A Sample ON
MANAGING FINANCIAL RESOURCES AND DECISIONS
BY
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TABLE OF CONTENTS INTRODUCTION .......................................................................................................................... 1 TASK 1 FINANCIAL SOURCES FOR BUSINESS ..................................................................... 1 1.1 Sources of finance for Sweet Menu ...................................................................................... 1 1.2 Implications of sources ......................................................................................................... 2 1.3 Evaluation of sources ............................................................................................................ 3 TASK 2 IMPLICATION OF FINANCE ........................................................................................ 3 2.1 Costs associated with the sources ......................................................................................... 3 2.2 Importance of financial planning .......................................................................................... 4 2.3 Information needs of decision makers .................................................................................. 5 2.4 Impact of finance on financial statements ............................................................................ 6 TASK 3 FINANCIAL DECISIONS BASED ON FINANCIAL INFORMATION ...................... 6 3.1 Analyse budget...................................................................................................................... 6 3.2 Calculation of unit costs........................................................................................................ 8 3.3 Capital Investment Methods ................................................................................................. 8 TASK 4 EVALUATE THE FINANCIAL PERFORMANCE OF COMPANY .......................... 11 4.1 Financial statements ............................................................................................................ 11 4.2 Difference between the statements ..................................................................................... 11 4.3 Ratio Analysis ..................................................................................................................... 12 CONCLUSION ............................................................................................................................. 13 REFERENCES ............................................................................................................................. 14
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INTRODUCTION Financial resources play an important role in the functioning of the business. The funds are essential for survival. The purpose of this report is to understand the sources of finance available to the restaurant company Sweet Menu. It will reflect how the financial decisions are made on the basis of the available information. It will also show the feasibility of different business projects by making use of investment appraisal methods. Some financial ratios are also calculated at the end in order to evaluate the financial position of the business. It is expected that report will be able to achieve its goals and objectives.
TASK 1 FINANCIAL SOURCES FOR BUSINESS 1.1 Sources of finance for Sweet Menu
Figure 1: Source of Finance Sweet Menu restaurant is making plans about opening its two new branches in Central London and Croydon. A sum of ÂŁ 300000 and ÂŁ500000 are needed for the investment (Ball, Jayaraman and Shivakumar, 2012). Hence, finance can be arranged from the two sources: Toll Free No. +44 203 3555 345 Mail Us: help@globalassignmenthelp.com Looking For Assignment Help? Global Assignment Help provides best solution to students at an affordable price.
Internal Sources
Retained profits – This amount is preserved after disposing off all the debts and liabilities. The source is mainly used in meeting the future contingencies such as expansion, retrenchment etc (Bhowmik and Saha, 2013).
Sale of assets – It is the most easily available source within business. Funds can be arranged by selling some of the assets such as machinery, land, etc.
Personal savings – It is the most common form of finance available for the entrepreneurs. Three owners of Sweet Menu can arrange money from their respective personal savings.
External Sources Bank Loan – Most of the people arrange money from this source only. In these days, loans are available at easy formalities. Loan can be taken after fulfilment of certain requirements (Brigham and Ehrhardt, 2011). Bank overdraft – The company will need liquid cash for managing its day to day operations. This need arises due to time gap between the collection and payments. In order to fulfil such gap, bank overdraft is the most preferred option. Issue of shares – It is another good option for Sweet Menu. Shares can be issued for subscription among the public. It can be an IPO that is initial public offering.
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HELP@GLOBALASSIGNMENTHELP.COM 1.2 Implications of sources The implications of the sources can be stated in the following manner:
Retained earnings – The use of retained earnings can have an impact on the divided policy of the company. The amount of dividend for the shareholders may get lower. However, there is no dilution of control and ownership in this option (Dada, Azim and Ullah, 2014). There is no effect on the financial liabilities as money arising from this mode is regarded as the part of reserve and surplus.
Bank loan – Under the option of bank loan, business owners of Sweet Menu are required to perform all the legal formalities. The deposition of collateral security to the bank is also made (Winand and et. al. 2012). On completion of all the legal formalities, owners can make use of funds because the ownership is transferred to them. On the other hand, if business does not succeed, then collateral security given by the owners can go on sale.
Bank overdraft – In this option, lender gives additional money to the entrepreneur. The ownership remains unaffected. Issues related to cash flows may arise because bank demands overdraft to be repaid at a short notice (Ittelson, 2009).
Hire purchasing and leasing – It is the most effective option when there is shortage of cash. Hire purchasing and leasing can be done for any kind of machinery or equipment or tools. The ownership is transferred to the owner after making payment for the last instalments. Hence, it is a kind of loss for the hire purchasing organization.
