Financial Decision Making

This report focuses on the financial decision making process of Roast Ltd, a coffee house in the UK. It includes an analysis of the company's performance, investment appraisal, and sources of finance. The report also provides an overview of the coffee house industry and the financial position of Roast Ltd. It concludes with recommendations for the acquisition of Roast Ltd by Starbucks.

Financial Decision Making

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
PART 1: Industry Review................................................................................................................1
PART 2: Business Performance Analysis........................................................................................2
2.1 Statement of profit or Loss....................................................................................................2
2.2 Statement of Financial Position............................................................................................4
2.3 Statement of cash flow statement..........................................................................................6
Part 3: Investment Appraisal and Sources of Finance.....................................................................8
3.1 Investment Appraisal............................................................................................................8
3.2 Sources of fund:..................................................................................................................10
REFERENCES..............................................................................................................................12

EXECUTIVE SUMMARY
Present report is based upon financial decision making of Roast Ltd which is one of the
famous coffee houses of United Kingdom. It is segregated in two parts first one is based upon the
analysis of performance of the company. For this purpose, all the final accounts including
Statement of profit and loss, financial positions and cash flow are analysed. Different ratios such
as operating, net, and gross profit, current, quick, debt equity etc. along with operating cash cycle
are calculated to determine that Starbucks can acquire it or not. It has been recommended to the
organisation that it should acquire Roast Ltd because its performance in the market is very good.
Second part is based upon an investment option of 400 million pounds. For the purpose of
analysing profitability and efficiency of this alternative different investment appraisal techniques
such as NPV, ARR and payback period are calculated.
PART 1: Industry Review
This section of the report focuses on the coffee house industry which is one of the largest
sectors of UK and it is growing massively due to increasing demand of coffee in the market. In
order to get an insight and overview of the industry following points could be considered:
 According to a study coffee house industry is generating employment in UK and
provided more than 210000 jobs to the individuals and contributed in the growth of
country (Employment generated by coffee house industry, 2019).
 Major players of the industry are Starbucks, Cafe Ritazza, cafe Nero etc. which are
competing with each other and making efforts to become the market leader. All these
organisations are operating business in effective manner within the particular sector.
 The whole sector have contributes around 6.1% in the annual growth of the industry of
UK.
 According to the market research of IBIS coffee house industry of UK has generated
revenues of 6 million pounds in current year as compared to last few years.
 There are total numbers of the organisation that are related with the sector of coffee
house at the place of UK in 16199 that has been enhanced through growth rate due to
compare with the previous year.
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 There are defined different types of possibilities that can be achieved through the
particular enterprise. With the help of these opportunities include with a healthy organic
that can carry out the recent trend of stay healthy (Correia, Dussault and Pontes, 2015).
On the basis of above described points it has been determined that different types of
difficulties are also faced by coffee house industry to grab growth opportunities. All the
challenges are affecting the market trends and scenario that directly leaves impact upon
preferences and choices of customers. There is one more issue that is faced by the particular
sector related with the intense competition and mostly face by the new entrance of this sector.
The main cause of this competition is high profit margin where a business engage in this
industry.
PART 2: Business Performance Analysis
2.1 Statement of profit or Loss
Statement of profit and loss is an account which is used to record all the incomes,
expenses and calculate the profits generated by an organisation in an accounting year. With the
help of it profitability of an enterprise could be determined by top level executives and external
parties such as investors, government and suppliers. From the income statement of Roast Ltd it
has been analysed that revenue of the business are improving as per the total sales transcribed in
the year 2017 and get outcome in the revenue of 2022000 which is increased up to 2534000 in
2018. If revenues are increased by an organisation then it may result in higher incomes and
profits and along with this expenses may increase because the company is required to spend
money to enhance sales. Total operating expenditure of Roast Ltd were 466000 for 2017 which
are increased up to 477000 in 2018 (Gal, Stewart and Hanne, 2013).
All over the analysis it is mainly depended on the ration analysis that present actual
position of the business in present time due to compare with last year activities and show
financial performance of business.
Gross Profit Margin
This ratio is used by the business to measure the profitability that present the ability of a
business to earn income against set value that invested on labour and on material cost. If gross
profit ratio increasing so it presents growth of business that supports to business to consume
money for the future operating expenditure.
