Sample on MANAGING FINANCIAL RESOURCES & DECISIONS
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Table of Contents INTRODUCTION......................................................................................................................1 TASK 1.......................................................................................................................................1 AC 1.1 Sources available to the business organizations....................................................... 1 AC 1.2 Implication of internal and external finance sources................................................ 2 AC 1.3 Most appropriate source of finance for Sweet Menu Restaurant..............................3 TASK 2.......................................................................................................................................4 AC 2.1 Cost of identified appropriate finance source for Sweet Menu Restaurant.............. 4 AC 2.2 Importance of financial planning for the Sweet Menu Restaurant for their new......4 business plan..........................................................................................................................4 AC 2.3 Information needs of different decision makers in Sweet Menu Restaurant business5 AC 2.4 Impact of finance sources in the business financial statements................................ 6 TASK 3.......................................................................................................................................7 AC 3.1 Analysis of budgets and take appropriate decision................................................... 7 AC 3.2 Calculation of unit costs (meal cost) and take pricing decisions.............................. 8 AC 3.3 Using investment appraisal techniques to know the project viability.......................9 TASK 4.....................................................................................................................................10 AC 4.1 Main financial statements produced by the organization........................................10 AC 4.2 Appropriate formats of financial statements for different type of businesses........ 11 AC 4.3 Interpretation of financial statement using ratio analysis method.......................... 15 CONCLUSION........................................................................................................................ 16 REFERENCES.........................................................................................................................17
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INTRODUCTION Success of business depends greatly upon the availability of finance. The amount of cash available for spending in business is termed as finance. There are number of sources available to the business organizations to mitigate their financial need. It can be fulfilled from the sources that are available internally in the organization. Moreover, outside sources also can be used for such purpose. In this report, financial sources are identified for a reputable Restaurant company named Sweet Menu Restaurant. The Restaurant is operating in Gants Hill in East London founded before 10 years ago. This Restaurant has a good corporate image and well known position in the market as it serves various types of inter-continental foods at fair prices. Now, company’s owner desires to expand their business by opening its branches in Central London and Croydon. Therefore, the present report helps in determining the available financial sources, their implication as well as advantage and disadvantage for the company. Furthermore, the report will explain that how managers can take efficient and strategic decisions to manage these sources.
TASK 1 1.1 Sources available to the business organizations Financial sources are categorised into two that are internal and external. Internal financial sources comprise the sources that are available in the business whereas external finance sources include the sources that can be taken from the outsiders. Type of Internal sources
Description Under this type of source, business can take loans from their friends and relatives. Business owner can get funds from their friends and relatives for different time period at cheaper interest rate that helps to
Angel investors
eliminate or minimize the financial needs.
Retained earnings and profits of other Balance of business profit which is not distributed as Toll Free No. +44 203 8681 670 Mail Us: help@assignmentdesk.co.uk Assignment desk provides assignment help from professional UK writers.
business
dividend is called retained earnings (Broadbent and Cullen, 2012). All the corporations can use this source for fulfilling their financial need. Along with the retained earnings, owner also can use profit of their other businesses. Personal savings of the owner can also be used as a financial source for the expansion of business. It is mostly used in case of newly business organization when outside sources are available in very less
Owners personal savings
External sources
amount.
Description There are two types of shares that are ordinary and preference share capital. Business can issue these shares in the market
Issuing shares
in order to get funds easily. Bank loan is the most common source of borrowed funds (Thomas, 2001). Bank gives loans to the corporate sectors for a specified
Borrowed funds
time period at an implied interest rate. Under the lease financing, business can attain rights for using assets without having ownership (Brayley and McLean, 2001). It is a contract between the asset’s owner and user that provides rights for the use of assets at a
Lease
rental charges. Toll Free No. +44 203 8681 670
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Venture capital can be acquired in the highly potential growth earning businesses. Venture capitalists are much interested to invest in such businesses that can provide higher returns to them and fulfil long term business Venture capital
requirements.
