Financial Management Theories and Practices

This assignment delves into the core concepts of financial management. It requires students to examine key theoretical frameworks and practical applications in areas such as financial planning, investment decisions, capital budgeting, and risk management. Students will analyze provided case studies and research articles to demonstrate their understanding of how these theories are applied in real-world business scenarios.

MFRD

Table of Contents
Introduction......................................................................................................................................1
Task 1...............................................................................................................................................1
1.1 Internal and External Sources of finance..........................................................................1
1.2 Implication of sources of finances....................................................................................2
1.3 Suitable sources of finance for Sweet Menu Restaurant.................................................4
Task 2...............................................................................................................................................5
2.1 Cost of different sources of finance..................................................................................5
2.2 Importance of financial planning for Sweet Menu Restaurant.........................................6
2.3 Information needed by different decision maker of Sweet Menu restaurant..................7
2.4 Impact of source of finance on financial statements........................................................8
Task 3...............................................................................................................................................9
3.1 Analyze of cash budget in order to make appropriate decision......................................9
3.2 Calculation of Unit cost and its relevant decisions related to pricing..............................9
3.3 Viability of the projects by using various investment techniques..................................10
Task 4.............................................................................................................................................11
4.1 Main financial statements...............................................................................................11
4.2 Format of financial statements for different types of organization................................11
4.3 Calculation of various ratios to find out the best company...........................................12
Conclusion.....................................................................................................................................14
References......................................................................................................................................14

Introduction
Finance is the branch of economics concerned with the management and allocation of
resources, investment and acquisition. In other words, it can be said as the science that describes
the management and creation of funds, investment, banking and assets & liability of the
company. In this report, various sources of finance are discussed that are available within the
organization in order to meet its short-term, medium-term and long-term requirements of
finance. In this report, cost incurred by the company at the time of raising funds from these
sources is also discussed.
In this report, importance of financial planning in the respect of Sweet Menu Restaurant
is also interpreted. In this, impact of sources of finance on financial statements will also be
discussed. In addition to it, 4 month cash budget of Blue Island restaurant is going to be analyzed
in order to find its current market position. Along with this, various techniques are used in order
to select the best project out of the two. In this, financial statements of different types of
organization are interpreted. At last, various ratio of both the company are going to be discussed
in order to find out which company’s financial position is good.
Task 1
1.1 Internal and External Sources of finance
There are various sources of finance that are available within the company in order to raise
its finance. Thus, some of the internal and external sources of finance through which Sweet
Menu restaurant can raise its finance are as follows:-
Internal sources of finance
Retained earnings: Sweet Menu restaurant can raise its capital by using retained earning
available with them. Retained profit is the part of profit which is kept as a reserve by the
company for the future use (Arnold, 2011).
Owner's investment: Owner investment is the capital that is incurred by the owner itself
as a start-up or additional capital. This can also be termed as the personal saving of owner of the
company. Owner of Sweet Menu restaurant can even invest their own saving by taking the
personal loan in order to fulfil the requirement of finance.
Sale of fixed assets: By selling out the old or absolute fixed asset, Sweet Menu restaurant
can raise its finance. Keeping the absolute machine will simply increase the cost of company.
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External sources of finance
Issue of shares: This is one of the most common sources for company to raise its funds.
Sweet Menu restaurant can even raise its capital by issuing shares to the general public in lieu of
which they can collect fund from them.
Bank Loan: This is a type of money that is borrowed by the company from bank at an
agreed rate of interest over a set period of time (Beaver, McNichols and Rhie, 2005). Thus,
Sweet Menu restaurant can even raise its capital by borrowing it from the bank by submitting
collateral to bank.
Hire purchase: By using this source, Sweet Menu restaurant can be able to use assets or
property without purchasing it at that particular time.
1.2 Implication of sources of finances
Sources Legal Financial Dilution of ownership
control
Sale of assets A legal procedure
needs to be followed
by Sweet Menu
Restaurant at the time
of selling assets.
Able to meet its urgent
requirement of finance
but at the same, it will
also reduce the assets of
Sweet Menu Restaurant.
Ownership changes,
when the legal procedure
of selling asset is
completed.
Issue of shares A proper legal
procedure needs to be
followed by Sweet
Menu restaurant at the
time of issuing shares.
