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Managing
Financial
Resources
2010/11
Assignmen
t
Module: Managing
Financial Resources
Module Tutor: Paul
Smith

Word count: 3217

Jitender Singh
12/6/2010

Managing Financial Resources


Leeds Metropolitan University
2 |Page

Leeds Metropolitan University


Business School
MSc Finance

Managing Financial Resources


Leeds Metropolitan University
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S.N Contents Page


o No.
1 Executive Summary 3
2 Introduction to Company 3
3 Aim and Objectives 4
4 Financial Accounting Concepts and Principles and 4
Their Uses to Evaluate Business Performance
5 Impact of Financial Accounting Concepts upon 4-5
Corporate Reporting on the Financial and Non-
financial Performance of an Organisation
6 UK GAAP and Changes in Accounting Standards 5
7 Accounting Policies Adopted by the Company 5-6
8 Ratio Analysis 6-12
9 Comparison between J Sainsbury Plc and WM 12-14
Morrison Supermarket Plc
10 Limitation of Ratio Analysis 14-15
11 The Role of Management Accounting in Evaluating 15-16
the Business Performance
12 Non-financial evaluation using ither management 16
strategic techniques
13 Conclusion 17
Referencing
Bibliography

Executive summary

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This report is all about financial and non-financial analysis of J Sainsbury


Plc. This report is containing the accounting concepts and principles, ratio
analysis limitations, role of management accounting in performance
evaluation, changes in accounting standards from UK GAAP to IFRS
(International Financial Reporting Standards). This report is also focused
on the accounting policies adopted by the company. Comparative analysis
is done with WM Morrison, the comparison shows that WM Morrison out
performed J Sainsbury. The company’s present financial and non-financial
performance is much better than its previous performances. At the end
report also contains the non-financial evaluation using other management
strategic techniques. By analysing the company’s financial and non-
financial performance, it is clear that company has performed better than
its previous performances, but still company need to work hard in order to
compete its competitors, as in this report WM Morrison has outperformed
the company in comparative analysis.

Introduction to Company

J Sainsbury plc was established in 1869 and today it is one of the leading
players in supermarket having 537 supermarkets and 335 convenience
stores. It has diversified its business in banking with Lloyds Banking
Group and in real estate sector by two joint ventures with Land Securities
Group PLC and The British Land Company PLC. (J Sainsbury Annual
Report 2010, p.1)

“The corporate strategy of J Sainsbury is to improve its profitability


through universal customer appeal and increase reach throughout UK” (J
Sainsbury Annual Report 2010, p.6).

The Company is focusing on five main areas. J Sainsbury has good brand
name and reputation for providing quality food and services. The five
areas of focus are:

• Quality food at fair price.

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• Accelerating the growth of complementary non-food ranges


and services.
• Reaching more customers through additional channels.
• Increasing supermarket space.
• Active property management.
(J Sainsbury Annual Report 2010, pp.8-10)
Aim and Objectives:
The paramount aim of this report is to interpret and analysis the financial
position of the company using ratio analysis and by comparing with some
other company. The other objectives are to evaluate business
performance by using financial accounting concepts and principals,
evaluating the limitations of ratio analysis, UK GAAP and changes in
accounting standards and role of management accounting in evaluating
business performance.

Financial Accounting Concepts and Principles and Their uses to


Evaluate Business Performance

Accounting concepts and principles are the basics of the accounting,


without them, preparation and understanding of accounts is not feasible
thus it is significant that accountants and users of financial statements
should clear about the concepts. More the concepts and principles are
clear, easy the evaluation of the business performance.

Britton and Waterston pointed that (2010, p.55), “they have usually been
implicit and understood as a common culture of accounting......”

John R. Dyson (2007, p.4) says, “Accounting is a service provided for


those who need information about an entity’s financial performance, its
assets and its liabilities.”

Impact of Financial Accounting Concepts upon Corporate


Reporting on the Financial and Non-financial Performance of an
Organisation

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As it is common assumption that all businesses follow the concepts, then


it’s very hard to say whether they are following the identical concepts. By
the following statement we can state that companies act of UK is quite
vague.