Sale of assets – Under this option, assets can be sold on lease or on complete sale. The ownership is transferred after making a certain agreement (Siano, Kitchen and Confetto, 2010).
1.3 Evaluation of sources Following sources of finance have been selected for the restaurant: Toll Free No. +44 203 3555 345 Mail Us: help@globalassignmenthelp.com Looking For Assignment Help? Global Assignment Help provides best solution to students at an affordable price.
Bank loan – Bank loan is the most commonly availed option for business owners. It is evident that amount needed for expansion in restaurant industry is high. There are different types of risks associated with it (Flynn, Uliana and Wormald, 2012). Bank loan gives high level of flexibility as compared to the other sources. Loans can be obtained easily after fulfilment of certain legal formalities. Bank overdraft - It can be used by these two new restaurants as it is very effectual in achieving balance between cash inflows and cash outflows. Further, a good record of payments can be maintained because any kind of cheque does not discard due to lack of money. There is no burden of late payment penalties and payments within business are made on time. No paperwork is involved in the process (Keller, 2013). Cash can be accessed any time and the payment can be made to the suppliers with ease. Day to day business operations can be handled in an effective manner. Retained earnings - Another feasible option for Sweet Menu is retained earnings. The company has been running its business operations since last 10 years. It can be estimated that restaurant has earned high amount of profits within business due to such good reputation among the masses (Leung, 2011). There are no legal formalities and financial obligations associated with it as sources are easily available within the business. It can be very feasible if company is in good financial position.
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IMPLICATION OF FINANCE 2.1 Costs associated with the sources Every source of finance has a cost associated with it. These can be described in the following manner:
Retained earnings – There is a problem of improper utilization of funds. Some unessential charges may emerged in case if, objective related to use of retained earnings is not stated clearly (Murty Kopparthi and Kagabo, 2012). Further, an issue of overcapitalization may also arise. Low rate of dividend for the shareholders can lead to dissatisfaction among them.
Bank loan – Bank loan is a common option but sometimes it may also be difficult to use. There is a need to submit different types of legal formalities. Cost in the case of bank loan is the amount of interest which is being charged on the borrowed amount. However, interest charges can also act as burden for the business (Price, 2015). In case of Sweet Menu Company, amount of investment in two proposal is high hence, interest charges will also be high on the loan. There are some costs associated with the paper work which can also be a burden for the entrepreneurs.
Bank overdraft - This option is also having some costs. There are many high interest charges and they are usually higher as compared to other sources of borrowing. However, expenses may increase if the limit of overdraft exceeds (Simser, 2011). Borrower must keep into mind that bank overdraft is a kind of temporary loan and it requires regular revisit from the lending institutions.
Government grant – It is also a loan for the company. It is likely to be appeared in the cash flow statement (Zhang and Chen, 2014). It will be shown under the heading of cash flow from financing activities. It is recorded as a liability under the balance sheet.
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2.2 Importance of financial planning Sweet Menu is required to perform good financial planning with regard to the opening of two new restaurants. It plays an important role within the company. This planning is to be performed carefully in order to make sure that all the things are going into the right direction. It helps in managing cash inflows and cash outflows within the business (Abraham, Deo and Irvine, 2008). There is a need of strong capital foundation and financial planning. It becomes easy to allocate all the resources. All the day to day expenses can be managed with ease as with the help of planning, financial needs are fulfilled on the immediate basis. Future and scope of these two ventures can be decided in a well manner through financial planning. There are many uncertainties related to the future and proper planning helps in removing those uncertainties. It also assists in taking corrective actions at immediate point of time. It also creates a link between the existing and future requirements by estimating sales and growth plans for the business (Menifield, 2013). There is an increase in the cash flow also and this leads to increase in the capital also. Financial planning also facilitates the use of best and suitable source of finance for the business. Company will always need a stable and effective source of money so that its business operations can be financed with ease. Unessential payment of taxes can be avoided as this activity also covers tax planning. High level of control can be seen on the selection of sources (Noor, 2013). 2.3 Information needs of decision makers Decisions that are made within the company are evaluated at these levels:
Strategic level – At this level, directors that mean the three owners of Sweet Menu restaurant will be involved. They are responsible for making more strategic and crucial decisions (Petch, 2012).
Tactical level – At this level, middle level managers are engaged in the process. Generally, they take decision more of technical nature. Toll Free No. +44 203 3555 345
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Operational level – It is the last level in the organization where supervisors are involved in order to take decisions. Here, decisions are related with day to day operations.
There are various decisions makers within the business of Sweet Menu. These are as follows:
Suppliers – Suppliers would like to maintain healthy business relations with the company. They expect that business should give them timely payments for the supply of all the inputs and raw materials (Financial Management and Control, 2014).