Company will be able to
meet its long-term
requirement of finance
but at the same, company
is also required to pay
dividend to the
shareholders.
Ownership changes when
shares are issued.
Bank loan Company needs to fill
up the application
form at the time of
availing loan.
Sweet Menu restaurant is
able to avail the finance
within a short period of
time but at the same time,
they are required to pay
Ownership of the fund
borrowed changes.
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high rate of interest
(Brigham and Ehrhardt,
2013).
1.3 Suitable sources of finance for Sweet Menu Restaurant
Sources Advantages Disadvantages Suitability
Issue of shares Able to get large
amount of capital
within a short period
of time. This method
also aids company to
meet its long-term
requirement of funds.
In addition to this
company is not
required to repay the
fund collected.
Dividend will be paid
out of the profit earned
by the company. This
in turn will reduce the
profit margin of
company. This method
is only suitable for a
limited company.
This is one of the best
and safest methods for
Sweet Menu restaurant
in order to expand its
business.
Bank loan Business is able to get
advance. Company
can also borrow large
amount of money in
order to meet its long
term requirement of
finance (Chandra,
2011).
Need to repay money
borrowed within a set
period of time along
with the high rate of
interest. Company is
also required to submit
collateral security at
the time of availing
loan facility.
This method is suitable
for purchasing asset,
or paying dividend to
the shareholders or to
expand its business.
Thus, after comparing the above mentioned two sources it can be concluded that in order
to raise capital Sweet Menu restaurant should issue new shares into the market. Because by
issuing the share company will be able to increase its equity whereas if they go with bank loan
them there debt will increase which is not good. In addition to this it can also be concluded that if
company issue the share s than they are not required to pay dividend to the shareholders if the
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situation of loss arises. But company will be required to pay interest to the bank irrespective of
the fact whether company generate the profit or suffer loss. Along with this company is not
required to submit any collateral security at the time of issuing the shares. Sweet Menu restaurant
is not even required to repay the money raised if issuing shares.
Task 2
2.1 Cost of different sources of finance
Retained earnings: - Sweet Menu restaurant can use this method in order to expand its
business. But at the same time company is required to pay taxes on their savings. In addition to
this Sweet Menu restaurant will not be able to garb any new opportunities. Opportunity cost is
the cost them is lost by the company when they prefer to choose any other alternative against the
one selected.
Sale of fixed asset: - Sweet Menu restaurant can use this method in order to expand its
business by selling the old and obsolescent assets. But at the same time it will increase the cost
of the company (DRURY, 2013). Company assets will be reduced as compared to its liability.
Sweet Menu restaurant can also face the loss if it is not able to sell out the asset at the deprecated
value.
Issue of shares: - Company can be able to meet its long term requirement of the funds. But
at the same time it will affect the cost of the company. Sweet Menu restaurant is required to pay
dividend to the shareholders out of the profit earned. In addition to this Sweet Menu restaurant is
required to bear various expenses than can arrive at the time of issuing the shares. These
expenses can occur at the time of adverting or at the time of following legal procedure to issue
shares.
Bank loan: - Sweet Menu restaurant by availing loan facility from the bank can be able to
meet its urgent requirement of finance. But at the time it will affect the cost of the company.
Company is required to submit the collateral security (Efendi, Srivastava and Swanson, 2007). In
addition to which they are also required to pay high rate of interest to the bank. This in turn
reduces the profit margin of the company.
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2.2 Importance of financial planning for Sweet Menu Restaurant
To manage income available with the company more efficiently:- Financial planning of all
activities in advance will assist the company to manage its available income more efficiently in
order to achieve the desired objective.
To build a long term capital base and shape all the future activities related to finance: -
Planning of all the financial activities in advance will aid the Sweet Menu restaurant to build a
long term capital base which in turn will help the company to shape its all future activities
related to the future.
Utilization of the resources to the full extent can be made: - Advance planning of all the
financial activities will aid the Sweet Menu restaurant to utilize the available resources to the full
extent (Hursti and Maula, 2007). In addition to which company will also be able to reduce the
wastage of resources.
Sale forecast: - Sweet Menu restaurant can forecast the sale by planning all the financial
activities in advance.
Able to distribute finance properly in each and every department: - Financial planning will
assist the Sweet Menu restaurant to distribute the finance properly that is available with them in
each and every department. Financial planning will also assist the company to overcome the
problem of deficit or surplus.