“These five principles were also contained within company law in UK


but they have now been removed from the company act and we are
now required to prepare financial statement in accordance with a
true and fair view and the IASs.” ( Britton and
Waterston, 2010, p. 221)

By above statement we can state that it is not necessary that all the
companies follow the identical concepts as they are not specified in the
companies act. This means that their records may differ because they can
record and organise the accounts, they think is best. This ultimately
affects the corporate reporting.

To ensure and regulate the accounting and financial reporting standards,


currently there are two regulatory bodies, first is financial Reporting
Council which is independent and responsible for promoting high quality
corporate governance and reporting to nurture investment (Financial
Reporting Standard, 2010) and the second is ,”Accounting Standard Board
which issues accounting standards, moreover it is collaborated with
International standards and in order to ensure that its standards are
developed with due regard to international developments”(Accounting
Standard Board, 2010).

Identical accounting and financial reporting standards can provide users a


fair and true view of financial position and performance of companies.

UK GAAP and Changes in Accounting Standards:

UK GAAP stands for UK General Accepted Accounting Practices, till 2005


all public companies had followed UK GAAP. All companies listed in
London stock exchange and Alternative Investment Market (AIM) need to

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adopt the International Financial Reporting Standard. Under UK GAAP,


companies need to publish four financial statements that are:

• Income statement
• Statement of total recognised gain and losses
• Position Statement (Balance Sheet)
• Cash Flow Statement
(Halmes, et al., 2008, p.1-2)

In 2005, fully listed companies needed to adopt IFRS on or after 1 January,


2005; after or on 1 January 2007, all companies listed in Alternative
investment market adopted IFRS.

Accounting Policies Adopted by the Company

• The Group’s financial statements have been prepared according to


International Financial Reporting Standards (“IFRSs”) as adopted by
all public limited companies. ( J Sainsbury Annual Report 2010, p.
51)
• Company use historical cost convention for preparing financial
statements; derivative financial instruments, investment properties,
available-for-sale financial assets, share-based payments and
retirement benefit plan assets have been measured at fair value. ( J
Sainsbury Annual Report 2010, p.51)
• Effective interest methods have been used in calculating interest
income in income statement for all instruments that are measured
at amortised cost. (J Sainsbury Annual Report 2010, p. 52)
• “Depreciation is calculated to write down the cost of the assets to
their residual values by using straight-line method on the following
bases:

○ Freehold buildings and leasehold properties – 50 years, or the


lease term if shorter
○ Fixtures, equipment and vehicles – 3 to 15 years
○ Freehold land is not depreciated

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Land and buildings under construction and non-current assets held


for sale are not depreciated” (J Sainsbury Annual Report 2010, p.
53).

• Inventories are valued at the lower of cost and net realisable value.
Inventories at warehouses are valued on a first-in, first-out basis.
Inventories at retail outlets are valued at calculated average cost
prices. (J Sainsbury Annual Report 2010, p. 54)

Ratio Analysis:

Ratio analysis is one of the potent tools of the financial analysis and easy
to calculate. A ratio can be used as yard measure for evaluating the
financial position and performance of a business because the absolute
accounting cannot provide the reasons behind it. Ratios give us a common
scale to measure which is helpful in appropriate evaluations because it’s
very difficult to analysis absolute figures. By calculating few ratios, it’s
possible to find out the strengths and weaknesses of the business but
they do not explain the reason behind it.

There are number of ratios classified into different categories; Black


(2009, pp.211-212) has classified ratios in five groups:

• Profitability ratios
• Efficiency ratios
• Short-term solvency and liquidity ratios
• Long-term solvency and liquidity ratios
• Investment ratios

Profitability ratios:

Return on capital employed:

(FAME 2010a)

ROCE shows the profitability of the business.

