessive borrowings from the banks, credit agencies and other financial institutions. Cash flow shortages result to increase in costs, due to interest companies need to pay on borrowed loans, late-payment which may lead to fines, and subsequently the discounts that could be lost for paying bills lately. Lack of cash flow improvements can compound these unexpected costs and could result to difficulty in accessing credit and unfavourable payment terms on some types of purchases. Eventually, corporations that get better in the manner in which their receipts of cash and payment of cash are managed would be more flourishing than their counter-parts.

1.6 Research question

After identifying the aims and objectives of this study, the research attempted to answer the following questions.

What is cash flow concept?

How is it used in an organisation?

What is the impact of financial statements when valuing the cash flow statement?

What are the review conceptual models and theoretical fragments related to cash flow?

What review cash flow statement used by Tesco?

What are the risks faced by the company when evaluating their cash inflow and cash outflow?

The overall impact on cash flow statement inside and outside the industry

1.7 The dissertation outline

The study has been organised in a manner that makes it much easier to read and understand. As a consequence the outline is as follows:

Chapter one: introduction was concerned with general overviews of the study by presenting the aims and objectives, the significance of carrying such research as well as some questions faced by managers when valuing their liquidity.

Chapter two: literature reviews was applied as other’s opinion, what authors has writing and thinking about cash flow management.

Chapter three: methodology was highlighting the different techniques and approach used to carry out our research so that readers and manager can have a

Chapter four: data analysis was presented as the methodology used to conduct this research successful .it furthermore presented the chosen analytical method in accordance with qualitative approach chosen in this study. The data collected are analysed using a qualitative analytical method the methodology used to conduct this study has been discussed. in this chapter and evaluated in accordance with the theoretical framework established from the literature review.

Chapter five: conclusions and recommendations

1.8 summary

This chapter gave an insight of the research project by presenting the company Tesco plc which is subject to inquiry, highlighting the aims and objectives, and discussing the significance of carrying such project as well as the limitations. The subsequent chapter reviews the literature of direct marketing, discussed by prominent authors.