1.2 Implication of internal and external finance sources
Internal sources Implications
External sources implications Issuing shares: On the amount of equity share capital, dividend rate is not fixed. However, preference share capital requires regular dividend payments at fixed rate. Another implication is that ordinary shareholders have voting rights. It gives
Angel Investors: Borrowing loans from
controlling rights to the shareholders in order
friends and relatives, business needs to pay
to take part in operating functions. Thus, it is
interest to them. It will be paid on timely
clear that diversification of control is also
basis.
existed in this source. Borrowed funds: On the amount of borrowed
Retained earnings and other business profits:
loans, business has to pay timely interest
Retained earnings involve opportunity cost. It
charges to the loan provider. Thus, regular
refers to the loss of return that businesses can
interest payment brings financial risk to the
get through using retained earnings in any
business. Another implication is that they
investment proposal.
have to keep the business assets as a
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collateral security to the banks (Managing financial resource and decisions, n.d.). In case of any default in payment, banks have legal rights to discharge business assets at the market place. Further, it will greatly impact the corporate image of company in an adverse manner. Lease: Business does not need to purchase Personal savings: This is a cheaper source of assets for the purpose of using. In this source, finance as it does not involve any cost to the
ownership will not be transferred but
business. Moreover, by investing personal
business can lease assets from others. For
savings, fixed financial burden can be
that, business has to pay rental charges on the
reduced to a great extent. Main reason for this
periodical basis. However, benefit of using
is that businesses have to take lower funds
this source is that rental charges are
from the outsiders.
allowable expenditures for the tax purpose.
1.3 Most appropriate source of finance for Sweet Menu Restaurant The given scenario stated that Sweet Menu Restaurant needs finance amounted to 300000ÂŁ and 500000ÂŁ for the business expansion. On the basis of above identified implications, it can be said that under the internal sources, retained earnings and profits from other businesses will be the best among them. The reason for such decision is that it does not involve higher cost to the company. Further, these are the regular finance sources and eliminate the immediate finance requirements also. However, if company receives funds from the angel investors, then business will need to pay interest to them. On contrary, through ploughing back of profits, firm can generate funds without any cost. Moreover, Restaurant has a good market position and well known in the market. Loan capital will be the most appropriate finance source under the external sources. The reason for Toll Free No. +44 203 8681 670 Mail Us: help@assignmentdesk.co.uk Assignment desk provides assignment help from professional UK writers.
such decision is that banks and other financial institutions provide loans on the basis of their credit worthiness. Therefore, loans will be available easily to the Sweet Menu Restaurant. Moreover, it fulfils the short term, medium term and long term finance requirements of business. In addition to it, business has good reputation in the market thus, company is able to bear fixed financial burden. Other benefits will be that control diversification can be eliminated through using this finance source. Thus, it has become clear that both types of sources are appropriate for Sweet Menu Restaurant for their expansion plans.
TASK 2 2.1 Cost of identified appropriate finance source for Sweet Menu Restaurant The cost of retained earnings and other business profits for Sweet Menu Restaurant business is opportunity cost. It concerns with the loss of possible returns that the business can receive by investing the profits in other businesses or in other available alternative investment proposal. Moreover, higher rate of ploughing back of profits may create negative impacts to the shareholders. Furthermore, the amount of borrowed funds imposes cost of regular payment of interest. The interest rate may be fixed or volatile also called fluctuating. Fixed rate imposed fixed amount of financial burden to the company (Managing financial resource and decisions, n.d.). However, in case of fluctuates interest rates, the financial liability cannot be assessed in a correct manner. Another, the need of giving business assets as a collateral security will be included in the cost. Further, in case of having business loss it will affects the business operations in a negative direction. In addition to it, at the time of maturity, Sweet Menu Restaurant has to repay the loan amount. 2.2 Importance of financial planning for the Sweet Menu Restaurant for their new Business plan Financial planning plays a vital a significant role in the organization success. It mainly concerns with the process of setting business goals, targets and objectives and making plans for go ahead (Dunn and Liang, 2015). Financial manager is greatly responsible for Toll Free No. +44 203 8681 670 Mail Us: help@assignmentdesk.co.uk Assignment desk provides assignment help from professional UK writers.
