Restaurant Financial Management Strategies

This assignment delves into the financial management strategies required to run a successful restaurant. It examines various aspects, including securing funding through loans and sub-letting unused space, determining optimal pricing using cost-plus methods, implementing effective inventory management techniques like EOQ and JIT, and enhancing sales revenue through targeted promotional campaigns.

Finance in the Hospitality Sector

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
PART A......................................................................................................................................3
1.1 Reviewing 8 sources of funding that available to the business and service industries....3
1.2 Evaluating contribution made by the different methods of generating income...............6
2.1 Discussing the elements of cost, gross margin and selling prices for the products or
services...................................................................................................................................7
2.2 Evaluating the methods of controlling stock and cash in the context of business
environment............................................................................................................................8
3.1 Assessing the sources and structure of trial balance........................................................9
3.2 Evaluating business accounts, adjustments and notes....................................................10
3.3 Stating the purpose and process of budgetary control...................................................11
3.4 Analyzing variances and give suggestions for improvement.........................................12
CONCLUSION........................................................................................................................14
REFERENCES.........................................................................................................................15

INTRODUCTION
Financial management is the vital part of business organization that higher
management team employs for attaining goals and objectives. In the current times, UK
hospitality sector is growing fast as large number of tourists including both inbound and
outbound prefer to visit London. In this regard, companies operating in hospitality sector can
build competitive position over others when they provide customers with innovative services.
Hence, execution of such strategy is possible only when business unit manages its fund
wisely. The present report is based on different case scenarios which will provide deeper
insight about the financial sources that can be used by Paul for meeting monetary
requirements. Further, report will shed light on the ways through which Paul can generate
high income. It also depicts elements that Paul can undertake for the determination of selling
prices. Report also exhibits the manner in which trial balance gives input and helps in
preparing financial statements. Further, it will entail how budgetary control techniques help
in monitoring performance and taking corrective measure for improvement.
TASK 1
PART A
1.1 Reviewing 8 sources of funding that available to the business and service industries
Cited case presents that Paul owns and operates a small restaurant in Redbridge.
Business entity of such restaurant unit has built effective image in such sector and now
planning to upgrade equipments. Hence, concerned up-gradation will reduce energy
consumption by 30% per annum. Further, it also helps in increasing operational efficiency
and staff productivity to a great extent. However, for new energy efficient integrate
equipments or oven restaurant owner needs to do investment of £12000. In this regard,
several internal and external financial sources are available that Paul can undertake for
fulfilling monetary requirements such as:
Internal financial sources

Personal savings: Business entity saves money out of profit generated from the
operations. Hence, using some personal savings Paul can purchase equipments and become
able to enhance operational efficiency.
Advantages Disadvantages
 Imposes no financial burden in terms
of interest payment
 It does not influences dilution of
control
 Imposes opportunity cost: Loss of
interest if such money is given to
others
Sales of unused assets: Each business unit has some assets which are not using by
them in the productive activities. Further, unused assets also has some scrap value, thus, by
selling such them on residual value Paul can fulfil monetary need to some extent (Sources of
Finance, 2018).
Advantages Disadvantages
 Facilitates monetary development
without extra borrowings
 Lack of quick settlements
External sources of finance
Bank loan: Interest which is charged by financial institution on the monetary
assistance provided considered as main income for them. Thus, banks are usually interested
to provide customers with secured loan that enhances their income level (Sources of Finance,
2018). Hence, by approaching bank for loan business entity of restaurant can meet financial
requirements.
Advantages Disadvantages
 Easy repayment system in the form
of instalment
 No interference of financial
institution in the decision making
aspect
 High cost in terms of interest charges
Hire purchase: This system enables Paul to make payment in the form of instalment
while having the use of an oven. Thus, through undertaking the system of hire purchase Paul

