Financial Decision Making

This project report is based upon Roast Ltd. that is one of the main coffee houses established in United Kingdom. It analyse financial position of an enterprise with different ratios for calculating final accounts. These are net, gross and operating income through liquidity, solvency and profitability ratios etc. In order to make investment in a project different investment appraisal techniques are used by the organisation. These are pay back period, net present value, accounting rate of return. The enterprise is recommended to arrange funding from bank loan and share capital to make investment of 500 million pounds.

Financial Decision
Making
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EXECUTIVE SUMMARY
This project report is based upon Roast Ltd. that is one of the main coffee houses
established in United Kingdom. It analyse financial position of an enterprise with different ratios
for calculating final accounts. These are net, gross and operating income through liquidity,
solvency and profitability ratios etc. In order to make investment in a project different
investment appraisal techniques are used by the organisation. These are pay back period, net
present value, accounting rate of return. The enterprise is recommended to arrange funding from
bank loan and share capital to make investment of 500 million pounds.
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Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
Table of Contents.............................................................................................................................3
INTRODUCTION...........................................................................................................................4
PART 1............................................................................................................................................4
Organisation overview.................................................................................................................4
PART 2............................................................................................................................................5
2.1 Statement of profit or loss......................................................................................................5
2.2 Statement of financial position..............................................................................................7
2.3 Statement of cash flows.......................................................................................................10
PART 3..........................................................................................................................................13
3.1 Investment appraisal............................................................................................................13
3.2 Sources of funds..................................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16
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INTRODUCTION
Financial decision making is the process of formulating strategies for future as bit can
help to find the best suitable growth opportunities for business. It is very essential to formulate
effective decisions for future as it is beneficial or development of company (Ambuehl, Bernheim
and Lusardi, 2014). When these are formed then management pays attention towards financial
situation and position of enterprise and analyse final accounts such as cash flow and final
account. By evaluating them actual status of business entity is determined and then strategies are
formed. This project report is based upon Roast Ltd. which is an independent coffee house chain.
It is mainly established in UK and founded in year 2008. This assignment describes industry
review and analyse all financial statements including Profit and loss account, balance sheet and
cash flow. Additionally, investment appraisal techniques with sources of funds are also discussed
in this project.
PART 1
Organisation overview
Coffee house industry of United Kingdom which is very large and it is contributing in the
development as well as growth of UK's economy. Industry review of it could be understood with
the help of following points:
 The industry contributes in Gross Domestic Product of UK with 3.7 billion pound in
2017.
 Total growth of coffee house sector for year 2018 is 7.9%.
 The main players in the United Kingdom for coffee house sector are Starbucks, Costa
Coffee, Caffe Nero, Coffee #1, Cafe2U, Puccino's, Muffin Break, AMT Coffee and Roast
Ltd., etc (Major players in coffee house industry of UK, 2019).
 One key opportunity for this industry is to expand enterprise where it has not yet
established the business. The places where people like to have coffee the sector should
target those countries.
 The coffee house industry is facing is a main challenge of different drinks and increasing
number of healthcare individuals for ignoring such beverages that adversely affect their
health.
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PART 2
2.1 Statement of profit or loss
It is a part of financial statements which are presented in front of various stakeholders of
the business for the purpose of providing them information bout profitability of the organisation.
It can help investors, suppliers, creditors and customers to form different types of decisions like
credit, investments, goods and buying of products from an entity (Baker and Ricciardi, 2014).
Roast Ltd. is a coffee house which is established in UK. The Income Statement of the
organisation it has been determined that for year 2017 sales of it was 2022 but in year 2018 it has
been increased up to 2534. It can be seen that the enterprise has generated more sales during year
2018. Due to increment in the sales cost of goods sold of the organisation is also inclines up to
1990 in 2018 from 1505 which is for 2018. It has left affect upon gross profit of the enterprise
which is being enhanced in 2018 as compared to 2018. for both the years it is 517 and 544
respectively. Profit and loss for these years are 36 and 81. It shows that the profitability of the
organisation is very high in year 2018 as compared to 2017. For analysis of information the
following ratios have been considered:
Gross profit ratio: It analyzes the relationship between gross profit and net sales of the
organisation for a specific time period. With the help of this tool operational performance of
Roast Ltd. Could be examined by the management (Duclos, 2015).
