Financial Analysis and Investment Proposal

Verified

Added on  2020/06/03

|18
|4135
|99
AI Summary
This assignment involves conducting a comprehensive financial analysis of a hospitality business named R. Riggs. Students must analyze trial balance data, calculate key financial ratios, and determine the optimal capital structure by exploring both internal and external financing options. The report also requires evaluating two investment proposals based on profitability and margin considerations. Students will need to demonstrate their understanding of financial statements, cost analysis, break-even point (BEP) calculations, and investment decision-making.

Contribute Materials

Your contribution can guide someone’s learning journey. Share your documents today.
Document Page
Finance in the Hospitality Industry

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Reviewing sources of funding which are available to business and service industries.........1
1.2 Evaluating range of methods that contribute in income generation......................................5
TASK 2............................................................................................................................................6
TASK 3............................................................................................................................................6
TASK 4............................................................................................................................................6
3.1 Assessing the sources and structure of trial balance..............................................................6
3.2 Evaluating business accounts, adjustments and notes...........................................................7
4.1 Calculating ratios to assess business performance................................................................9
4.2 Recommending appropriate future management strategies.................................................11
TASK 5..........................................................................................................................................12
5.1 Classifying cost in terms of fixed, variable and semi-variable............................................12
5.2 Calculating contribution per product and explaining CVP relationship..............................12
5.3 Taking short-term management decision on the basis of profit or loss potentials and BEP
analysis......................................................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16
Document Page
INTRODUCTION
Financial management is essential within the hospitality sector for the attainment of goals
and objectives. In the recent times, hotel unit can enhance productivity and profitability only
when it delivers high quality services to the customers. Further, level of competition is also stiff
in the hospitality sector which in turn directly influences profit margin of firm. In this regard,
finance manager of the firm has accountability to make suitable assessment of cost and lay high
level of emphasis on developing competent plan. Now, companies which are operating in
hospitality sector needs to conduct research for assessing the expectation level of customers.
Hence, by allocating funds to each business activity in a optimal way firm can attain success to a
great extent. The present report is based on different case scenarios which will provide deeper
insight about the sources that can be undertaken by business entity for meeting financial
requirement. Besides this, it will shed light on the sources that assists firm in generating more
income. It will also develop understanding about the aspects of financial accounting such as trial
balance, income statement and balance sheet. In this, report will highlight the extent to which
financial position and performance of R. Riggs is sound. Report will also entail how BEP
analysis aid in decision making and makes contribution in the attainment of goals.
TASK 1
1.1 Reviewing sources of funding which are available to business and service industries
On the basis of cited case situation, business entity of small business enterprise requires
£450000 for purchasing new building. In this, there are several internal and external sources
that can be undertaken by the firm for meeting monetary needs pertaining to capital expenditure
or investment. Hence, major internal and external sources which are suitable for this purpose
enumerated below:
Internal sources
Document Page
Retained profit: In order to deal with the undesirable situations business entity lays high
level of emphasis on retaining some amount rather than investing the whole. Hence, by using
such fund entrepreneur can meet financial needs and requirements to the significant level.
Advantages: Disadvantages
In this, owner of the firm is free from fixed
obligation in terms of interest payment (Brotherton,
2012).
When business unit uses whole retained profit for
meeting requirements then they would not be in
position to deal with the future contingent situation.
Friends and family members: By taking financial assistance from friends and family
members owner of small business unit can generate funds.
Advantages: Disadvantages
Less interference in decision making
Absence of both monetary and non-
monetary obligations
Sometimes, business entity faces difficulty in
convincing family members towards the plan. This
aspect imposes issue in front of firm pertaining to
raising funds.
Sales of fixed assets: Sole trader can also generate funds by selling fixed assets which
are not used in productive activities. Every business unit has some scrap in the form of
machinery, other equipments etc (Internal Source of Finance, 2017). In this regard, by selling
such unused assets entrepreneur can raise fund and thereby would become able to implement
plan.
Advantages: Disadvantages
Low cost is the main advantage which
is associated with the selling of assets.
Moreover, in this, by placing
advertisement in the newspaper firm
In the case of quick selling of assets, sometimes
business unit does not receive suitable amount.