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“Return on capital employed is a fundamental measure of business


performance as it compares the operating profit with the total capital
used to generate that profit.” (Black, 2009, p.212)

The graph shows that J. Sainsbury’s ROCE is better as comparative to its


last ten years performance. More importantly there is rise from 6.55%
(2009) to 9.09% (2010), moreover company achieved 9% of ROCE after
seven years. After achieving highest ROCE of the decade in 2003, there
was continued decline in ROCE till 2005. The figure shows that 2005 was
toughest year of the decade for J Sainsbury, because of sudden fall in
sales their operating profit dramatically fall down. During 2005-07,
company shows remarkable comeback and reached to 6.96%. Now the
company is giving 9.19% of ROCE which is considerably higher than
available interest rate in banks.

As it is good news for investors that the company is doing well as


comparative to its previous performances in decade.

Return on Shareholders’ Funds

(FAME 2010a)

The return on owner’s equity has been also improving from last three
years after lots of ups and downs in the decade; presumably shareholders
are benefited from the increase in profit margin and turnover.
Shareholders hope that it doesn’t fall again, as it is at its highest of the
decade and consistently improving from past three years.

Gross margin %

(FAME 2010a)

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“The Gross profit margin ratio relates the gross profit of the business to
the sales revenue generated for the same period” (Atrill and McLaney,
2008, p.192)

The graph shows that J Sainsbury has slight downturn for consecutive
three years which indicate that cost of sale has increased as a percentage
of sales. It is quite unusual to observe that gross margin of the company
was consistently rising for consecutive three years from 2001; after
reaching its highest in the decade in 2004, next year it suddenly slip to its
lowest in the decade.

This is the area where company really need to think because if they want
to sustain or improve their position in the market they need to be cost
efficient.

Profit margin %

(FAME 2010a)

“Net margin shows the proportion of sales which resulted in a profit after
all overheads (other than finance charges) had been deducted.”(Black,
2009, p 213)

Company has good profit margin as comparative to its performances in


last ten years, expect year 2003,this rise in profit margin is due to
increase in turnover and decrease in operating expenses.

Efficiency ratios:

Return on total asset

(FAME 2010a)

Return on asset is the efficiency ratio which shows how efficient company
is using its assets. (Black, 2009, p.214)

It’s good to see that company has used its assets more efficiently as
compared to its past because of increase in sale. After decline in turnover

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in 2005 company has managed to come back very well in just 5 years,
moreover from 2009 to 2010 company has enormously become more
efficient.

Short- term solvency and liquidity ratios:

Current ratio

(FAME 2010a)

Current ratio shows the short-term solvency of the business by relating an


organisation’s current asset to its current liabilities. (Walker, 2002, p. 98)

There is decline in current ratio throughout the ten years except a slight
rise in 2003. As published in most of the books that the idle current ratio
is 2:1, then this is severe position of the company as it has maintained
quite low current ratio. Even though in 2005 there was dramatic fall in
sale, company could face liquidity problems but the company passed
through that nightmare with the low current ratio. As J Sainsbury is a
Supermarket, there inventory turnover and debtors collection period is
quite low as comparative to other businesses.

Long-term solvency and liquidity ratios:

Gearing %

(FAME 2010a)

“Gearing reflects the relationship between a company’s equity capital


(ordinary shares and reserves) and its other forms of long-term funding
(preference shares, debentures, etc.)” (Black, 2009, p. 221)

There is no idle ratio proposed by any scholars, it is only depend upon the
company that how much company want to raise the debt. In 2010, the
gearing ratio of the company is quite low, which indicated that company
has long-term solvency. There was a hike in 2006 in gearing ratio in 2006

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that was because company raised lot of debt and spent it on long term
assets which was a good decision by the company, moreover company’s
operating profit also raised that was also good news for investors. In 2007,
gearing ratio fell from 169.92% to 65.97%, because company pay back
debt by issuing shares that was also a good decision by company because
in 2007 world economy met with recession, because of the low debt
company needed to pay low interest; next year company again reduced
its debt, the low gearing ratio helped the company in surviving through
the recession. Company still maintain a low gearing ratio because UK
economy still has not out of the recession.