making financial plans for the business. According to the scenario, Sweet Menu Restaurant business is making plans for expanding their business operations. Therefore, the need of making strategic financial plans will be arise for the business. It helps to acquire sufficient amount of funds and manage it in a proper way so as to achieve financial goals. Initially, the business financial planner has to determine the current available finance sources that can be used for opening branches in Central London and Croydon. He has to make strategic business plans to met their financial need at lower the cost factor. After that, the financial manager has to forecast the future incomes and expenditures that can be occur from the operational activities (Snider, 2015). It will be estimate for all the projects, departments and the business divisions. The managers also identify the cash need and make plans for raising the cash funds in business. Finance managers can prepare budget for that purpose that combines all the probable incomes and expenditures for the future period. It aims at running business operations successfully through controlling business cost and maximize its incomes. This in turn, company will be able to generate higher the profits. Furthermore, financial policy helps to manage the business funds in an effective and efficient manner. Overall, the financial planning helps to achieve the predetermined financial targets of business. 2.3 Information needs of different decision makers in Sweet Menu Restaurant business Different users need distinct information to take better decisions. In Context to Sweet Menu Restaurant business, the information need of different decision makers are explained below: Decision makers
Information need In the present era, running business successfully is the responsibility of managers. Therefore, they require information regarding all the incomes and expenditures
Business managers
from the financial statements. The managers analyse and Toll Free No. +44 203 8681 670
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evaluate the business expenses with the objectives of making effective control (Slack, Chambers and Johnston, 2010). Further, budgeting is also an important tool that used by managers to manage the cash sources and its applications to ensure adequate cash availability. Through managing the funds appropriately, financial position and operational performance can be improved in a great manner. They provide credit to the Sweet Menu Restaurant business, therefore they analyse the business creditworthiness. They analyse the financial statements and cash flow statements to identify the liquid availability and cash earning capacity (Zager and Zager, 2006.). Further, they analyse the profitability statement to know the Restaurant business Creditors
profits. Government have the objectives to increase their incomes sources. Tax is the most important source of government incomes that is calculated on earned business profits. Therefore, government need information regarding business profits to identify the tax obligations and in case of any
Government
default, they impose penalties and other lawsuits.
2.4 Impact of finance sources in the business financial statements All the business transactions show in the business financial statements. It includes financial and operating transactions. Therefore, the type of financial sources that have been Toll Free No. +44 203 8681 670 Mail Us: help@assignmentdesk.co.uk Assignment desk provides assignment help from professional UK writers.
used by Sweet Menu Restaurant business will impact the financial position statements. However, the cost of financial statements impacts the profitability statement. As stated earlier, most appropriate finance source for Sweet menu Restaurant are retained earnings and borrowed funds. The cost of retained earnings that is opportunity cost will not show in the profit and loss account. However, the amount of retained earnings used will be shows in the statement of changes in retained earnings. On contrary, cost of borrowed funds that is interest will be show in expenditure sides of profit and loss account. Further, it will be deducted from the cash in the company's current assets head. According to the given scenario, the cost will be show in profit and loss account as interest charges however, under the current assets group; it will be subtracted from cash and banks (Managing financial resource and decisions, n.d.). Another, the taken amount of borrowed funds will be show in balance sheet. In context to Sweet Menu Restaurant business, the amount will be show in liability side as long term loan under the noncurrent liabilities head. Further, the amount will raise the business cash hence; it will be show in assets side under the current assets group through increasing the cash and bank balance.
TASK 3 3.1 Analysis of budgets and take appropriate decision The present scenario stated the cash and inventory budget of Blue Island Restaurant for the upcoming four months. The company is a great competitor of Sweet Menu Restaurant business. Under the cash budget, the Restaurant directors summarize the all estimated cash receipts and payments together. The cash budget can be analysing with identifying the changes in cash incomes and expenses (Whited, 2014). In context to Blue Island Restaurant business, the percentage changes are calculated as under:
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Percentage
Changes in cash
changes in cash
sales/Previous month
sales
sales*100
Percentage
Changes in cash
changes in cash
expenses/Previous
expenses
month expenses*100
11.11111111 11
3.3333333333 16.1290322581
83.52229780 -71.5299877601 13.7575236457
8
The prepared budgeted figures indicate that sales only a single factor which contributes the towards the cash incomes. According to the budget it can be reported that the cash sales are increasing in all the four subsequent months. The sales are 15000£, 15500£, 18000£ and 20000£ respectively. However, the percentage changes are 3.33%, 16.129% and 11.11% indicate that in the month of November, sales are increasing at higher rate comparatively than other periods. However, in the month of October, sales increases by only 3% while in the month of December, the percentage changes get declined from 16.129% to 11.11%. It indicates that in this month, sales are increasing at lower rate. Therefore, the managers should make planning to increase business sales (Cox, 2014). On contrary, various components are existed that contributes towards the business expenditures. It includes capital expenditures for buying assets such as Van and Furniture and Fittings. However, operational expenses includes expenses for paying salaries and wages, petrol charges, lighting and energy charges, insurance charges and purchase inventory (Whited, 2014). The total cash expenses for the business are 40850£, 11630£, 13230£ and 24280£ respectively. The expenditures tend to decline in the month of October and increase in both the following months. However, the percentage changes indicate that in the month of October, the cash expenses declined by 71.53% due to eliminate the capital expenses. This in turn, the net cash balance get converts from adverse balance to positive balance amounted to 3870£. After this month, it tends to increase by 13.75% due to increase salary and wages, purchase and lighting and energy expenses while the available cash at the ending period is positive amounted to 1290£. The reason behind that is the net cash balance for the month is Toll Free No. +44 203 8681 670 Mail Us: help@assignmentdesk.co.uk Assignment desk provides assignment help from professional UK writers.