 Formula: Gross profit / Net sales *100
Calculations of it for year 2017 and 2018 are as follows:
 Interpretation: From the above calculations it has been analysed that for year 2017
gross profit ration was high as compared to 2018 which means operational performance
of the organisation is being declined during current year.
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Net profit ratio: This ratio is used to determine that the organisation have acquired
higher profits during the accounting year or not. It guides investors of Roast Ltd. to analyse that
company is able to generate high profits or not so that a higher returns could be provided to them
on their investment.
 Formula: Net profit / Net sales *100
Calculations of it for Roast Ltd. are as follows:
 Interpretation: Above calculations show that the net profit of the company in the year
2018 up to 3.20% which was 1.78% in year 2017. It is reflecting that the company will be
able to provide higher returns to the investors in 2018 as compared to 2017.
Operating profit ratio: This ratio is calculated by organisations to analyse their ability
to generate operating profit for the accounting period (Fraczek and Klimontowicz, 2015). While
calculating it profit before interest and taxes is used for calculations to get accurate results.
 Formula: Operating profit / Net sales * 100

 Interpretation: The above calculations are showing that Roast Ltd. Have generated
higher operating profit in year 2018 as compared to 2017. It is showing that profitability
of the company is increased in current year.
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From the above analysis it has been determined that overall profitability of the
organisation is good because the net and operating profit ratios are showing increment for year
2018 as compared to 2017.
2.2 Statement of financial position
It is also known as balance sheet as it shows the actual financial stability of an
organisation. It is prepared for a year and all the assets, equities, and liabilities are recorded in it
(Füllbrunn and Luhan, 2015). It helps the external stakeholders such as investors and creditors so
that they can perform specific analysis. Actual and appropriate financial position of a business
could be determined by analysing the balance sheet. Roast Ltd.'s balance sheet is showing that
non current assets which are reocorded in the right side of the statement are increased in 2018 up
to 996 which was 670 in year 2017. It shows that organisation have bought property, plant and
equipment to operate business in systematic manner so that financial position could be
strengthen. The current asset heading in the same side showing an increment in inventoried up to
299 for 2018 which was increased from 120 for 2017. Trade and other receivables of Roast Ltd.
are also increased in 2018 as compared to 2017. For both the years these are 148 and 93
respectively. In year 2017 cash and cash equivalents were 134 but in 2018 the enterprise is
having nil balance for the same. It shows that the company is not having core current assets for
year ending 2018. Overall analysis of right side of statement of financial position is showing that
total assets of the company are increased in 2018 (Graham, Harvey and Puri, 2015).
Left side of balance sheet is showing that share capital for 2018 and 2017 are same but
retained earning are increased in 2018 up to 660 which was 579 in 2017. An increment can be
seen in the long-term borrowings which is recorded in the non current liabilities of the
organisation is also recorded in the statement of financial position which means Roast Ltd. have
taken loan from external parties for effective execution of operations. Current liabilities for year
2018 are increased up to 583 in 2018 which was 238 in 2017. For the purpose of analysis the
company following ratios are calculated:
Current ratio: Current ratio is used to calculate the relationship shared between the
current assets and current liabilities (Guastello, 2016). It will be beneficial for Roast Ltd. to
analyse that it can pay all the current liabilities with the help of short term assets.
 Formula: Current assets / Current liabilities
Calculations for this ratio could be analysed from following table:
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 Interpretation: The calculation of current ratio is showing that for year 2017 current
ratio was very high but for 2018 it has been decreased. It reflects that ability of making
payment of current liabilities within one year in reduced in 2018.
