Financial Decision Making

This report on the project explains the concept of financial decision making over the term. Every organisation base on the financial activities that supports them to operate activities. The staff members of finance department of Starbucks are analyzed by the CFO to know actual position of business as well as attractiveness of a business.

FINANCIAL DECISION
MAKING

Contents
EXECUTIVE SUMMARY.................................................................................................................................3
PART 1: Industry Review..............................................................................................................................3
Top line review of current UK coffee house industry..............................................................................3
PART 2: Business performance analysis:......................................................................................................3
2.1 Analysis of profit and loss account....................................................................................................3
2.2 Statement of financial position..........................................................................................................5
2.3 Statement of cash flow......................................................................................................................7
PART 3: Investment Appraisal...................................................................................................................10
3.1 (a) Management Forecast................................................................................................................10
3.1 (b) Investment Appraisal.................................................................................................................10
REFERENCES..............................................................................................................................................14

EXECUTIVE SUMMARY
This report on the project explains the concept of financial decision making over the term.
Every organisation base on the financial activities that supports them to operate activities. The
staff members of finance department of Starbucks are analyzed by the CFO to know actual
position of business as well as attractiveness of a business. Due to the output of the financial
business; over the first part of the project report various types of financial results are evaluated.
In addition to the expenditure assessment, different kinds of techniques including payback
duration, accounting return rate and net present value are used in the second part of the
investment text. So it can be proposed to Starbucks group current discussion that they will buy
the limited company Roasted. This is so because the bulk of their comments display positive
outcomes.
PART 1: Industry Review
Top line review of current UK coffee house industry
In the UK dimension, coffee industry houses research is as followed
• Coffee bars business increased by 7.9 percent revenue throughout 2018.
• Undertakings with the highest share of the market in the Rest of the UK are Costa Limited, Pret
A General manager, Caffe Nero Limited among many others.
• The sector's main advantage is to extend its market through overseas markets like Vietnam,
India, where the populace is greater (Porter and Norton, 2012).
• This sector also faces a variety of obstacles, such as the emergence of more substitute
beverages contributing to a decrease in consumer interest to espresso.
PART 2: Business performance analysis:
2.1 Analysis of profit and loss account
The profit and loss account report is a type of report that includes total profit and loss
information for a specific period of time (Huston, Finke and Smith, 2012). In addition, the main
goal of this argument is to determine the financial condition of companies including the aid of
overall income and expenses. Based on Roast limited corporation's allocated profit and loss

account, this can be found that the amount of revenue from sales is greater in 2018 compared to
2017. In 2017, it was 2022000, which rose by 25.32 per cent and became 2534000. From the
overall analysis, it is getting that sales expenses were also increased in 2018. The gross income
in 2017 was 517,000, which rose to 544,000 during the following year. Their operating profits in
2017 were zero, and it was 60000 in 2018. In each of these periods they earned operating
income. This was of 51000 in 2017 that expanded by 149 percent in last year and have become
127000 in 2018. Throughout the fiscal year 2017, the volume of income without tax was 45000,
which growing following year and becomes 101000 in 2018. We ultimately won net profits of
36,000 in 2017 and 81,000 in 2018. There are several calculations estimated to allow a complete
review of Roast world plc's detailed financial consideration:
2017 2018
Gross profit 517 544
Net sales 2022 2534
Calculation 517/2022*100 544/2534*100
Gross profit ratio 25.57% 21.47%
2017 2018
Net profit 36 81
Net sales 2022 2534
Calculation 36/2022*100 81/2534*100
Net profit ratio 1.78% 3.20%
2017 2018
Operating profit 51 127
Net sales 2022 2534
Calculation 51/2022*100 127/2534*100