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Formula: Gross profit / Net sales *100
For 2017 = 517 / 2022 * 100
= 25.57%
For 2018 = 544 / 2534 * 100
= 21.47%
According to above calculations the gross profit margin of the company is decreased in
2018 which means profitability of Roast Ltd is also declined. The reason behind of reduction to
increase gross sales that presents negative indication to take financial decision to acquire of
particular organisation. Gross profit margin show impact in relation between the profit and the
COGS. Due to deduct gross profit profit ans improvement in cost of goods sold impact on the
decision making procedure.
So the growth of Roast Ltd is not analysed through particular ratio because it is based on
the cost of goods sold which is higher and revenue less than of it. So company can not afford the
procedure of coffee beans from other states of Europe where increase the interest rate after the
Brexit situation.
Net Profit margin
This margin is utilised to measure the profitability of the business that can be earned after
less all the taxes and interest in particular financial period. Due to greater profit margin present
high growth and success in context of company's scope (Govindan and et.al., 2015).
Formula: Net profit / Net sales *100
For 2017 = 36 / 2022 * 100
= 1.78%
For 2018 = 81 / 2534 * 100
= 3.20%
The above calculations are demonstrating that net profit margin of the Roast Ltd is
increased in 2018 from 1378% to 3.20% which shows that profitability is increased in this year.
Due to increment analysis the ability of the business and know about management control and
conduct its yearly expenses of operation like salaries, rent and many more. Through increasing
net profit get good indication for Starbucks as per the reason of acquisition.
Operating Profit Margin:
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The statistical measurement shows the ability of a business to reserve a cost as profit as
after paying off all the different production expenditure like raw material, wages etc. Due to
higher operating margin get the greater success rate in the business (Kliger and Gilad, 2012).
Formula = Operating profit / Net sales *100
For 2017 = 51 / 2022 *100
= 2.52%
For 2018 = 127 / 2534 * 100
= 5.01%
From the above calculations it has been determined that operating margin of Roast Ltd is
increased in 2018 which is showing that operational performance of the enterprise is increased in
this year. Operating profit margin in the rear of 2017 is computed as 2.52% that about doubled in
2018 which is 5.01%. The particular increment provide outcome as good performance of the
business.
After ratio analysis and through profit & loss statement of Roast Ltd has been observed
the business at the level of maturity stage that presents life cycle which enough to acquire the
business at its growth level.
2.2 Statement of Financial Position
Business entities generate a statement for the purpose of recording information related to
assets and liabilities on yearly basis which is known as statement of financial position. As per the
analysis of Roast Ltd balance sheet it is getting that company have total assets as well as
liabilities has been improved in the year of 2018. The total assets & liabilities in the year 2017
was recorded in financial accounts that was 1017'000 pounds but it is increased in the year 20187
such as 1443'000 pounds. Through increasing assets value and equity presents about the
operating condition. So for more analysis calculate ration related of financial statement such as:
Current Ratio
This ratio is mainly depended on the current assets and current liabilities of the
organisation. The ideal ratio of the current ratio is 2:1 (Kotlar and et.al., 2014). Through this
ration analysis the liquidity position of the business and pay amounts to debt in short period of
time regarding to liabilities. In the context of coffee industry, a business has two parts of assets
and one part of the liabilities.
Formula: Current assets / Current liabilities
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For 2017 = 347 / 138
= 2.51
For 2018 = 447 / 308
= 1.45
As per the above ratio calculation analysis the capability to pay off short term debt and
liabilities of Roast Ltd. In the year of 2018 the ratio is decreased as compare of 2017 because it
was 2.51:1 an 1.45:a in 2018. Due to investigating different aspects of statement of financial
position of an organisation, it is analysed that current ratio of the business deducted use to
overdraft facility to pay off additional amount for the securing coffee beans as per the other state
of Europe. There are deducting current ratio due to post Brexit effect on the inability of pay debts
of the business.
Quick Ratio
The particular ratio indicate changes in cash and cash equivalents does not include stock
and prepaid expenses. The ideal ratio is 1:1 in the coffee industry to pay off the quick amounts
through this ratio (Li, 2014).