Quick ratio: It is used in order to find out the short-term liquidity. With its help, the
managers in Roast Ltd. will be able to determine that the enterprise will be able to meet short
term obligation with the help of quick assets (Hershey, Austin and Gutierrez, 2015).
 Formula: Quick assets / Current liabilities
The calculations of quick ratio are as follows:
 Interpretation: The calculations above are showing that quick ratio in 2018 is very low
as compared to 2017 which shows that the enterprise will not be able to pay all the
current liabilities with the help of quick assets. Main reason for the decrement in it is no
availability of cash and cash equivalents in 2018.
Debt to equity ratio: This ratio explains the relationship between the total debts and
equities in an organization. It can help to keep them safe for the uncertainties. If it is low then it
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means that company is not utilising outsider's liabilities properly (Hirshleifer, Jian and Zhang,
2016). It will be beneficial for analysis of financial performance of Roast Ltd.
 Formula: Total debts / Total equities
Calculations for this ratio are as follows:
 Interpretation: Above calculations show that it has been determined the debt to equity
ratio is increased in 2018 as compared to 2017. In 2017 it was 0.31 and in 2018 it was
increased up to 0.68. It shows that the organisation has used all the external funds more
effectively in 2018.
Return on capital employed ratio: It is a financial ratio which is used by business
entities to measure the profitability and efficiency of using the capital appropriately. It will be
beneficial for management to determine that how well Roast Ltd. Is generating profits from the
capital invested (Lee and Lee, 2015).
 Formula: Operating profit / Capital employed * 100
Detailed analysis of this ratio is as follows:
 Interpretation: The above calculations are demonstrating that return on capital
employed for 2018 is very high as compared to 2017 as it is increased in current year. It
is showing that the coffee house is generated higher profits with the help of it capital in
2018.
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Working notes:
Calculation of capital employed:
2.3 Statement of cash flows
Cash flow statement 8is also a type of final accounts that are required to be audited by all
the companies for the purpose of making sure that all the elements which are recorded in
different statements are accurate. Cash flow is formulated to record only cash related transaction
and mainly inflows and outflows are recorded in it. There are three main activities which are
focused by analysers while assessing it. These are known as operating, investing and financing.
With the help of them stakeholders assess that the enterprise is having sufficient monetary
resources to execute all the operations in systematic manner. From the cash flow statement of
Roast Ltd. It has been analysed that in year 2018 the operating profit of the organisation was 127
and total cash outflow from operating activities of the enterprise was 24. Investing activities are
also showing negative balance for 2018 which is around 358. The cash inflow from financing
activities is 175. at the end of the accounting year the amount of monetary resources for the
organisation was 73 in negative. Cash flow statement can be prepared to analyze the liquidity
level in an organization. Calculation of it is as follows:
Operating cash cycle: It is mainly used by business entities for the purpose of analysing
the time which will be taken by an organisation to turn all the purchases of inventory in the
monetary resources (Lu, Won and Cheng, 2016). It is cash conversion cycle which helps in
finding out whether a company is having sufficient cash or not. With the help of it, management
of Roast Ltd. will be able to analyse the time in which the inventory will be converted in liquid
assets.
Formula: Days inventory outstanding+ days sales outstanding- days payable outstanding
Calculations of all the main element of operating cash cycle are as follows:
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Days payable outstanding:
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Payable turnover: Cost of sales /account payable
From the above calculation it has been analysed that operating cash cycle in year 2017
was 13 days but it is increased in 2018 up to 32 which means the organisation is taking more
time in 2018 to covert the inventory in cash. It is showing that performance of Roast Ltd is
decreased in this year.
Dividend policy: It means a decision which is taken by top management of companies to
allocate proportion of total earnings to the shareholders (Mitchell, Hammond and Utkus, 2017).
If an organisation is having different investment opportunities then the amount of income is kept
as retained earnings. The cash flow statement of Roast Ltd. Shows that it has been analysed that
the enterprise has not paid any dividend to its shareholders. This decision of the enterprise was
not right because tit is having sufficient profits in 2018 as compared to 2017. This decision may
affect shareholders’ interest and result in decrease in capital.