Increase the cash flow and to monitor the spending habits and expenses: - Proper planning
of all the financial activities will assist the company to increase its flow of cash. Along with this
it will help the Sweet Menu restaurant to monitor the spending habits and expenses that are
taking place in the restaurant.
Reduce Uncertainty: - Financial planning will assist the Sweet Menu restaurant to reduce
the condition of uncertainty. Planning of all financial activities will help the Sweet Menu
restaurant to know in advance the area which can affect the demand and supply of the products
in there restaurant.
Avoid condition of Shocks and Surprises: - Sweet Menu restaurant will be able to avoid the
condition of shocks and surprises that can be faced by them due to change in the internal and
external environmental condition (Johnson, 2014).
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Maintain a balance between inflow and outflow of cash: - Planning of all the financial
activities will aid the Sweet Menu restaurant to maintain a balance between inflow and outflow
of the cash from within and outside the business organization.
2.3 Information needed by different decision maker of Sweet Menu restaurant
There are assortments of information that are required by different decision maker. Some
of the information required by the stakeholders of the company is as follows:-
Shareholders: - Shareholders are the individual who invest their capital in the company.
These shareholders want the company's financial statements in order to analyze the financial
position of the company. They also prefer these statements in order to decide whether they
should in the company (Kaplan and Atkinson, 2015). Along with this they also prefer statements
to decide whether company is capable of paying dividend to them or not.
Employee: - Employees are the persons who work for the betterment of the company. They
simply prefer the income and expenditure statements in order to find out whether the Sweet
Menu restaurant is generating profit all not. In addition to this they also prefer this statement in
know whether the company is in a position to pay them salary on time or not.
Customer:-Customers are the persons who want value for the money invested by them.
These individual does not require any type of statements. They simply want that the Sweet Menu
restaurant should provide them with high quality product at low price.
Suppliers: - They supply raw material to the Sweet Menu restaurant. They want the
financial statements of the company in order to decide whether the company is in a position to
pay them on time for the goods supplied by them or not.
Manager: - Managers are the individuals who form various strategies in order to achieve
the desire objective of the company. Managers want balance sheet and financial statements of the
company in order to find out the growth of the company (McKinney, 2015). In addition to these
managers requires these statements in order to form various strategies to achieve the desired
objective.
Government: - Government is the corporate body which affects the functioning of the
organization. They want financial statements and company audit report in order to calculate the
amount of tax need to be paid by the company. Along with this they prefer these statements to
decide whether the company is in a position to survive or not.
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2.4 Impact of source of finance on financial statements
Sale of assets: - Entry of sale of assets will be shown on the asset side of the balance sheet
under the head of fixed asset (Molly, Laveren and Deloof, 2010). The value of the asset will be
deducted from the fixed assets and the same will be added under the head of current assets in
terms of cash or bank.
Retained earnings: - Entry of retained earnings will be made on the liability side of the
balance sheet under the head of Share capital.
Issue of shares: - Entry of issue of shares will be made on the liability side of the balance
sheet under the head of share capital. Along with this entry of dividend paid to the shareholders
will be shown on the debit side of the profit and loss account.
Bank loan: - Entry of bank loan will be will be shown on both asset and liability side of the
balance sheet under the head of non-current liability and current assets.
Profit and loss account for the year ended 31st December,
Operating profit
Less: Interest paid to bank
Profit before tax
Tax
Profit after tax
Dividend paid to shareholders
Retained profit for the year
….
…..
….
….
…..
….
…...
Balance sheet as at 31st December,
NON-CURRENT ASSETS
Furniture
less:- sale of asset
…...
…...... …....
CURRENT ASSETS
Cash(+)[due to sale of fixed asset]
Bank(+)[due to bank loan taken from bank]
….....
SHARE CAPITAL
50,000 ordinary share capital @ £10 per share
Revenue reserves(Retained profit) ….....
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NON-CURRENT LIABILITY
Loan …....