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
can attract potential investors.
Facilitates quick generation of funds
Reduction or controlling of working capital: Business entity can meet monetary needs
and requirement by making control on working capital. In accordance with such aspects by
speeding up the time of receivables and stretching payables business entity can manage funds
more effectually and meet monetary aspects.
Advantages: Disadvantages
Assists in maintaining ownership
within the firm
No requirement of collateral security
(Working Capital Loans The
Advantages and Disadvantages, 2017)
Negatively affects credit rating
High interest rates
External sources
Bank loan: It is one of the most preferred sources of finance which provides high level of
assistance to business entity in fulfilling monetary needs. Hence, by applying to banking
institution on the basis of collateral security owner of small business unit can generate funds.
Advantages: Disadvantages
This source of finance offer deduction
to the business entity in tax brackets.
In this, sole trader has convenience
pertaining to making payment in the
form of installments (Zhuang and et.al.,
2011).
In business loan, interest rates are
usually high which in turn imposes
burden on sole trader.
Sometimes, banks do not grant whole
amount for which business entity has
applied.
Document Page
Leasing: For purchasing building business entity requires more funds, in this, by taking
concerned asset on lease entrepreneur can meet financial needs. Moreover, in leasing, by making
payment of rent owner of the firm can use building for performing business activities.
Advantages: Disadvantages
Such financial source offers tax
benefits to the entity.
Leasing source protects business entity
from the potential of loss such as
reduction in the value of assets.
Under leasing, entrepreneur is obliged
to make use of asset as per the terms
and conditions of lessor. This in turn
closely influences the strategies and
policies of firm.
Venture capitalists: In the recent times, venture capitalist is the main sources of finance
which can be undertaken by small business entities. Now, venture capitalists provide fund to the
entities that have sound plan and potential to grow.
Advantages: Disadvantages
Along with the financials, venture
capitalist source provides organization
with expert advice. Moreover, due to
having interest in the venture,
capitalists also offer legal and tax
assistance to business entities (How to
Finance Your Business Growth, 2017).
Further, in this, sole trader offers
return to the capitalists only when
enough profit is generated. In this way,
such source reduces fixed monetary
obligation of firm.
Loss of control is one of the main
drawbacks which are associated with
such source. Moreover, venture
capitalists act as a equity holders and
interferes in the decision making
aspect.
Document Page
Factoring: Each business has some receivables so by discounting the same from financial
institution owner of small business unit can generate funds.
Advantages: Disadvantages
It offers conveniences to business entity in relation
to getting fund pertaining to receivables before the
due date. This is main benefit which encourages
business unit to undertake such source.
In against to offering early payment of receivables
financial institution charges some discounting
prices which in turn impose cost in front of firm.
In conclusive form, it can be stated that sole trade can meet monetary requirement of
£450,000, pertaining to capital expenditure, through the means of venture capitalist and bank
loan. Both such sources will assist in fulfilling needs and help in developing highly optimal
structure.
1.2 Evaluating range of methods that contribute in income generation
There are several methods which large sized restaurant unit can undertake to generate
income such as:
High focus on attractive interior and exterior: In the context of restaurant sector, interior
and exterior is the main aspects that have significant impact on customer decision
making. Thus, by making focus on creativity in this regard owner of restaurant unit
would become able to attract more customers which in turn contributes in income
generation.
Selection of skilled and talented personnel: In the context of large sized restaurant unit,
employees are the one who offer and deliver services to the customers. Thus, satisfaction
level of customers is highly influences from the manner in which personnel deal with
them. In this regard, by selecting highly skilled and talented personnel business entity
would become able to enhance customer satisfaction and loyalty (Kizildag, 2015). This in
turn makes positive and significant contribution in the profit margin of firm.
Organizing events: Large unit of restaurant chain can enhance income by organizing
cultural events, exhibition and band performance (Nussbaum, 2012). All such events
enable business entity to generate more income and enhance its profitability aspect.