Creditors – These are the ones who owns credit from the firm. Creditors show their interest in evaluating the financial position of business because they want to know whether organization has the ability to pay back the credit or not.
Employees – These people take decisions related to their career opportunities and growth within the organization (Bhowmik and Saha, 2013). They want to work with a name which has a good name and which operates on a high scale.
Customers – These customers are interested in the products and services offered by the company. For the last 10 years, Sweet Menu has developed a very solid reputation among its customers with regard to food quality and taste.
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Tax authorities – These authorities make sure that company is making timely payment of taxes or not. These bodies also make sure that there should not be any illegal tax avoidance from the side of company (Davies and Drexler, 2010). Toll Free No. +44 203 3555 345
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2.4 Impact of finance on financial statements Selected sources of finance will have an impact on the different financial statements: Bank Loan – This source can increase the value of liabilities under the balance sheet. The amount of capital will also increase (Evans and Porter, 2010). This event is likely to be recorded under the heading of cash flow from financing activities in the cash flow statement. However, interest applied on the loan amount will be recorded in the profit and loss account. Bank overdraft – This source will enhance the value of liabilities within the balance sheet that is leading to increase in the amount of capital also. This transaction will be recorded under the cash flow statement as well as under the heading of cash flow from financing activities (Mayne and Zapico-Goni, 2007).
However, interest charges are to be recorded in the profit and loss
statement. Retained profits – It will create an impact on the balance sheet that also affects reserve & surplus. This activity will be recorded under the heading of cash flow from investing activities within the cash flow statement. The profit and loss statement will also be affected due to retained earnings. Government grant – It is also a loan for the company. The event is likely to be recorded as a liability under the balance sheet (Merton and Bodie, 2010). It will appear within the cash flow from financing activities under the cash flow statement.
FINANCIAL DECISIONS BASED ON FINANCIAL INFORMATION 3.1 Analyse budget Budget is a quantitative statement which discloses the financial position of the business. Budgeting is performed keeping in mind the future and hence it also identifies the risks associated with the future. The given cash budget is of Blue Island Restaurant. Following observations can be made from the budget: Toll Free No. +44 203 3555 345 Mail Us: help@globalassignmenthelp.com Looking For Assignment Help? Global Assignment Help provides best solution to students at an affordable price.
The sales are reflecting a fluctuating trend and it is affecting the demand of the service of the restaurant within the market (Beck, Levine and Loayza, 2015).
The outflows for the month of September are showing the inability of the firm in meeting the expenses through cash sales. Expenses such as furniture, van and fittings are showing negative balances.
In the month of October, firm has achieved the positive net balance of 3870. The level of expenditures has also shown a decrease in the value.
In the month of November a positive cash balance of 4770 has been maintained due to increasing demand for products (Ittelson, 2009). It reflects that business is having high competency level and efficiency.
In the month of December, there is hike in the furniture and fitting expenses. It has raised the outflow for the company. It has resulted in negative balance however the amount of revenue has increased.
From the above analysis it can be interpreted that financial position of the Blue Island Restaurant is good and company has the potential to achieve expansion. There is a need to adopt appropriate measures to fill out the gapes (Sources of finance, 2012). 3.2 Calculation of unit costs Computation of Food Cost Percentage Food Cost Percentage = Total Costs of Ingredients/ Selling Price * 100 Food Cost Percentage = 10/16*100 Food Cost Percentage = 62.50% After analysing the above calculation, it can be said that 6.50% of the food costs is likely to be beard by the restaurant. A profit of £6 is being generated on the selling price of £16 per meal. In order to achieve good financial position, the restaurant is expecting a 40% profit on the mark up cost and 20% VAT on the products.
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3.3 Capital Investment Methods Blue Island is making plans to assess the viability of two business proposals. The feasibility of the two projects can be examined through application of capital investment techniques. The cash Flows Interpretation After deriving the results of payback period, it can be interpreted that payback period of proposal 2 is higher as compared to proposal 1. It means the initial investment in case of option 2 is being recovered early. Net Present Value Interpretation – After deriving the results of NPV technique, it can be interpreted that net present value of project 2 is higher. It means this project is generating high returns for the company. Recommendation It is recommended that Blue Island is required to select proposal 2 for the investment as it is rendering good returns for the company. The results of this method can be trusted because it takes into consideration the time value of money. Project 2 has huge business potential as compared to project 1.
EVALUATE THE FINANCIAL PERFORMANCE OF COMPANY 4.1 Financial statements The statements which shows financial position of the company from different angles are known as financial statements. There are mainly three types of financial statements which are as follows: Toll Free No. +44 203 3555 345 Mail Us: help@globalassignmenthelp.com Looking For Assignment Help? Global Assignment Help provides best solution to students at an affordable price.