Operating profit ratio 2.52% 5.01%
The proportions measured described suggest that this current business status is greater than
in the preceding period. Like their net income rate in 2017 was 1.78 percent but 3.20 percent in
2018. This is attributed to the greater net income price in 2018. As for the business's net income
ratio, this can be found which its percentage in 2017 was 2.52 percent, which rose during the
year to 5.01 percent the year after. This reveals that in 2018 this proportion is nearly double as
compared to 2017. While overall profit margin in 2017 was better than in 2018. As in 2017, this
fell by 25.57 percent in the year to 21.47 percent. It is so although their operating margin does
not rise by gigantic standards although their income from sales rises by giant stare.
It is analyzed as per Roast limited corporation's income statements review earlier, their
sales figures is strong in 2018, this can be reflected on. Calculating various forms of proportions
and profit and loss report information will state this. In the exception of the gross income, most
of their measures indicate improved results in 2018. As per the scenario, they need to concentrate
on reducing overall selling costs. All are the gross profit cost relies on the overall sales expense.
Just like if selling prices are greater than the gross profit is reduced. Therefore, they will
concentrate on decreasing sales spending. In each of these times, their actual quality is strong,
particularly in 2018.
2.2 Statement of financial position
The monetary condition report is also understood via the financial statements. This can be
described as a sort of comment consisting of comprehensive details on the overall cost of wealth
and liabilities over a given period of time (Finke and Huston, 2014). There are net earnings will
be consisted existing as well as un-current assets. Either current or non-current obligations are
listed in the total obligations as well. Due to collecting key data from the business's financial
statements, administrators may use key details about how much debt is required to be charged as
well as how much money they required to spend for various expenses. Based on Roast Limited's
financial statements, it can be found to always have land, project including facilities in the non-
current assets with a value of 670,000 in 2017, which rose in 2018 and have become 996,000 in
2018. It shows that in 2018 them may well have taken certain transaction of this property. They

provide triple kinds of investments as regards total assets that are stocks, exchange & related
accounts receivable, and money & marketable securities. In the year 2017, the inventory price
was 120000, which increased in the coming year and becoming 299000. This indicates that they
could have made a significant inventory sale in 2018. Additionally, the interest expense sum was
93,000, which rose by 59.14 percent in 2018 and was 148,000. Other than that, in 2017 the cash
sum was 134,000 and in 2018 it was zero. Broadly speaking, their gross resources in 2017 were
1017,000 and in 2018 were 1443,000.
This can be measured as having equal sum of equity shares in both 2017 and 2018
respectively in the Capital and Obligations category. In dual years it is of 200,000. However in
some periods their quality of dividend payments was identical. As in 2017, it was 579,000 that
rose in the coming time and 660,000 in 2018. Their gross equity thus amounted to 779,000 in
2017 as well as 860,000 in 2018 respectively. Therefore, the lengthy-term lending in 2017
amounted to 100,000, that rose in the coming day and was 275,000. This suggests that they could
have relied on financing to meet the economic capital needs. They have different types of things
in their present obligation, including accounts payable, loan line of credit. Its bank credit card
was zero in 2017 but it was 73000 in 2018. In 2017, and also the exchange accounts payable,
they stood at 138,000, which increased in the coming year and becoming 235,000. While that
gross debts totaled 238,000 in 2017 and 583,000 in 2018. There are other factors measured to
allow a reasonable interpretation of this business's financial statements that are as follows:
Current ratio:
2017 2018
Current assets 347 447
Current liabilities 138 308
Calculation 347/138 447/308
Current ratio 2.51 times 1.45 times
Quick ratio:
2017 2018

Quick assets 227 148
Current liabilities 138 308
Calculation 227/138 148/308
Quick ratio 1.64 times 0.48 times
Return on capital employed:
2017 2018
Operating profit 51 127
Capital employed 879 1135
Calculation 51/879*100 127/1135*100
ROCE 5.80% 11.19%
Based onto the factors measured earlier, it could be found that their majority of the ratios
in 2018 is not in great shape relative to 2017. Including the existing ratio was 2.51 times in 2017,
but dropped by 1.45 time in the following year. It suggests that in 2018, the organization is
unable to reach the desired ratio 2:1 criterion. The low performance in 2018 is attributed to the
large rise in their current liabilities in 2018 compared to 2017. In the year 2018, and their rapid
ratio is also smaller. It was 1.64 times in 2017, but decreased in the coming year and become
0.48 years. This means that they have to follow the requirements of the perfect rapid
combination 1.5:1 occasions in 2018, much like the previous estimate. That's because in 2018 the
value of fast assets had been reduced. As it was 227000 in 2017, although it was 148000 in 2018.
But their output in charging yield on working resources was good in 2018 compared to 2017. As
in 2017, it was a 5.80 percent increase in following year and an 11.19 percent rise in 2018.
Broadly speaking, thus, based on Roast Limited's capital structure review, it can be found that
our financial statements in 2017 was higher than in 2018.