can avoid the issue of financial burden and able to purchase oven as well as use the same in
daily activities.
Advantages Disadvantages
 Payment convenience
 Helpful for small traders as it contain
less risk
 Possession is given to buyer on the
payment of last instalment
Factoring: On the basis of such external source of finance, by discounting receivables
from financial institutions money can be generated earlier or before the due date. Hence,
using such fund Paul can purchase upgraded oven and contributes in the organizational
success.
Advantages Disadvantages
 Facilitates earlier settlement  Discounting charges may result into
reduction in the amount of
receivables
Venture capitalists: In the recent times, venture capitalists offer financial support to
the growing venture. Thus, by presenting business condition and plan Paul can influence
venture capitalists decision in relation to offering money (Internal and External Sources of
Finance, 2018).
Advantages Disadvantages
 Such capitalists provide business
owner with expert advice that aid in
the profitability and success.
 Venture capitalists do more
interference in business decisions
Friends and family members: By approaching to the known individuals such as
relatives and friends etc Paul can generate enough funds.
Advantages Disadvantages
 It does not imposes obligations and
contain more documentary formalities
 Interference of friends & family
members in decision making
sometimes create issue in front of
owner

Leasing: It is another most effectual source that can be undertaken for fulfilling
concerned needs. Hence, by purchasing equipment on lease and paying rent for the same on
periodical basis Paul can perform activities prominently without any large investment.
Advantages Disadvantages
 Offers opportunity in relation to
using equipments on rental basis and
thereby avoids the issue of obsoletion
 Lack of ownership rights pertaining
to the assets
Considering overall evaluation, it is suggested to Paul that emphasis need to be placed
on using personal savings and either bank loan or hire purchase system. Hence, using such
internal and external source Paul can purchase new energy-efficient integrated oven and use
the same in business activities as well functions timely.
1.2 Evaluating contribution made by the different methods of generating income
Business entity of restaurant, Paul, can generate income through the means of
following sources:
Sales of old oven:
Given scenario entails that Paul does not require old oven for performing business
activities and functions. Such old oven has residual value of £3000 respectively that can be
sold by business entity to others. Hence, by selling oven at higher price in comparison to
residual value Paul can generate profit margin and become able to improve cash-flows.
However, on the critical note, it can be stated that sometimes due to existence of less
potential buyers owner has to sell asset on lower prices over scrap value which in turn may
result into loss.
Sub-letting unused space:
As per the case, 2 coffee shops are situated in vicinity of restaurant such as Starbucks
and Cafe Nero. Area in which Paul’s restaurant is situated affluent with busy professionals.
Hence, management team of Costa Cafe approached Paul relation to taking ground floor
space on rental basis. Thus, by sub-letting or renting out unused space to Costa Cafe Paul can
get income. However, such income generation alternative is evaluated on the basis of
competition (Walker, 2016). Moreover, both Paul and new or proposed tenant are operating
in similar sector such as restaurant. On the basis of this aspect, if Costa Cafe will be

established on ground floor then possibility pertaining to decreasing demand for Paul’s
restaurant services occurs. Thus, Paul should sub-let property to the one who are operating in
the industries other than restaurant.
Selling of recipes for commission:
Paul, restaurant owner, has high level of experience in creating and offering new
recipes to the customers. Recently, Paul has introduced recipe book with 20 new desert ideas
namely chef 5 star. Hence, on commission basis by selling such book to the manufacturers of
ice-cream Paul can generate income. This is to be critically evaluated on the basis of the
aspect that through such recipe book other restaurant units also would become able to serve
deserts to the customers. Hence, for avoiding such cons Paul should not include all innovative
recipes in the book. Through offering some exclusive and unique deserts in own restaurant
Paul can develop satisfaction among the customers. This in turn also helps in creating word
of mouth publicity and enhancing customer base.
2.1 Discussing the elements of cost, gross margin and selling prices for the products or
services
For cost recovery and attainment of suitable profit margin owner of the restaurant is
required to set suitable prices of the dishes offering. Cost of the services and gross margin %
are the main two inputs that provide high level of assistance in setting prices of the services.
Elements of cost, GM% and selling price
Cost of products or services: It can be distinguished into two parts such as follows:
 Direct expenses: This is also known as prime cost which in turn highly associated
with the food or dishes preparation (Dopson and Hayes, 2016). Example of direct
expenses, in the context of restaurant, includes raw food items etc.
 Indirect expenses: It implies for the one that Paul has to incur for ensuring smooth
functioning of operations. Indirect expenses include both fixed and variable cost that
business entity incurs for the attainment of gaols (Legrand, Sloan and Chen, 2016).
Fixed cost contains rent, salaries of personnel etc that remains same at each level of
offering. On the other side, variable cost changes in line with the offerings or number
of units offered such as electricity, promotional etc.