Income statement – It is a document showing all the income and expenses for the company. It shows how better the business performs over a certain period. It states figures of gross profit and gross loss (Evans and Porter, 2010). Amount of revenue, sales and cost of goods sold are also defined in that period. Cash flow statement – It is a statement reflecting the cash inflow and outflow from three different types of activities. It is having both internal and external use. It is used for making long term as well as short term plans in an internal manner. Further it is used by the external stakeholders such as creditors, investors, government for the purpose of making certain financial decisions. Balance sheet – It is a statement reflecting the financial position of a particular company at a particular time (Mayne and Zapico-Goni, 2007). Company’s assets, liabilities and owner’s equity are presented in summarized form. It covers an equation which is as follows: (Assets = liabilities + Owners' equity) It includes different types of assets and liabilities which are fixed assets, current assets, current liabilities, long term debt, loan capital etc. 4.2 Difference between the statements Different types of businesses operates in UK. All the business need to prepare their own financial statements in an appropriate format. There are some requirements which are needed to be fulfilled. Following are the businesses: Partnership – It is important for all the partners to prepare the financial statements. The partners are required to prepare all the major financial statements (Zhang and Chen, 2014). In case if a partner has committed some wrong or fraud into the business, the other partners can discard his share.
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Sole entrepreneurship – This type of business is owned and managed by a single owner. It is not compulsory for the owner to prepare all the major financial statements. The owner of the business is responsible for regulation and monitoring. Limited companies – It is mandatory for a public limited company to disclose all the major financial statements for public viewing (Financial Management and Control, 2014). The statements are prepared as per the provisions of GAAP and IFRS.
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4.3 Ratio Analysis
Current ratio – It is a liquidity ratio which shows the ability of the company in fulfilling its short term obligations. The ratio is showing better results for Sweet Menu. The liquidity position of Sweet Menu is better as compared to Blue Island. The ratio is higher than the ideal ratio which indicates that SM has the potential to fulfil its short term obligations at any time (Advantages and Limitations of Ratio Analysis, 2014).
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Quick ratio – It is also a measurable of liquidity position. The quick ratio is showing good results for SM as compared to BI. It again reflects that restaurant is fulfilling its short term liabilities in effective manner.
Asset turnover – This ratio measures the ability of the company in generating the sales from the assets. The Blue Island is delivering good results hence it can be interpreted that company is utilizing its assets more efficiently (Flynn, Uliana and Wormald, 2012). Ratio above 1 is considered very positive from the business point of view.
Debt to equity ratio - It is a ratio which measures the financial leverage of the company. The ratio for both the companies has been maintained around .5. This denotes that there are half as many liabilities as there is equity (Murty Kopparthi and Kagabo, 2012). It shows that assets of the company are funded in the ratio of 2:1 by investors to creditors.
Net profit margin – It is the proportion of net profit which is in relation to the revenue earned during the period (Brigham and Ehrhardt, 2011). It can be seen that net profit margin for Blue Island is better as compared to the Sweet Menu. It shows that BI is successfully converting the sales revenue into the profits. Company is earning good returns on its assets
Gross profit margin – It is the proportion of gross profits in relation to the revenue earned during a period. Underlying profitability of the business can be noticed from this ratio. The gross margin for BI is better than SM (Ball, Jayaraman and Shivakumar, 2012). It is a sign of good financial position and business is earning good amount of sales.
CONCLUSION From the above study it can be concluded that business is required to make optimum utilization of all the financial resources. Selection of sources depends upon many factors. The pros and cons of every source is needed to be evaluated. Among all the capital appraisal methods, Net Present Value is mots effectual because it takes into consideration the time value of money. Ratio analysis is very impressive tool for measurement of financial performance. It helps in judging the liquidity, solvency and profitability within the business. Toll Free No. +44 203 3555 345 Mail Us: help@globalassignmenthelp.com Looking For Assignment Help? Global Assignment Help provides best solution to students at an affordable price.
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REFERENCES Books and Journals Abraham, A., Deo, H. and Irvine, H., 2008. What lies beneath? Financial reporting and corporate governance in Australian banks. Asian Review of Accounting. 16(1). pp. 4 – 20. Ball, R., Jayaraman, S. and Shivakumar, L., 2012. Audited financial reporting and voluntary disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting and Economics. 53(1). pp. 136-166 Beck, T., Levine, R. and Loayza, N., 2015. Finance and the sources of growth. Journal of Financial Economics. 58(1-2). pp. 261-300. Bhowmik, K. S. and Saha, D., 2013. Sources of Finance. Financial Institution of the Marginalized India Studies in Business and Economics. Pp. 61-71. Brigham, F. E. and Ehrhardt, C. M., 2011. Financial Management: Theory and Practice. 8th ed. Cengage Learning.
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