2.3 Statement of cash flow
The concept cash flow can be described frequently as to and from money after a specified
period of time (Epstein, Buhovac and Yuthas, 2015). To analysis the cash situation of trade
associations, a cash flow statement is provided that provides specific details on the total sum of
transactions contributing as money collections. Such as certain practices which are becoming a
source of cash outflow from companies. In essence, it is equipped from three forms of running,
funding, and spending practices. It can be found in the sense of Roast Business entity that overall
cash inflow from financing activities in 2018 was (24000). It means that there were more things
that become triggers of cash outflow. Moreover, there has been cash increase in the supply from
saving practices as well. It was of (358000) in 2018, it’s occurring this period they didn't sell
some resources and made property purchases. However, they had cash inflow from 175000
continuing operations. Ultimately they had cash position in adverse sense of (73000). Generally,
its cash flow viewpoint can never be elaborated on as being in a beneficial situation.
Operating cash cycle: The Operating Cycle concept sets out just how many days it requires for
a firm to turn stock transactions into money refunds from their eventual sale. This is also known
as the cycle of cash movement or cash transfer, or the process of transfer of money. The business
cycle is composed of several elements: payable transition times, stock turnaround periods or
trading receivable turnover hours. All come together to create the total calculation of the times of
the business period. The definition of the operational process and the study of the operation cycle
emerge theoretically from such. To become more precise, the periods of paid turnaround are the
amount of time that a business takes care of how fast it will paying off its financial commitments
to distributors.
Operating cash cycle = Days inventory outstanding + days sales outstanding - days payable
outstanding.
For year 2017:
Days inventory outstanding= 365/ inventory turn over
= 365/ 12.54
= 29 days

Days sale outstanding= 365/ receivable turn over
= 365/ 21.74
= 17 days
Days payable outstanding= 365/ payable turn over
= 365/ 10.90
= 33 days
So operating cash cycle= (29+17-33) days
= 13 days
Working Note:
Inventory turn over= cost of sales/ average inventory
= 1505/120
= 12.54
Receivable turn over= net sales/ account receivable
= 2022/93
= 21.74

Payable turn over= cost of sales/ account payable
= 1505/138
= 10.90
For year 2018:
Days inventory outstanding= 365/ inventory turn over
= 365/ 6.65
= 55 days
Days sale outstanding= 365/ receivable turn over
= 365/ 17.12
= 21 days
Days payable outstanding= 365/ payable turn over
= 365/ 8.47
= 44 days
So operating cash cycle= (55+21-44) days
= 32 days
Working Note:
Inventory turn over= Cost of sales/ average inventory

= 1990/ 299
= 6.65
Receivable turn over= Net sales/ account receivable
= 2534/148
= 17.12
Payable turn over= Cost of sales/ account payable
= 1990/235
= 8.47
Based on that measured operational period, it can be found that it had been 13 days in 2017 and
32 times in 2018. Therefore, the output of businesses is higher in 2017 compared to 2018. That's
so since their money conversion output will be efficient in 2017 and far less efficient in 2018.
Dividend policy: A dividends is the portion of income paid to the organization’s investors, and
the reward earned from stakeholders for their stake in the company. Top administration should
make the most of the income to accommodate its different owners, but stock investors are
granted top priority because they face the firm's greatest risk. Dividend policy of a corporation
determines the level of dividends the employer pays to its investors and the pace at which the
distributions are given forward (Lee, Yun and Han, 2016). If a business makes money they have
to determine what to do about it. As per the analysis of Roast limited company, it is analyzed that
they did not payment of the dividend in the year of 2018, so accordingly it is getting that
dividend of the year 2018 which is not good. It is presented that they had suitable price of net
profit in the year of 2018 that was comparing with the 2017. In the last, the profit of 2017, 36000
and in the year 2018 was 81000 greater than of 2017.
PART 3: Investment Appraisal
3.1 (a) Management Forecast
Roast limited executive administration team is making an expenditure of $500 million.
They also rendered five-year working capital estimates beginning in 2017 through 2021. On the