Hence, by summing up all the cost incurred and dividing same with the number of
offerings unit cost can be assessed by Paul.
Gross margin %: It entails or includes margin that Paul wants to earn by offering
dinning services to the customers. Hence, by determining such % margin restaurant owner
can set suitable prices of the offerings.
Selling price: This refers to the figure which business entity of restaurant wants to
charge from each customer for the dishes offered. Thus, by using the following formula
selling price can easily be determined by Paul such as:
Selling price (per unit): cost per unit + (Cost PU * gross margin %)
For instance: Following expenses have incurred by Paul for providing 100 customers
with the dinning services. Further, Paul wishes to earn 20% profit margin from each customer
through dinning services:
Particulars Figures (in £)
Direct expenses 1200
Indirect expenses 1750
Total cost 2950
Cost per unit 2950 / 100 = 30
Selling price 30 + (30 * 20%) = 35
2.2 Evaluating the methods of controlling stock and cash in the context of business
environment
In the context of business unit, cost control is highly required for providing customers
with quality services at affordable prices. Moreover, cost of the products or services have
direct impact on the prices of offerings and thereby decision making aspect of customers.
Further, business entities can execute plans only when they have enough cash for the same. In
addition to this, inventory control or management is equally important within the business
units because excess stock leads cost of services. Thus, by using following methods Paul can
exert control on both cash and stock such as:
Ways to control stock: Ordering and holding cost is one of the main aspects that
closely impacts cost of the products or services. EOQ is the most effectual methods that can

be used by Paul for determining the level of stock that needs to be maintained within the
restaurant unit for ensuring smooth functioning of operations (Wild, 2017). However, EOQ
assessment includes complex and time-consuming evaluation. Further, JIT (just in time)
inventory management tool highly suits to the restaurant sector which in turn assists in
controlling holding cost significantly (Feng and et.al., 2014). In accordance with such
method, as per the demand of customers Paul can order stock and avoids wastage to a great
extent. Thus, with the help of above depicted stock management methods Paul can exert
effectual control on cost and enhance margin.
Ways to control cash: For the purpose of cash control, Paul should use the method of
budgetary control which assists in monitoring the performance of every area and department.
This method helps business entity of restaurant in assessing areas such as material, labour etc
where actual expenses are higher over expected. Thus, through investigating causes and
taking appropriate measure on time restaurant owner can make prominent use of cash
(Weygandt, Kimmel and Kieso, 2015). However, sometimes budgetary control tool presents
high deviations when manager fails to make appropriate estimation regarding income and
expenses. Further, financial planning is another suitable way that can be used for cash
control. As, it helps in co-ordinating activities with the future plan and thereby helps in
maintaining as well as making effectual use of cash within the firm.
3.1 Assessing the sources and structure of trial balance
Journals and ledgers are recognized as the main sources which in turn help in
preparing trial balance. Further, structure of trial balance includes two sides such as debit and
credit. Debit side of trial balance presents expenses and assets including both current and
non-current.
Date Particulars Debit (£) Credit (£)
4 July 2019 Wages a/c Dr
To outstanding wages
a/c
6000
6000
4 July 2019 Prepaid insurance a/c
Dr
To insurance a/c
4500
4500
5 July 2019 Rent a/c Dr 4300