comparatively higher than cash availability at the ending month of October. Once again, expenditures increases by 83.52% due to acquiring the fixed assets amounted to 10000ÂŁ. Another reason for such increases is increasing the operating expenses of salary and wages, lighting and energy and purchasing inventory. This in turn, resulted in negative cash balance and adverse cash availability at the month ending. On the basis of above identification, it can be reported that the months in which capital expenditures will be occur lead to highly increase in the cash expenses results in adverse availability of cash. Through implementing an effective control tool, expenditures can be minimised (Amoako and et. al., 2013). Apart from it, inventory budget indicate that Restaurant is paying 60% of purchase obligations in same month and 40% in the next month. 3.2 Calculation of unit costs (meal cost) and take pricing decisions Blue Island Restaurant cost sheet indicate costs for purchasing steak, vegetables and other ingredients, making payment to labour and all the other overheads. The overheads are absorbed using absorption costing technique. The cost is the basis for setting price for the offered meal. The scenario depicts that prices are decided by adding mark up cost of 40%. Along with it, the rate of value added tax (VAT) is 20%. Thus, prices can be determined as under: Item name
Cost (In ÂŁ)
Steak
3
Vegetables and other ingredients
1.5
Labour
3.5
Overheads (using absorption costing technique)
2
Meal cost
10
Add: mark up percentage @40%
4
VAT @20%
2
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Set meal prices
16
Food cost percentage: It can be calculated by dividing total costs with the decided sale prices. The food cost percentage for Blue Island Restaurant business is computed below: Food cost percentage = Total Ingredients costs/Sale price = 10£/16£*100 = 62.50% Thus, it can be reported that deciding the meal prices at 16£, company is earning 37.50% profit on total sales. It indicates that company is earning good profitability. 3.3 Using investment appraisal techniques to know the project viability The scenario stated that Blue Island Company have available space for open its branches for expansion purpose. Two investment proposal are available that can be go ahead to utilize the available space. Investment appraisal techniques: Two techniques require to be applied with both the proposals that are net present value and payback period. The time period taken by the proposal to get back its initial outflow called payback period (Baum and Crosby, 2014). However, the difference between the discounted cash inflows and initial outlay called net present value. Calculation of payback period Year
Proposal 1
Cumulative
Proposal 2
Cumulative
0
-1200
-1200
-1200
-1200
1
800
-400
300
-900
2
600
200
400
-500
3
400
600
500
0
4
200
800
600
600
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5
50
850
500
1100
Residual value
0
850
50
1150
Payback period of proposal 1st = 1 year + (400ÂŁ/600ÂŁ) = 1.667 year Payback period of proposal 2nd = 3 year Calculation of net present value Discount Year
Proposal 1st
factor@10%
Discounted cash flow
0
-1200
1
-1200
1
800
0.909
727.2
2
600
0.826
495.6
3
400
0.751
300.4
4
200
0.683
136.6
5
50
0.621
31.05
Net present value
490.85 Discount
Year
Proposal 2nd
factor@10%
Discounted value
0
-1200
1
-1200
1
300
0.909
272.7
2
400
0.826
330.4
3
500
0.751
375.5
4
600
0.683
409.8
5
500
0.621
310.5
Residual value
50
0.621
31.05
NPV
529.95 Toll Free No. +44 203 8681 670
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On the basis of above computation, it can be suggested that Blue Island Restaurant has to adopt 2nd investment proposal due to higher the net present value of 529.95ÂŁ. However, the payback period of this proposal is higher to 3 years but decision cannot be taken on the basis of this method. The reason behind that is the method does not identify the overall viability of the investment proposal (GĂśtze, Northcott and Schuster, 2015).
TASK 4 4.1 Main financial statements produced by the organization Every business organization desire to know their performance after the end of the financial year. Therefore it prepares financial statements includes income statement and financial position statements.
Particular
Description
Income statement
This statement summarizes data regarding business incomes and expenditures. All the operating transactions are combined in this statement (Miller-Nobles, Mattison and Matsumura, 2015). The excess of incomes over expenditures indicate business profits. However, in case where expenditures are higher than business incomes indicate worst business performance due to loss available. Profit and loss account is known as income statement indicates gross as well as net profits. Gross profit is the difference between the total sales and cost of goods sold. However, the difference between gross profit and total indirect expenses indicate net profit or loss.