basis of five times their cash flow is 60, 112, 148, 180 and 224 million. This suggests that the
executives plan to see higher cash inflow rates, which are rising year in and year out. However,
they do forecast with little or no substantive framework. Such as having the large amount of
capital inflow in all five times is not appropriate for everyone.
3.1 (b) Investment Appraisal
Investment evaluation is a method for an organization to determine the value of future
developments or ventures based on the results of many various investment planning and funding
strategies. It is a type of quantitative evaluation for investors, because it can quickly identify
lengthy-term patterns and the expected competitiveness of a business.
Payback period: Payback period is the number of hours since investing money and the moment
the transaction actually ended. It will consider the expense of the expenditure and measure it by
the additional cash flow to determine the payback time period. Investing with faster payback
cycles are more attractive, as it would require a shareholder fewer let’s bring back their money.
This strategy is being applied in the sense of Roasted Limited, and it is estimated that their 500
million expenditure will be restored in 4 years time. However, the projected length of time is 5
years. On here are some drawbacks and advantages of this strategy which are as follows:
Benefits – The main advantage of this program is that it is clear and easy to implement. In fact,
this is appropriate in the field of ambiguity.
Drawback - The disadvantage of this approach being that it lacks other variables such as
investment growth, capital period worth among many others.
Net present value: The net present value (NPV) is the contrast between all the estimated value
of cash inflows for a given amount of time as well as the actual value of capital outflows. NPV is
being used to measure a proposal's projected productivity, and is a method of investment money
management that allows for the money is probably margin requirement. The duration velocity of
cash is the idea that capital is valued something in the current than it would have been an equal
sum in the potential as it has to generate interest indefinitely. Cash inflows as well as outflows
are balanced, taking into consideration accessible money supply, in compliance with the term
existentialist philosophy of currency. Just like in the Roasted limited partnership dimension, the

total current financial value is 110000. It notes that the investment from the organization will be
useful in the future. Underneath the benefits and drawbacks of this methodology are stated:
Benefits – Businesses profit from this strategy to create a simple image of potential productivity.
Drawback – In addition to the advantages, this approach often has certain limitations, as it will
not recognize time element.
Accounting rate of return: The accounting return on investment (ARR) is a measure
used for the money management of resources to determine the total return of an investment
relative to the original cost. With the exception of NPV, ARR may not compensate for the
margin requirement of capital, so if the ARR is equivalent to or higher than the expected profit
amount, otherwise the venture is considered to only have reasonable viability rates. ARR is
defined as a cumulative return, so a 20 % ARR implies the project is expected to be back 20p for
every 100p expended for duration of a period. To measure the ARR you will multiply the annual
return by the median expenditure in the very same period over a particular time. for example, in
the sense of the above-mentioned Roasted Business entity, the rate of interest on the planned
expenditure can be found to be 18%. Their goal ARR, while, is 10%. As per the listed some
drawbacks and advantages of this methodology which are as follows:
Benefits: It Find this strategy both the resource cost of capital and it is beneficial to improve the
profitability of the product
Limitations: This program is difficult to just use. Unlike this type the rate of interest is hard to
determine.
Broadly speaking, therefore, based on the earlier in this thread-mentioned investment evaluation
methods, it can be found that their 500 million investment proposition can be advantageous. This
is because any strategy produces positive results.
Source of Finance
As far as the financial market is concerned, there are a wide variety of funding outlets used
among business organizations to satisfy the use of budgetary requirements (Lee and Lee, 2015).
They may collect finances from various kinds of funds in the section of the latter Roasted

Limited Business. We each have some drawbacks and advantages. There are some origins of
finances which are as pursues:
Long term funds: This can be described as a kind of funding source that company has
accumulated for further than a year. It comprises of certain funding origin such as:
Equity Share: It is a major source of lengthy-term funds for corporate entities. This reflects
starting a business. Finally, by selling normal stock shares, the publicly sole trader will collect
money from the public as stock-share capital. This is one of the main sources of funding that
corporate company’s use regularly to raise large sums of money. They can obtain financial
support through this fund source in the sense of the above-mentioned Roasted Limited Company.
Following are a few of the drawbacks and advantages of this Funding origin which are as
pursues:
 Benefits: There are no related defined costs on common shares. Dividends may be
received if a company receives sufficient computable income but there is no requirement
to make dividends to shareholders.
 Limitations: The Company has no contractual duty to make distributions payable on
shareholdings. Hence the shareholders' possibility of missing the dividends is very large.
Short term funds: This can be described as a kind of funding source that company has
obtained with less than a year. It comprises of certain money origin such as:
Loans from co-operative banks: Co-operative lenders are a good source of fast-term
financing. When receiving funds from this origin, annual interest is simpler for businesses as this
offers the opportunity to paying in installment. Along with within this financing origin is very
lower and can be inexpensive for businesses (Johnson and et. al, 2016). In the sense of the
above-mentioned Roasted Limited Company, through this source of funding, they will meet the
need for financing. Listed are a few of the benefits and drawbacks of this funding method which
is as follows:
 Benefits: An advantage is that once a mortgage has been paid that there's no
responsibility for the lender. Like in this scenario, financial companies do not assume
equity positions in companies too.