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
Sub-renting: By giving some part of restaurant on rent to others entrepreneur can
enhance its income (Law and et.al., 2012). For instance: Owner of restaurant chain can
increase its income level by giving some part to the one who offer handicraft products. In
this way, by receiving rent from such entity owner can get more income.
Offering high quality and developing attractive ambiance: Now, customers prefer to
visit hotel or restaurant which lays high level of emphasis on hygiene. Thus, by providing
customers with high quality services and attractive ambiance business entity can
maximize both productivity as well as profitability.
Cost control: For enhancing the income level, it is highly required for the owner of large
chain of restaurant to exert control on cost aspect. In this regard, by applying the tool of
budgetary control manager of restaurant can assess financial deviations and thereby
would become able to take action for improvement (Luo, 2011). Thus, through the means
of such tool firm can avoid unnecessary expenses and thereby become able to enhance
income level.
TASK 2
Enclosed in PPT.
TASK 3
Enclosed in PPT.
TASK 4
3.1 Assessing the sources and structure of trial balance
Trial balance may be served as a statement which contains balances of all the ledger
accounts. It has two sides such as debit and credit that clearly reflects the figures of assets,
liabilities, income and cash flow statement (What is a Trial Balance, 2017). This statement is
highly significant which in turn provides input or financial assistance to R. Riggs in the
preparation of financial statements.
Sources and structure of trial balance
Document Page
Ledgers are considered as main sources that give input for the trial balance. By
considering the closing balances of ledger accounts, trial balance is prepared by the accountant
which in turn helps in preparing further financial statements. Structure of trial balance mainly
consists of two sides such as debit and credit. Figures pertaining to expenses and assets are
recorded in assets side. On the other hand, incomes as well as liabilities are posted in the credit
side of trial balance.
Journal Entries in the books of accounts of R. Riggs
Date Particulars Debit side (£) Credit side (£)
03 / 03 /
2017
Furniture a/c…Dr
To Creditors a/c…Cr
525
525
30 / 12 /
2017
Bank a/c….Dr
To Interest received from Bank... Cr
500
500
Trial balance of R. Riggs
Particular Debit (£) Credit (£)
Furniture 525
Creditors 525
Bank a/c 500
Interest received from Bank 500
Document Page
Total 1025 1025
3.2 Evaluating business accounts, adjustments and notes
Income statement for the year ended on 31st December 2017
Particulars
Amount
(£)
Amount
(£)
Sales 157165
Less Cost of Goods Sold 94520
Gross Profit 62645
Discount Received 160
Interest Earned 500
Operating profit 63305
Less: Expenditure
Wages and Salaries 31740
Rent 3170
Discount allowed 820
Van Running Cost 687
Bad debts 730
Doubtful debt provisions 91
Depreciation 1630
Total expenses 38868
Net Profit 24437
Statement of financial position for the year ended on 31st December 2017
Particulars (in £) (in £) (in £)
Fixed Assets
Office furniture and Van (6650 + 525) 7175
Less: Depreciation 1630 5545
Current Assets
Stock 2400

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
Debtors 12316
Less: provision for doubtful debts 496 11820
Prepaid expenses 230
Cash at bank and hand (5424 + 500) 5924
20374
Total Assets 25919
Current Liabilities
Creditors 5245
Creditors of furniture 525
Accruals 412 6182
Financed by
Capital 12400
add: Net profit 24437
Less: drawings 17100 19737
Total Liabilities 25919
4.1 Calculating ratios to assess business performance
Ratio analysis of R. Riggs is as follows:
Ratios Formula Calculation
Profitability ratios
Sales revenue 157165
Gross profit 62645
Net profit 24437
Document Page
Gross Profit Ratio (Gross profit / Net Sales)
*100
(62645 / 157165) *100 = 39.9%
Net Profit Ratio (Net profit / Net Sales) *100 (24437/ 157165) *100 = 15.5%
Liquidity ratios
Current assets 20374
Current liabilities 6182
Current Ratio Current assets / Current
liabilities
20374
/ 6182 = 3.29
Acid test ratio/ Quick
Ratio
(Current asset – (Closing
stock + prepaid expenses) /
Current liabilities
(20374
– (2400 + 230) / 6182 = 2.87
Efficiency ratios
Debtors 12316
Creditors 5770
Cost of goods sold or
purchase
94520
Debtor’s turnover Ratio Debtors/ (Annual credit sales
/ 365)
12316 / (157165 * 365) = 28.60 days
Stock turnover ratio COGS / Stock 94520 / 2400 = 39.38 times
Creditors turnover Creditors / (Annual credit 5770 / (94520 * 365) = 20.28 Days
Document Page
Ratio purchase / 365)
GP ratio: By doing ratio analysis, it has found that, in the year of 2017, GP margin of R.
Riggs accounted for 39.9% respectively. Hence, GP margin of the firm was neither too
high nor too lower. However, due to high level of direct expenditure firm failed to
generate suitable margin.
NP ratio: In comparison to GP, NP margin of R. Riggs was lower in the year of 2017.
The rationale behind such lower net margin is that firm failed to exert effectual control on
indirect expenditure.
Current ratio: Result of ratio analysis shows that, in 2017, current ratio of R. Riggs was
3.29:1 significantly. Hence, considering the ideal ratio such as 2:1, it can be presented
that liquidity position and performance of R. Riggs is sound.
Quick or acid test ratio: The above depicted table shows that at the end of 2017, quick
ratio implies for 2.87:1. On the basis of ideal ratio, business unit must have 2 assets for
meeting 1 obligation. In accordance with such standard R. Riggs is highly capable in
relation to meeting obligations from current assets excluding stock & prepaid
expenditure.
Debtor’s receivable period: Financial statement analysis exhibits that debtor’s receivable
is 29 days. This aspect shows that business unit offers more credit limit to the customers
which in turn place direct and negative impact on working capital.
Creditor’s payment period: From analysis, it has been identified that R. Riggs made
payment to creditors within 20 days in the year of 2017. On the basis of such aspect, it
can be said that, in 2017, business unit was obliged to make payment to creditors earlier.
Stock turnover ratio: In 2017, stock turnover ratio of R. Riggs account for 39.38 times.
By taking into account such aspect, it can be presented that manager has managed
inventory more effectively and efficiently.