Task 3
3.1 Analyze of cash budget in order to make appropriate decision
From the following cash budget it can be concluded that financial position of the
company is relatively not good. It inflow and outflow of the cash is constantly changing. In the
month of September payment made by the Blue Island restaurant was almost three times that of
its income generated. It is also seen out the in the month of October and November Blue Island
restaurant was able to manage its flows of cash from the organization. But again in the month of
December Company’s payment was more than its income generated. Thus, at last it can be
concluded that financial position of the Blue Island restaurant is not relatively good. The reason
behind this could be that company is not focusing more on the formation of the various strategies
in order to control the flow of cash.
3.2 Calculation of Unit cost and its relevant decisions related to pricing
Particular Cost
Cost of meal £10
Mark up pricing 40.00%
VAT 20.00%
Cost of meal £10
Mark up pricing £4
VAT £2
Final price £16
Unit price = 16-4-2= £10
From the following calculation it concluded that per unit cost price is £10. Unit cost is
calculated by deducting the VAT and Mark up price from the final price of per day meal.
3.3 Viability of the projects by using various investment techniques
Payback period
Year Proposal 1 Proposal 2
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Cash flows Cash flows
0 (£1,200) (£1,200)
1 £800 (£400) £300 (£900)
2 £600 £200 £400 (£500)
3 £400 £600 £500 £0
4 £200 £800 £600 £600
5 £50 £850 £500 £1,100
Residual Value £0 £850 £50 £1,150
Payback period:- Payback period method is used by the company in order to calculate
the time period after which they are able to recover back the amount invested by them (Sabău,
2013). Thus, after calculating the Payback period of both the proposal it is suggested that Blue
Island Restaurant should move on with proposal 1. Because PBP of proposal 1 is less as
compared to proposal 2.
Net present value
Proposal 1 DF @10% Present value Proposal 2 DF@10%
Present
value
Initial
investment (£1200) (£1200)
1 £800 0.909 £727.2 £300 0.909 £272.7
2 £600 0.826 £495.6 £400 0.826 £330.4
3 £400 0.751 £300.4 £500 0.751 £375.5
4 £200 0.683 £136.6 £600 0.683 £409.8
5 £50 0.621 £31.1 £500 0.621 £310.5
Residual Value £0 0.621 £0 £50 0.621 £31.1
NPV £491 £530
Net present value: - Net present value method is used by the company to calculate the flow
of cash by taking into consideration the rate of discounted factors (Shahrokhi, 2008). Thus, after
the NPV it is suggested that Blue Island restaurant should move on with proposal 2 as compared
to proposal 1. Because proposal 2 will give higher return to the company on the amount invested.
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Task 4
4.1 Main financial statements
There are three types of financial statements that need to be issued by the UK limited
company are as follows:-
Income statements/Profit & loss account: - Income statement is the statement that set out
the summary of the trading event that impact the working of the company over a particular year
of time (Moyer and et.al, 2011). This statement shows how each type of events affects the wealth
of the company. The income statement varies from one business to another. This statement is
also prepared in order to find out the income generated and expenses made by the company
during a financial year.
Balance sheet: - Balance sheet is prepared by the company in order to find out the actual
position of the business. These statements are also used by the manger to prepare various
strategies. This is a statement of the manner which indicates how business holds its wealth, how
much of the wealth is pledged to outsiders and the net wealth of the business.
Cash flow Statement: - This statement includes the analyzed of the cash including the
short-term highly liquid investment that are received and paid by the company during the
financial year. This statement gives the reader an insight into the sources and uses of cash over a
period of time (Muradoglu and Harvey, 2012). This statement is divided into three different
types of activities (i.e. operating, investing and financial activities). In addition to this, this
statement also aids the company to find out its actual position at the end of every financial year.
4.2 Format of financial statements for different types of organization
Limited company: - Limited company is the company that is listed on the stock exchange.
Limited company can be a private firm or a public firm. Function of private firms are managed
and controlled by the owner itself (Paramasivan, 2009). Similarly, functions of public firm are
controlled and managed by government. These both companies are required prepare all type of
financial statements along with the company audit report in order to calculate the amount of
profit and tax that need to be paid by the company.
Partnership: - Partnership firm are the firms which is established by making an agreement
between all the partners (Rose and Hudgins, 2014). This firm is also required to prepare all types
of financial statements along with partners’ capital account.
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Sole traders: - Sole traders/proprietor is the firm that owned and controlled by the single
individual person (Ryan, 2005). These organization is required to prepare only income statement
if its size is small otherwise if its size is large than are required to prepare all financial
statements.