Balance sheet
It combines all the assets and liability of business. Under the assets side, all the current, noncurrent and intangible assets will be shown. Toll Free No. +44 203 8681 670
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However, liabilities include shareholders fund, current liability and long term liability. Financial performance can be determined from this statement. Investors and creditors use this statement to analyse the solvency position and make risk and reward analysis.
4.2 Appropriate formats of financial statements for different type of businesses Every business organization prepares financial statements in the prescribed formats by Generally Accepted Accounting Practices (GAAP) and International Financial reporting Standards (IFRS) (Picker, 2016). Sole proprietorship: In this form of organization, business owner have not legally obliged to prepare financial statements. They prepare profitability statement and balance sheet for their own purpose. The sole proprietors follow simple accounting procedures and prepare financial statements so as to ascertain business profitability. Partnership: Under this form of organization, association of two or more person establish the organization. They make agreements for deciding the terms about their profit sharing ratio in which partners can share the business profits. In case of partnership firms, the business units need to prepare capital accounts for each of the partners. Company: It is a legal body that came into existence by incorporating with the company law. The owners are the ordinary shareholders who make investment in the company with the objective of getting larger the return. The publically listed company prepares financial statements as per international and domestic accounting standards. Many of the organizations need to follow International Financial Reporting Standards (IFRS) so as to report financial statements. Moreover, they need to publish financial statements so as to meet information need of stakeholders.
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4.3 Interpretation of financial statement using ratio analysis method After preparing the financial statement, business needs to analyse their performance by adopting various analytical techniques. Ratio analysis is the most significant among them. It calculates different kind of ratios that represent relationship between two components of the statements (Chan, 2015). It makes analysis of business profitability, solvency, liquidity and efficiency. Sweet Menu
Blue Island
Formula
Restaurant
Restaurant
Net Profit margin
Net profit/sales
0.01
0.13
Gross Profit margin
Gross profit/sales
0.63
0.66
1.78
0.63
liabilities
0.63
0.15
Net sales / net assets
1.79
2.4
Debt/Equity
0.41
0.58
Ratios Profitability ratio
Liquidity ratio Current assets/ Current Ratio
current liabilities Current assets – Inventory/ current
Quick Ratio Efficiency ratio Asset Turnover Solvency ratio Debt/equity ratio
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Profitability ratio: The gross profit of Blue Island and Sweet Menu Restaurant businesses are 0.66 and 0.63. However, net margin ratio is 0.13 and 0.01 respectively. Both the ratios are higher in case of Blue Island indicate that business have better operational performance comparatively than Sweet Menu Restaurant business. Liquidity ratio: The current ratio indicates proportion of current assets and current liability. Blue Island Restaurant has current ratio of 0.63 while in case of Sweet Menu Restaurant the ratio is 1.78. Another measurement of the liability is quick ratio. The ratio of Blue Island and Sweet Menu Restaurant are 0.15 and 0.63. Both the ratios are higher in Sweet Menu Restaurant business implied that this business has greater liquid availability. This in turn, it can be said that Sweet Menu Restaurant business is highly able to meet its short term obligations effectively. Efficiency ratio: Assets turnover ratio of Blue Island and Sweet Menu Restaurant Business are 2.4 and 1.79. It indicates that Blue Island Business Company is using business assets efficiently due to higher the turnover ratio (Henry and Robinson, 2015). Solvency ratio: Blue island Restaurant has debt equity ratio of 0.58 while in case of Sweet Menu Restaurant business the ratio is 0.41. Higher the debt to equity ratio indicates higher the risk and vice versa. Thus, it can be said that Blue Island Restaurant is using higher level of debts as compared to the business equity.
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CONCLUSION The present report concluded that financial sources and making effective financial decisions are crucial for the business. Financial planning is plays a significant role in carrying out business successfully. It helps all the business organizations to acquire finance sources that imposed minimum the cost to the company. This in turn, business can yield higher the profitability. In addition to it, the report concluded that investment appraisal techniques are most important tool through which business can invest the funds in most profitable investment proposal. On contrary, ratio analysis is the tool that analyse the financial statement in every aspect.
REFERENCES ●
Amoako, K.O. And et. al., 2013. Cash Budgetan Imperative Element of Effective Financial Management. Canadian Social Science.
●
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
●
Broadbent, M. and Cullen, J., 2012. Managing financial resources. Routledge.
●
Chan, J.L., 2015. New development: China promotes government financial accounting and management accounting. Public Money & Management.
●
Cox, P., 2014. Master Budget Project: Miscellaneous Cash Flow. Strategic Finance.
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