 Limitations: In addition to the advantages, this path also has some drawbacks, like the
difficult purchasing process. That is because lenders track previous financial history until
they accept a loan.
So it can be recommended to here as-mentioned business that they should lend from the
co-operating lenders together in the above two sources of finance. It is so because it would be
convenient for them to gain resources at a cheaper cost if they do.

REFERENCES
Books and Journal
Arnold, G., 2012. Corporate financial management. Pearson Education.
Drew, J.M. and Cross, C., 2016. Fraud and its PREY: Conceptualising social engineering tactics
and its impact on financial literacy outcomes. In Financial Literacy and the Limits of
Financial Decision-Making (pp. 325-340). Palgrave Macmillan, Cham.
Epstein, M. J., Buhovac, A. R. and Yuthas, K., 2015. Managing social, environmental and
financial performance simultaneously. Long range planning. 48(1). pp.35-45.
Epstein, M.J., Buhovac, A.R. and Yuthas, K., 2015. Managing social, environmental and
financial performance simultaneously. Long range planning, 48(1), pp.35-45.
Finke, M. S. and Huston, S. J., 2014. Financial literacy and education. Investor behavior: The
psychology of financial planning and investing. pp.63-82.
Gardiner, P.A., Byrne, G.J., Mitchell, L.K. and Pachana, N.A., 2015. Financial capacity in older
adults: a growing concern for clinicians. The Medical Journal of Australia, 202(2), pp.82-
85.
Giannouli, V. and Tsolaki, M., 2015. A neglected drama for elders: Discrepancy between self-
perception and objective performance regarding financial capacity in patients with
cognitive deficits.
Huston, S .J., Finke, M. S. and Smith, H., 2012. A financial sophistication proxy for the Survey
of Consumer Finances. Applied Economics Letters. 19(13). pp.1275-1278.
Johnson, C .L. and et. al, 2016. What are student loan borrowers thinking? Insights from focus
groups on college selection and student loan decision making. Journal of Financial
Counseling and Planning. 27(2). pp.184-198.
Koh, Y. and Lee, H. A., 2015. The effect of financial factors on firms’ financial and tax reporting
decisions. Asian Review of Accounting.
Lee, T. D., Yun, T. and Han, K.S., 2016. The role of creative strategy, ad disclosure and
regulatory focus in investors’ decision making: An experimental investigation.
In Financial Literacy and the Limits of Financial Decision-Making (pp. 103-134).
Palgrave Macmillan, Cham.
Michailova, J., Mačiulis, A. and Tvaronavičienė, M., 2017. Overconfidence, risk aversion and
individual financial decisions in experimental asset markets. Economic research-
Ekonomska istraživanja, 30(1), pp.1119-1131.

Richard, O. C., Kirby, S .L. and Chadwick, K., 2013. The impact of racial and gender diversity in
management on financial performance: How participative strategy making features can
unleash a diversity advantage. The International Journal of Human Resource
Management. 24(13). pp.2571-2582.
Sadique Hussain, S.A., Ibrahim, M. and Balouch, W., 2015. Impact of Women Behavior on
Financial Decision Making. Global Journal of Management And Business Research.
Sicherman, N., Loewenstein, G., Seppi, D.J. and Utkus, S.P., 2016. Financial attention. The
Review of Financial Studies, 29(4), pp.863-897.
Siegrist, M., Bowman, G., Mervine, E. and Southam, C., 2020. Embedding environment and
sustainability into corporate financial decision‐making. Accounting & Finance, 60(1),
pp.129-147.
Valentine, S. and Hollingworth, D., 2015. Communication of organizational strategy and
coordinated decision making as catalysts for enhanced perceptions of corporate ethical
values in a financial services company. Employee Responsibilities and Rights
Journal, 27(3), pp.213-229.