Financial Analysis Report for a Guest House Business Start-up

This report presents a financial analysis of a guest house start-up, encompassing key financial assumptions, financial ratio analysis, and an assessment of associated business risks. It examines the investments made by the business and delves into the cost management strategies employed, including an analysis of the cost of failure and the importance of forecasting cash flows. The report details how cash flows are estimated using secondary data and explains the rationale behind the chosen discounting factor. Furthermore, it provides a comprehensive overview of the guest house's financial performance, highlighting its strengths, weaknesses, and potential areas for improvement, making it a valuable resource for understanding the financial aspects of a start-up guest house business. The report concludes with an analysis of the discounted factor used by the business and the reasons for its usage in the financial projections.

Running head: FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
Name of the Student
Name of the University
Author Note

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Abstract
This report contains details about the financial analysis of the data of the guest house start up
business. It contains details like financial assumptions, risks associated with the business, NFI
details, cost management and cash flow forecasts and the basis for arriving at them. It concludes
with an analysis of the discounting factor used by the business and the reasons for it.

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Table of Contents
Financial Analysis of the business...............................................................................................3
Financial Ratio Analysis..............................................................................................................3
Investments of the business..........................................................................................................3
Financial Risk Analysis of the business.......................................................................................3
References....................................................................................................................................4

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Financial Analysis of the business
Financial Assumptions
As the business is related to that of a guest house, and it is a start-up, it is assumed that
the capital needed for the setting up of business is taken from a financial institution in the form
of a loan and is repaid to the institution on a quarterly basis (Hamdy, Sirén and Attia, 2017).
Apart from these, as the business is entirely based on the cash flows incurred by a firm, it is also
assumed that the company’s income is generated through cash flows incurred by it. Hence, it is
assumed that there are no credit sales or purchases made by the company. Another assumption is
that the company divides its cash flow and quarterly income statements equally and ignores the
slight differences that happen on a quarterly basis.
Financial Ratio Analysis
The financial ratios of the company are calculated using different sources of information
available about the company’s finances. After computation of the same, it has been identified
that the current ratio of the company is not ideal at 1.006. In general, anything above 1.2 is
considered to be ideal (Robinson et al. 2015). The current ratio of the company suggests that the
current assets of the company are just sufficient to meet the current liabilities of the company.
The quick ratio of the company is not very ideal as it suggests that the company cannot
immediately meet its short term obligations completely. The net working capital is positive. This
suggests that the company is immediately able to meet its capital requirements due to the amount
of current assets it has. Cash ratio is not very ideal as it forms part of only 10 percent of the
current liabilities of the company. The returns of the business are sensitive with regards to the
flow of customers (Iooss and Lemaître 2015).
Investments of the business
As the company is a start-up, there is no scope for foreign investments as the company is
yet to establish itself in the market. Hence, the NFIs of the restaurant for the short term are nil or
negligible (Ewens, M., Nanda, R. and Rhodes-Kropf, M., 2018).
Financial Risk Analysis of the business
The financial risk of the company is not very high at the moment as the volatility of its
revenues is not very high. There is a stability in the operations of the business and they cannot go

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bankrupt in the near future (Kou, Peng and Wang 2014). However, there is a chance of the
business being affected by some unnatural circumstances and losing its investment.
Cost of Failure
Cost of failure of an investment is the probability of getting variable returns from an
investment. In the given situation, as the guest house has taken a large amount of loan for
starting its business, the cost of failure is the company losing both its investment and the assets
held by it in order to repay the loan (Lanen, Anderson and Maher, 2013). If the turnout of the
customers is not as expected, then the company has no other source of repaying its loans than to
sell off the assets. Hence, it can be said that the cost of the failure of the business is very high.
Cost management
Cost management deals with the estimation and controlling of costs incurred by an entity
by the management for a given financial year. In the given scenario, as the guest house incurs
significant expenses towards salaries of the staff, utilities and interest payment, it should ensure
that they are not overpaying the staff. This means that they should take care of the fact that the
staff are being properly utilised for the amount that is being spent on them. Also, it should also
make sure that the travel agent is providing the business with sufficient customers to generate
revenues according to the fees that is being received by him. Other expenses like loan payment
and TGST should contribute towards building the reputation of the company and hence need to
be spent in an appropriate manner. Forecasting cash flows is important because if the business is
not able to obtain funds, it may become insolvent. Hence, the firm should always be able to
maintain a steady flow of the cash balances to run its business successfully. This is absolutely
necessary for a business like a guest house where the cash flows are very quick and need to be
maintained to meet the immediate and long term obligations.
Arriving at the cash flows
Cash flows are arrived at by using secondary data available for businesses which are
similar to that of the guest house start up in the country. Data is estimated using reliable
measures of estimation like the possibility of occupancy of rooms during each of the quarters, all
the mandatory expenses that have to be paid by the business and the probable income that can be
generated by the sale of food and drinks in the restaurant (Efayena, 2015). The benefits of

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arriving at these cash flows is that they provide the business with a realistic view of where it
stands in the industry. They are also helpful in the preparation of the master budget.
Arriving at discounted factor
The discounted factor is taken to be a number that is realistic and close to the returns that
are being achieved by the guest house businesses at the given point of time. The rate of return is
kept at an acceptable level which is possible to achieve by the business in the near future (Moore,
Boardman and Vining 2013). The main purpose of calculating the discounting factor is to
calculate the present value of the cash flows and understand whether the profitable according to
the present value of the returns being provided by it. If the net present value is positive, then the
project is a profitable one and should be accepted. Otherwise, it suggests that the project is not a
profitable one and should not be accepted by the investor.

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References
Hamdy, M., Sirén, K. and Attia, S., 2017. Impact of financial assumptions on the cost optimality
towarAlayemi, S., 2015.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Kou, G., Peng, Y. and Wang, G., 2014. Evaluation of clustering algorithms for financial risk
analysis using MCDM methods. Information Sciences, 275, pp.1-12.
Iooss, B. and Lemaître, P., 2015. A review on global sensitivity analysis methods.
In Uncertainty management in simulation-optimization of complex systems (pp. 101-122).
Springer, Boston, MA.
Ewens, M., Nanda, R. and Rhodes-Kropf, M., 2018. Cost of experimentation and the evolution
of venture capital. Journal of Financial Economics, 128(3), pp.422-442.
Lanen, W., Anderson, S. and Maher, M., 2013. Fundamentals of cost accounting. McGraw-Hill
Education.
Efayena, O., 2015. The role of accrual accounting basis in the prediction of future cash flows:
The Nigerian evidence. Research Journal of Finance and Accounting, 6(4), pp.171-180.
Moore, M.A., Boardman, A.E. and Vining, A.R., 2013. More appropriate discounting: the rate of
social time preference and the value of the social discount rate. Journal of Benefit-Cost
Analysis, 4(1), pp.1-16.