Efficiency has been highlighted as a key financial objective for each company – as it is inherent in optimising profit from any business and helping sustain core business – which is the primary objective of both groups. It is also a good indicator of healthy cash flow management – a specific Sainsbury’s objective.
Efficiency ratios reveal how effectively a company uses its assets and liabilities and is a good general indicator of how well the day to day operations are managed. (McLaney, 2009)
Overall analysing the figures in Tables 5&6 – there is very little in the way of dramatic increases or decreases in efficiency over the period in question. A key ratio used to measure overall business / sales performance, however, is the average inventory turnover. The results in 2013, following the trend (2009-2012) would suggest that Sainsbury’s is managing its stock control, ordering and sales cycle much better than Tesco with an average of 16 days relative to Tosco’s 22 days. Figures may be skewed somewhat by the scale of Tesco’s operation (inventory which is almost 4 times the volume of Sainsbury’s), the effects of International distribution and changing consumer spending habits. Tesco may also have a larger proportion of inventory made up from non-food items which obviously have a longer shelf life. A longer average inventory turn period means more of Tesco’s capital is tied up in stock – increasing their cost of sales for each good considerably.
The efficiency ratios indicate Tesco has a more favourable cash flow management / credit control system in place. Receiving payment after 14.22 days whilst only settling with suppliers after 66.51 days (in 2013). Compare this with Sainsbury’s whose settlement period for trad...
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...h just a small decrease of 1.26% in 2012/2013 to 6.25 (2013). This coupled with a small increase in 2013/2014 of 1.60% recovers this figure to 6.35 (2014). Tesco figures show a dramatic decrease over the period – from a peak of 9.55 they reported a decrease of 50.16% in interest cover to 4.76 (2013). In addition it suffered a further decrease of 2.1% to finish at 4.66 the following year. In relative terms Operating Profit is covering interest by 4.66 times which is still a healthy position for a company of its size. However given Sainsbury’s success in maintaining Interest Cover Ratio greater than 6, and the general declining trend in Tesco’s coverage – Tesco management may need to restructure their debt portfolio, particularly given the businesses declining operating profit, to make sure their repayments are not hampering the growth of the business in other areas.
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