Comparison Between J Sainsbury plc and WM Morrison


Supermarket plc:

It’s good to compete with your previous benchmarks and should set new
benchmark for yourself but it does not mean that you should not consider
your competitors performance. One should do comparison with its
competitors in order to know its efficiency and effectiveness. Comparative
analysis is a helpful tool for investors and shareholder as both are
interested in maximising their wealth; by comparative analysis they are
able to make better decision.

Figure 1

(Fame 2010a, b)

Figure 1 shows the ROCE of J Sainsbury and Wm Morrison, the figure


shows that throughout the decade Morrison outperformed J Sainsbury
expect year 2006. Even though Wm Morrison had negative ROCE in 2006,
as an investor point of view it is better option for investment because its
average return is much higher than J Sainsbury. At last we can say that
Wm Morrison is more efficient and effective in deploying the resources
than J Sainsbury.

Figure 2

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(FAME 2010a,b)

Figure 2 shows that Wm Morrison is more profitable for shareholders than


J Sainsbury expect year 2006; but J Sainsbury has provided its highest
return on equity of the decade which is also good news for its
shareholders.

In both the profitability ratios Wm Morrison outperformed J Sainsbury as in


both the cases the Wm Morrison’s average return of the decade is better
than J Sainsbury’s. But now J Sainsbury is more profitable and providing its
best return of the decade.

Figure 3

(FAME 2010a, b)

Figure 3 is picturing the short-term liquidity of both the organisation,


throughout the decade J Sainsbury was more liquid than Wm Morrison,
even though they have net current liabilities.

Figure 4

(FAME 2010a, b)

Figure 4 presenting the gearing ratio of both the companies; throughout


the decade J Sainsbury has very high gearing ratio than Wm Morrison
which points that J Sainsbury has severe long-term solvency issues as
comparative to Wm Morrison.

Limitations of Ratio Analysis

If one is aware of the accounting formulas, he can very easily calculate


the ratios but it requires lot of analytical skills in analysing the ratios. Thus
analysis differs from analyst to analyst, and then it becomes very hard to
make one conclusion. Moreover it is not necessary that if the business

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does not have idle ratios like 2:1 is said to be idle current ratios; it does
not mean that business is going to experience solvency or liquidity issues
or we can’t conclude that the business will experience long-term solvency
problem, if the gearing ratio of the organisation is high, it may be that
company has very good relations with stakeholders or management is
very smart in handling these issues or they have aggressive approach.

Walker (2002, pp.121-122) summarises the limitations of ratio analysis:

• Ratios are constructed from accounting data and they therefore


inherit the subjective aspect of this data.
• If the accounts are made up to different dates, then different
external factors may have influenced the figures.
• The results of ratios may be interpreted indifferent ways.
• If only one or two year’s figures are available then there is no
reference to trends over recent years.
• There is no reference to future prospective or plans.
• The focus tends to be on relative rather than absolute values
• The ratios are based on balance sheet data, which may not be
representative of the year as a whole.

The Role of Management Accounting in Evaluating the Business


Performance

Till now I have analysed and interpreted the data by using the financial
accounting tool i.e. ratio analysis. Now it’s time to through some light on
the management accounting and its role in evaluating business
performance.

Management accounting has significant role in evaluating business


performances, though financial accounting measures the performance of
businesses but it provides overview of the performance that is not
adequate for managers to make any decision, they need in-depth
analysis of the business.

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According to National Association of Accountants (n.d., quoted in Shim


and Siegel, 1999, p.1) management accounting is,

“the process of identification, measurement,


accumulation, analysis, preparation, interpretation and communication of
financial information, which is used by management to plan, evaluate and
control within an organisation.”

With the increase in competition, every organisation wants optimum


utilisation of resources available to them. According to Atrill and McLaney
(2009, p.23), it is possible to identify four broad areas of decision making
where management accounting information is required.

• Developing objectives and plans


• Performance evaluation and control
• Allocating resources
• Determining costs and benefits

Non-financial Evaluation Using Other Management Strategic


Techniques

J Sainsbury has diversified business in Banking with Lloyds Banking Group


and has two property joint ventures with Land Securities Group PLC and
The British Land Company PLC.