To outstanding rent a/c 4300
Trial Balance
Particulars
Figures (in
£)
Figures (in
£)
Draft net profit for the year 99,900
Equipment 71,000
Motor vehicle 18,000
Bank balance 5,500
Closing Inventory 2,300
Trade payables 5,900
Opening capital 53,000
Drawings 62,000
Total 158,800 158,800
3.2 Evaluating business accounts, adjustments and notes
a. Profitability statement of Olakunle’s Budgeted as at 30 June 2019
Particulars Figures (in £)
Draft Net Profit for the Year 99,900
Adjustment for wages accrued ( - ) 6,000
Adjustment for insurance prepaid ( - ) 4,500
Adjustment for insurance prepaid ( - ) 4,300
Revised net profit for the year 85,100
b. Statement of Olakunle’s financial position as at 30 June 2019
Statement of Financial Position
Particulars Figures (in £)
Fixed assets:
Equipment 71,000
Motor vehicle 18,000
89,000
Current assets:
Closing Inventory 2,300
Bank balance 5,500
7,800
Total assets 96,800

Liabilities and Capital:
Trade payables 5,900
Opening capital 53,000
Drawings ( - ) 62,000
Draft net profit for the year 99,900
Total 96,800
3.3 Stating the purpose and process of budgetary control
Budgetary control may be defined as a system of management control in which actual
spending and income is compared with the planned figures with the motive to assess
deviations. Such tool is highly effectual in the context of cutlery manufacturer which give
idea to the business entity regarding making modifications in the existing plan for getting
profit margin.
Purpose of budgetary control: Cutlery manufacturer employs budgetary control tool
for fulfilling following objectives or purposes:
 Company undertake budgetary control tool for enhancing profitability aspect through
eliminating wastage
 Facilitates co-ordination in the activities of various departments
 Enhancement of operational efficiency
 Helps business entity in doing proper planning for the future through the means of
various budgeting framework (Budgetary Control: Definition, Objectives and
Benefits, 2018)
Process of budgetary control
Establishment of targets: Budgetary control starts with the setting of plan or target
performance. Hence, by co-ordinating all the activities of business organization budgeted
figures are setting down by the manager.
Recording performance: Once target has setting down thereafter manager provides
concerned department with budgeting frameworks (Weygandt, Kimmel and Kieso, 2015).
Further, under such stage manager records financial performance of each department.
Performance evaluation: At this stage, manager of the cutlery manufacturer lays
emphasis on comparing actual performance with the budgeted or expected plan.

Assessment of variances and reasons: In the fourth stage, manager calculates
differences and make efforts in relation to identifying reasons exist behind the same. Hence,
referring the reasons associated with the deviation manager undertakes corrective measure for
improvement.
Thus, by following above mentioned process cutlery manufacturer can exert control
over unnecessary spending and thereby become able to make optimum use of financial
resources.
3.4 Analyzing variances and give suggestions for improvement
Variance analysis is the most effectual financial technique which enables business
entity to assess deviations timely and thereby undertake strategic measures that helps in
achieving success. Such tool helps company in monitoring performance and doing suitable
modifications in the existing strategic as well as policy framework (Osadchy and
Akhmetshin, 2015). On the basis of cited case situation, Alina, cutlery manufacturer produces
steel spoons. Hence, variance analysis tool has been employed by Alina for the purpose of
financial management in the following manner:
Assessment of variances
Particulars Budgeted figures Actual figures Variance (Budgeted –
actual)
Unit sold 100,000 70000 (30000)
Material 15000 22500 (7500)
Direct labour 22500 24375 (1875)
Particulars Material (£) Labour (£)
Price/rate variance (4500) 3750
Usage/efficiency variance (3000) (5625)
Total variance (7500) (1875)
Sales variance: The above depicted table presents that adverse deviation of £3000 has
found in sales units. This aspect shows that cutlery manufacturer failed to sell planned unit
during the concerned period. Hence, lack of effective promotional campaign may be served
as a cause due to which manufacturer failed to attract more customers.