4.3 Calculation of various ratios to find out the best company
Ratios Sweet Menu
Restaurant Blue Island Restaurant
PROFITABILITY
RATIO
Gross profit £222,500 £198,000
Net sales £350,000 £299,000
Gross profit ratio
Gross profit
ratio=Gross profit/Net
sales*100
63.57% 66.22%
Net profit £85,000 £94,800
Net sales £350,000 £299,000
Net profit ratio Net profit Ratio=Net
profit/Net sales/100 24.28% 31.70%
LIQUIDITY RATIO
Current assets £68,000 £41,000
Current liability £195,000 £123,000
Current ratio Current ratio=Current 0.35 0.33
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assets/Current liability
Liquid assets £24,000 £10,000
Current liability £195,000 £123,000
Quick ratio
Quick ratio=Current
assets-Stock/Current
liability
0.12 0.081
SOLVENCY RATIO
Sales £350,000 £299,000
Stock £44,000 £31,000
Stock turnover ratio
Stock turnover
ratio=COGS/Avg
inventory*100
0.12 0.10
Debt £31,000 £5,000
Equity £164,000 £118,000
Debt equity ratio Debt equity
ratio=Debt/Equity 0.19 0.04
After calculating the various ratios it can be concluded.
Profitability ratio: - Profitability ratio of Blue Island restaurant is favourable as compared
to that of Sweet Menu Restaurant. The reason behind this could be that company has started
making various strategies in order to reduce the cost of its production.
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Liquidity ratio: - After calculating the liquidity ratio of both the companies it can be
concluded that financial position of Blue Island is good as compared to Sweet Menu Restaurant.
Because the lower the liquid ratio indicates that more amount of liquid cash is available with the
company in order to meet its urgent requirement of funds. The reason behind this could be that
Blue Island restaurant is properly managing all its financial activities.
Solvency ratio: - Solvency ratio also indicates that financial position of Blue Island
restaurant is favourable as compared to Sweet Menu restaurant. Because the lower solvency ratio
indicates that financial position of the company is good.
Thus, at last it can be concluded that financial position of the Blue Island Restaurant is
better as compared to Sweet Menu Restaurant in term of profitability, liquidity and solvency.
Conclusion
The following report emphasizes on the several of finance will aid the Sweet Menu restaurant to
start up its two new units in different countries. In this importance of financial planning to Sweet
Menu is also concluded. In this report cash budget of the Blue Island restaurant is also analyzed
in order to find out its flow of cash. In it also concluded that Blue Island restaurant should move
on with proposal 1 because it is much more beneficial as compared to proposal 2. At last, various
ratios of both the restaurants are calculated and it is concluded that financial position of Blue
Island Restaurant is fairly better as compared to Sweet Menu restaurant.
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References
Books and Journals
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Accounting Studies. 10(1). pp. 93-122.
Brigham, E. and Daves, P., 2012. Intermediate financial management. Cengage Learning.
Brigham, E. and Ehrhardt, M., 2013. Financial management: theory & practice. Cengage
Learning.
Brigham, E. and Houston, J., 2011. Fundamentals of financial management. Cengage Learning.
Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Efendi, J., Srivastava, A. and Swanson, E. P., 2007. Why do corporate managers misstate
financial statements? The role of option compensation and other factors. Journal of
Financial Economics. 85(3). pp. 667-708.
Hursti, J. and Maula, M.V., 2007. Acquiring financial resources from foreign equity capital
markets: An examination of factors influencing foreign initial public offerings. Journal of
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Johnson, P., 2014. Fundamentals of collection development and management. American Library
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Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-
CLIO.
Molly, V., Laveren, E. and Deloof, M., 2010. Family business succession and its impact on
financial structure and performance. Family Business Review, 23(2), pp.131-147.
Moyer, R.C., McGuigan, J., Rao, R. and Kretlow, W., 2011. Contemporary financial
management. Cengage Learning.
Muradoglu, G. and Harvey, N. 2012. Behavioural finance: the role of psychological factors in
financial decisions. Review of Behavioural Finance 4 (2). pp.68 – 80.
Paramasivan, C. 2009. Financial management. New age international.
Rose, P. and Hudgins, S., 2014. Bank Management & Financial Services, 9th.
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