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
4.2 Recommending appropriate future management strategies
To,
Board of Directors, R. Riggs
Date: 11th November 2017
Subject: Financial analysis and improvement strategies
In order to assess financial position of the company ratio analysis tool has been undertaken. On the basis
of ratio analysis results, it is recommended to the team of higher management to lay emphasis on
undertaking modern budgeting technique such as Activity and zero based which in turn helps in
developing competent financial plan. By doing this, firm can make suitable comparison of actual
performance and thereby become able to develop suitable strategies that exert control on both direct as
well as indirect expenses. Besides this, it is suggested to the firm that it should make focus on identifying
most profitable opportunities rather than retaining more current assets with itself. On the basis of such
aspect, by investing money in the profitable opportunities firm enhance profitability aspect. Besides this,
business unit should purchase product from supplier who grant credit for longer time. Besides this, for
making improvement in working capital owner should reduce the credit limit of debtors. Hence, by
undertaking all such strategies business unit would become able to strengthen its position and
performance.
Sincerely
Business analyst
TASK 5
5.1 Classifying cost in terms of fixed, variable and semi-variable
Fixed cost: It comes under the category of cost which does not increase or decrease as per
the changes take place in the level of output produced or sold. In other words, it can be
said that units of production do not have significant impact on fixed cost (Irwin and Scott,
2011). Such cost includes depreciation, salaries of personnel, rent etc.
Variable cost: As the name suggests, such type of cost varies in accordance with the level
of output produced. Hence, proportion of units production and sold has direct impact on
Document Page
the cost level (Variable Costs, 2017). Examples of variable cost include material, labor
and packaging.
Semi variable cost: It is recognized as mixed cost which in turn includes both fixed and
variable. On the basis of such aspect, cost remains fixed at specific set of production and
becomes variable after specific level exceeded. Wages, electricity etc are the main
examples of semi-variable cost which business unit incurs while performing activities.
5.2 Calculating contribution per product and explaining CVP relationship
Break even point (BEP) clearly indicates the level at which cost and revenue will be
equal. By doing BEP analysis, firm can determine the point after which it would become able to
attain profit margin (Ross, Westerfield and Jordan, 2008). Further, CVP analysis also provides
high level of assistance to the company in assessing the number of units which it needs to
produce and sold for getting desired profit margin.
Computation of BEP analysis for Problem Ltd
Particular
s
Figures
Sales units 10,000 units
Sales
revenue
£100,000.00
Variable
cost
£70,000.00
Selling
price (per
unit)
£100,000 /
10000 = £10
per unit
Variable
cost (per
unit)
£70000 /
10000 = £7
per unit
Break-even
point (in
TFC /
(selling
20000 / (10-
7)
Document Page
units) price-
variable
cost)
6667 units
Break-even
point (in
value)
BEP
(units) *
selling
price
66670
Number of
units to
earn
required
profit of
£20000
(TFC +
target
profit) /
(selling
price-
variable
cost)
(30000 +
20000) / 2
16667 units
Particular
Each
unit
1st proposal
Each unit
Each
unit
2nd
proposal
Each
unit 3rd proposal
Sales £9 90000 £11 110000 £10 100000
Less-
variable cost £7 70000 £7 70000 £8.5 85000
Contribution 2 20000 4 40000 £1.5 15000
Less-fixed
cost 20000 20000 20000
Profit/loss -2 0 2 20000 -0.5 -5000
BEP (Units)
(20000 / £2) (20000 / £4) (20000 / £1.5)
10000 units 5000 units 13333units
BEP (£)
10000U * £9 5000U * £11 13333U * £10
90,000 55,000 133330