In 2007, they identified following five areas of focus for developing their
business:

• “Great food at fair price.


• Accelerating the growth of complementary non-food and services.
• Reaching more customers through additional channels.
• Growing supermarket space.
• Active property management.”
(J Sainsbury Annual Report 2010, pp.8-10)

J Sainsbury has shown significant progress in each area that has


contributed to their good performance. During 2009/10 they have

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accelerated their growth in these areas by allocating additional capital


and resources.

(J Sainsbury Annual Report 2010, p.8)

J Sainsbury has won number of corporate responsibility awards like

• “Dow Jones Sustainability Index 2009/10 for sustainable in market.


• IGD Food Industry Award for environmental sustainability.
• CBI Human Capital Award for broad-ranging HR and people-
management excellence.
• Carbon Trust Standard for supermarket division’s reduction of CO2
year-on-year.
• FTSE4Good Index for management of environmental, social and
ethical issues.”

(J Sainsbury Annual Report 2010, p. 12)

Conclusion

J Sainsbury is one of the finest supermarkets in the market and known for
providing quality of food and services. In recent years company has made
many changes in its operations and diversified in banking and real estate
sector. Company has improved its performance in financial and non-
financial field. Its increasing return on capital, operating profit and low
gearing ratio is good sign of its future growth. After 2005, company has
shown continuous improvement almost in all areas. Company’s return on
capital and equity is better than many other companies in the current
recession scenario, moreover company able to maintain its good
relationship with customers by providing quality food and services.
Company has won many awards in corporate social responsibility
moreover company has won Dow Jones Sustainability index award for year

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2009-10 for sustainable in market which is good news for shareholders. In


2010, the profit before taxation of the company is raised from 466 million
pounds by 57.3% to 733 million pounds; moreover current assets of the
company have increased from 1,570 million pounds by 18.03% to 1,853
million pounds, which shows that the profitability and liquidity position of
the company has increased. It’s good that company has performed well
from its previous performances but its still underperform as comparative
to its top competitors like WM Morrison. But still there is lot of
opportunities in non-food service sector.

REFERENCING

Book

Atrill, P. and McLaney, E. (2008) Accounting and Finance for Non-


Specialists. 6th ed. Harlow: FT Prentice Hall

Atrill, P. and McLaney, E. (2004) Management Accounting- An Active


Learning Approach. 6th ed. Oxford: Blackwell Publications.

Atrill, P. and McLaney, E. (2009) Management Accounting for Decision


Makers. 6th ed. Harlow: FT Prentice Hall.

Britton, A. and Waterston, C. (2010) Financial Accounting. 4th ed.


Harlow: Pearson Education Limited.

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Dodge, R. (1997) Foundation of Business Accounting. 2nd ed. London:


International Thomson Business Press.

Dyson, John R. (2007) Accounting for Non-Accounting Students. 7th


ed. Harlow: Pearson Education.

Geoff, B. (2009) Introduction to Accounting and Finance.2nd ed.


Harlow: FT Prentice Hall

Holmes, G., et al. (2008) Interpreting Company Reports and Accounts. 10th
ed. Harlow: FT Prentice Hall

Shickney, Clycle P., et al. (2010) Financial Accounting: An


Introduction to Concepts, Methods and Uses. 2nd ed. USA: South –
Western Congage Learning.

Shim, Jae K., et al. (1999) Management Accounting. 2nd ed. USA: The
McGraw-Hill.

Walker, J. (2002) Accounting in Nutshell - Finance for the Non-


Specialist. 1st ed. India: Viva Books.

Online sources

Chadwick, L (1993) Management Accounting. [Internet] London:


Routledge. Accessed from: Google Books<http://books.google.co.in/books?
id=q9kNAAAAQAAJ&printsec =frontcover& dq =
management+accounting&hl=en&ei=9LHuTMX3AsrQcYKcpcIK&sa=X&oi=book_r
esult&ct=result&resnum=1&ved=0CDQQ6AEwAA#v=onepage&q&f=false>
[Accessed 25 November 2010]

J Sainsbury Plc.(2010) Annual Report. [Internet], UK, J Sainsbury Plc.