Material variance: Outcome of variance analysis shows £7500 as total adverse
material variances. In this, due to the wastage of material business unit spent £3000 extra in
comparison to the planned figure. Along with this, rise in the cost of material is also the main
cause adverse results assessed. Hence, for achieving success and making optimum use of
financial resources cutlery manufacturer should develop suitable policies or strategic
framework.
Labour variance: By applying the tool of budgetary control, it has found that labour
has taken more time in manufacturing cutleries over the expectations. Hence, due to having
less efficient or skilled personnel business unit has generated adverse results such as £5625
respectively.
Measures for improvement
 It is suggested to Alina that emphasis needs to be placed on organizing effective
training session for the personnel. This in turn develops or enhances proficiency level
of personnel and improving overall business performance.
 Besides this, Alina should frame and introduce guidelines regarding material usage.
Moreover, wastage of material reduces when employees have clear idea about the
manner in which activities need to be performed.
 It is recommend to Alina that it should focus on assessing and accessing low cost raw
material supplier. Hence, by establishing contact with the low cost supplier such
manufacturing can attain expected outcome in the category of material cost variance.
 Usually, customers are encouraged to purchase products or services from the well
known retailer. Thus, through the means of promotional campaigns or advertisements
Alina can persuade both existing and potential customers about innovative cutleries
offering by it. In this way, promotional strategy will help in enhancing both demand
and sales revenue.
CONCLUSION
By summing up this report, it has been concluded that by undertaking bank loan
source of finance Paul can generate funds and thereby would become able to execute plan.
Besides this, it can be inferred by sub-letting unused space and selling recipes on commission

basis business entity of restaurant can maximize both profitability as well as cash-flows.
Further, it has been articulated that cost-plus pricing method is highly suitable that owner of
restaurant needs to consider while setting prices of the services. It can be seen in the report
that through using EOQ and just in time method help in assessing as well as maintaining
enough stock within the firm. It can be summarized from the report that through continuous
monitoring Paul can assess the areas where control needs to be exerted for the purpose of
cash management. It can be depicted that cutlery manufacturer should focus on organizing
training session for personnel which in turn helps in getting the desired level of outcome or
success.

REFERENCES
Books and Journals
Dopson, L. R. and Hayes, D. K., 2016. Managerial accounting for the hospitality industry.
Wiley Global Education.
Feng, M. and et.al., 2014. Does ineffective internal control over financial reporting affect a
firm's operations? Evidence from firms' inventory management. The Accounting
Review. 90(2). pp.529-557.
Legrand, W., Sloan, P. and Chen, J.S., 2016. Sustainability in the hospitality industry:
Principles of sustainable operations. Routledge.
Osadchy, E. A. and Akhmetshin, E. M., 2015. Development of the financial control system in
the company in crisis. Mediterranean Journal of Social Sciences. 6(5). p.390.
Walker, J. R., 2016. Introduction to hospitality. Pearson Higher Ed.
Weygandt, J. J., Kimmel, P. D. and Kieso, D. E., 2015. Financial & managerial accounting.
John Wiley & Sons.
Weygandt, J. J., Kimmel, P. D. and Kieso, D. E., 2015. Managerial accounting. Wiley.
Wild, T., 2017. Best practice in inventory management. Routledge.
Online
Budgetary Control: Definition, Objectives and Benefits. 2018. [Online]. Available through:
<http://www.businessmanagementideas.com/management/functions/budgetary-control-
definition-objectives-and-benefits/3590>.
Internal and External Sources of Finance. 2018. [Online]. Available through:
<https://www.askwillonline.com/2011/04/internal-and-external-sources-of.html>.
Sources of Finance. 2018. [Online]. Available through:
<http://www.businessmanagementideas.com/financial-management/sources-of-finance-
internal-and-external-industries/10548>.