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
No. of units
require to
sold to earn
target return
(20000 +
30000) / 2
(20000 +
30000) / 4
(20000 +
30000) / £1.5
25000 units 12500 units 33333 units
5.3 Taking short-term management decision on the basis of profit or loss potentials and BEP
analysis
By considering the outcome of assessment, it is suggested to the director of Problem Ltd
to select 2nd proposal which prove to be more fruitful for it. Moreover, the above depicted table
clearly presents that contribution and profit per unit accounts for £4 & £2 respectively. In
addition to this, for attaining the situation of no profit or no loss business unit is required to sell
only 5000 units which is highly lower as compared to others. Further, in the 2nd proposal, units
need to sell for gaining target return accounts for 12500. Thus, considering all such aspects
director of the firm is advised to opt second proposal over others.
CONCLUSION
By summing up this report, it has been concluded that for making investment in building
business entity should take resort of both internal and external sources. By doing this, firm can
create optimal capital structure. Besides this, it can be inferred that through delivering quality
services and making focus on cost control firm can incline the level of income. Further, it has
been articulated that trial balance is the major source which provides input and assists in
preparing financial statements. It can be seen in the report that R. Riggs is required to develop
competent framework for making improvement in the profitability aspect. Along with this, it can
be stated that BEP analysis aid in effective decision making to a great extent. On the basis of
evaluation, it can be summarized that business unit should select 2nd proposal which will help in
attaining positive and high margin.
Document Page
REFERENCES
Books and Journals
Brotherton, B., 2012. International Hospitality Industry. Routledge.
Irwin, D. and Scott, J. M., 2011. Barriers faced by SMEs in raising bank finance. International
Journal of Entrepreneurial Behavior & Research. 16(3). pp. 245-259.
Kizildag, M., 2015. Financial leverage phenomenon in hospitality industry sub-sector portfolios.
International Journal of Contemporary Hospitality Management. 27(8). pp.1949-1978.
Law, R. and et.al., 2012. A systematic review, analysis, and evaluation of research articles in the
Cornell Hospitality Quarterly. Cornell Hospitality Quarterly. 53(4). pp.365-381.
Luo, M., 2011. A bright side of financial constraints in cash management. Journal of Corporate
Finance. 17(5). pp.1430-1444.
Nussbaum, M. C., 2012. Not for profit: Why democracy needs the humanities. Princeton
University Press.
Ross, S. A., Westerfield, R. and Jordan, B. D., 2008. Fundamentals of corporate finance. Tata
McGraw-Hill Education.
Zhuang, L. and et.al., 2011. Cost-effective production of Bacillus thuringiensis biopesticides by
solid-state fermentation using wastewater sludge: Effects of heavy metals. Bioresource
technology. 102(7). pp.4820-4826.
Online
How to Finance Your Business Growth. 2017. [Online]. Available through:
<https://www.thehartford.com/business-playbook/in-depth/venture-capital>.
Internal Source of Finance. 2017. [Online]. Available through:
<https://efinancemanagement.com/sources-of-finance/internal-source-of-finance>.
1 out of 18
circle_padding
hide_on_mobile
zoom_out_icon
[object Object]

Your All-in-One AI-Powered Toolkit for Academic Success.

Available 24*7 on WhatsApp / Email

[object Object]