Available from: <http://www.j-
sainsbury.co.uk/files/reports/ar2010_report.pdf> [Accessed 1st November
2010]

Fame (2010a) J Sainsbury plc [ONLINE] Bureau Van Dijk Electronic


Publishing, Accessed from:
<https://fame.bvdep.com.ezproxy.leedsmet.ac.uk/version-
2010823/cgi/template.dll? product=1&user=ipaddress> [Accessed 28th
September 2010]

Managing Financial Resources


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19 | P a g e

Fame (2010b) Wm Morrison supermarket plc [ONLINE] Bureau Van


Dijk Electronic Publishing, Accessed from: Bureau Van Dijk Electronic
Publishing <https://fame.bvdep.com. ezproxy.leedsmet.ac.uk/version
2010823/cgi/template.dll> [Accessed 28th September 2010]

BIBLIOGRAPHY:

Book

Atrill, P. and McLaney, E. (2008) Accounting and Finance for Non-


Specialists. 6th ed. Harlow: FT Prentice Hall

Atrill, P. and McLaney, E. (2004) Management Accounting- An Active


Learning Approach. 6th ed. Oxford: Blackwell Publications.

Managing Financial Resources


Leeds Metropolitan University
20 | P a g e

Atrill, P. and McLaney, E. (2009) Management Accounting for Decision


Makers. 6th ed. Harlow: FT Prentice Hall.

Britton, A. and Waterston, C. (2010) Financial Accounting. 4th ed.


Harlow: Pearson Education Limited.

Dodge, R. (1997) Foundation of Business Accounting. 2nd ed. London:


International Thomson Business Press.

Dyson, John R. (2007) Accounting for Non-Accounting Students. 7th


ed. Harlow: Pearson Education.

Geoff, B. (2009) Introduction to Accounting and Finance.2nd ed.


Harlow: FT Prentice Hall

Holmes, G., et al. (2008) Interpreting Company Reports and Accounts. 10th
ed. Harlow: FT Prentice Hall

Shickney, Clycle P., et al. (2010) Financial Accounting: An


Introduction to Concepts, Methods and Uses. 2nd ed. USA: South –
Western Congage Learning.

Shim, Jae K., et al. (1999) Management Accounting. 2nd ed. USA: The
McGraw-Hill.

Walker, J. (2002) Accounting in Nutshell - Finance for the Non-


Specialist. 1st ed. India: Viva Books.

Online sources

Chadwick, L (1993) Management Accounting. [Internet] London:


Routledge. Accessed from: Google Books<http://books.google.co.in/books?
id=q9kNAAAAQAAJ&printsec =frontcover& dq =
management+accounting&hl=en&ei=9LHuTMX3AsrQcYKcpcIK&sa=X&oi=book_r
esult&ct=result&resnum=1&ved=0CDQQ6AEwAA#v=onepage&q&f=false>
[Accessed 25 November 2010]

J Sainsbury Plc.(2010) Annual Report. [Internet], UK, J Sainsbury Plc.


Available from: <http://www.j-
sainsbury.co.uk/files/reports/ar2010_report.pdf> [Accessed 1st November
2010]

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Fame (2010a) J Sainsbury plc [ONLINE] Bureau Van Dijk Electronic


Publishing, Accessed from:
<https://fame.bvdep.com.ezproxy.leedsmet.ac.uk/version-
2010823/cgi/template.dll? product=1&user=ipaddress> [Accessed 28th
September 2010]

Fame (2010b) Wm Morrison supermarket plc [ONLINE] Bureau Van


Dijk Electronic Publishing, Accessed from:
<https://fame.bvdep.com.ezproxy.leedsmet.ac.uk/
version2010823/cgi/template.dll> [Accessed 28th September 2010]

Managing Financial Resources


Leeds Metropolitan University