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PART 3
3.1 Investment appraisal
Management forecast: The managers of Roast Limited have forecasted strategic decision
making in planning to make investment of 500 million. The predicted cash flow for five years
period from 2017 to 2021 as 60, 100, 140, 160 and 200 million pounds. It shows that
management of the organisation is expecting maximisation of cash flow within five consecutive
years. All the predictions are made without any significant basis therefore it will be very difficult
to achieve this cash flow in the five year's period.
Investment appraisal: It can be defined as a set of different types of techniques which are
used by business entities to plan their investing decision in a specific opportunity. All these
techniques are discussed below in context of Roast Ltd. along with their benefits and limitations:
Payback period: This method is implemented by entities to determine the time period in
which the investment will be recovered. From the exhibit 3 it has been analysed that if Roast Ltd.
invest 500 million pounds than it would be recovered in 4 years. Some of advantages and
disadvantages are as follows:
 Advantages: With this benefit of different projects could be evaluated quickly and in less
time which helps to make quick decisions.
 Disadvantages: Time value of money is not taken by it in to consideration which do not
provide the exact results (Petersen, Kushwaha and Kumar, 2015).
Accounting rate of return (ARR): The most commonly used concept of capital
budgeting with the purpose for analysing the rate of return which could be acquired by an
organisation on the investments which are made by it. The exhibit 3 is showing that ARR for the
investment of 500 million pound will be 18% which is a good return on an investment. All its
benefits and limitations are as follows:
 Advantages: The company is helpful by analysing the possible return which will be
received by them by making investment in a project.
 Disadvantages: In this system time factor does not considered in this technique which
means the results that are generated by it are not trustworthy.
Net present value: It is the difference between the present value of cash flows and initial
investment made by the compare exhibit 3 is showing that the net present value for Roast Ltd.
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Will be around 110 if the organisation make an investment of 500 million pounds. Some of its
benefits and limitations are as follows:
 Advantages: It helps to make effective decisions as time value of money is considered in
this technique while calculations.
 Disadvantages: It cannot be used to compare and calculate the present values of such
projects which are having different sizes (Shouzhen and Su, 2015).
From the above discussion it has been analysed that the investment proposal of 500
million pounds will be beneficial for Roast Ltd. because all the techniques are showing positive
results in the context of it.
3.2 Sources of funds
For all the organisations it is very important to arrange funds for making an investment in
the future projects. For this purpose different sources are required and following are some of the
funds which could be used by Roast Ltd. For making investment of 500 million pounds:
Bank loan: It is one of the common source of funds which could be used by Roast Ltd to
acquire funding for making an investment of 500 million pounds. The organisation will be
required to pay the interest on a fixed rate to the bank on borrowed amount. Some of its benefits
and drawbacks are as follows:
 Benefits: It is a safe and effective source of fund which can help Roast Ltd. to invest in
the desired project.
 Drawbacks: If a loan from bank is taken then a collateral is required to be provided to
bank for the purpose of security and if a company is not able to provide it then it is not
possible to take a bank loan.
Issuing shares in the market: It is also a great option of acquiring funding in which
companies can issue shares in the market. With the help of it Roast Ltd. will be able to invest
money in the desired project. There are various benefits and drawbacks of it and some of them
are discussed below:
 Benefits: It is a long term source of arranging funding for business and no interest will be
required to be paid on them (WEBSTER, 2014).
 Drawbacks: If shares are issues in the market the owners will be required to share the
power of decision making with bother shareholders.
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CONCLUSION
From the above project report it has been concluded that financial decision making is the
process of formulating future strategies for betterment of an organisation. If an organisation is
willing to make investment in new projects then it ios very important for it to review the industry
and analyse opportunities within it. Afterwards analysis of financial performance should be
conducted so that it can be determined that the project could be funded by the enterprise or not.
There are various types of investment appraisal techniques which could be used to select best
suitable project to invest. These are NPV, ARR and payback period
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REFERENCES
Books and Journals:
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