Formula: Quick assets / Current liabilities
For 2017 = 227 / 138
= 1.64
For 2018 = 148 / 308
= 0.48
As per the above computation the outcome of quick ratio indicate that Roast Ltd can able
for Quick ratio of 1.64:1 in the year 2017 which is reduced in 2018 by 0.48:1. It is performing as
usual current ratio that has been deducted due to have external affairs that faced by the business.
Debt Equity Ratio
It is most essential ratio which is must compute by every organisation to know debt
position and supports to take effective financial decision towards to business. On the basis of this
ratio take acquire decision and measure ability of business to achieve to parts of debtor's capital
against one part contributed capital. The idle ratio is 2:1 in the coffee house sector (Ogiela,
2013).
Formula: Total debts / Total equities
For 2017 = 238 / 779
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= 0.31
For 2018 = 583 / 860
= 0.68
The above table it is presented that it is evident of the debt equity ratio that presents the
growth of organisation at ongoing way. Through formula get result as 0.31:1 in year 2017 &
0.68:1 in year 2018. Through growth ratio get positive result regarding to acquisition decision of
Starbucks.
As per the entire analysis of financial position of Roast Ltd can refer that the business is
able to pay its short term as well as long term liabilities due to face different problems which is
related with external environmental aspect like Brexit.
2.3 Statement of cash flow statement
All the organisations generate a statement to record information regarding inflow and
outflow of cash and it is known as cash flow statement. Main purpose of it is to provide
information about liquidity of the company to the stakeholders. The statement of cash flow of
Roast Ltd presents negative activities of cash inflows and outflows that means a business is
heavily paying through cash that become reason of the liquidity. Through more analysis the
operating cash cycle of Roast Ltd is defined as follows:
Operating Cash Cycle
It is a type of measurement that mainly utilised by business to evaluate the time that taken
by them to convert all the stocks through monetary resources. This measurement related to cash
conversion cycle that consist of the day of operations. Operating cash cycle supports in
determining the performance of the business. In case of Roast Ltd, the operating cash cycle is
calculated by the different number of days in which stock is outstanding and numbers of days in
which is sale outstanding and numbers of days of payment outstanding (Petersen, Kushwaha and
Kumar, 2015).
Particulars 2017 2018
Total days in year 365 365
Inventory turnover 12.54 6.66
Formula 365 / inventory turnover
Days inventory outstanding 29.11 54.80
Total days in year 365 365
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Receivable turnover 21.74 17.12
Formula 365 / receivable turnover
Days sale outstanding 16.79 21.32
Total days in year 365 365
Payable turnover 10.91 8.47
Formula 365 / payable turnover
Days payable outstanding 33.46 43.09
Formula
Days inventory outstanding + days sales
outstanding - days payable outstanding
Outcomes 13 32
Working notes:
Inventory turnover: Cost of sales / average inventory
Particulars 2017 2018
Cost of sales 1505 1990
Average inventory 120 299
Inventory turnover 12.54 6.66
Receivable turnover: Net sales / account receivables
Particulars 2017 2018
Net sales 2022 2534
Account receivables 93 148
Receivable turnover 21.74 17.12
Payable turnover: Cost of sales / account payable
Particulars 2017 2018
Cost of sales 1505 1990
Account payables 138 235
Payable turnover 10.91 8.47
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Calculation of operating cash cycle:
Particulars 2017 2018
Days inventory outstanding 29 55
Add: Days sales outstanding 17 21
Less: Days payable
outstanding 33 44
Operating cash cycle 13 32
As per the above evaluation, it is understanding that operating cash cycle of roast Ltd is
about 32 days in the year of 2018 and 13 days in 2017. It means the organisation take about a
month to related with the raw material that identified through cash in which an organisation do
effective benchmark.
Dividend Policy
It is a strategy where a business take effective decision regarding to dividend but it is
mainly based on the board of directors of a business. According to set proportion they are
divided profit among shareholders in set ratio. In respect of Roast Ltd, the organisation has
decided to there is not enough profit so not circulated amount of dividend in the year of 2018 and
as per the investor it is a valid decision. Roast Limited is developing enterprise which is essential
for a first invest and profit in the assets that can supports to operate effectively as compare of
distribution in between shareholders.
After the evaluation of the income statement, financial position as well as cash flow
statement of the business. So it is getting result Roast limited is small type organisation which
has restricted value of profit and income but at the growth and improvement recognise growth
rate of the business which is high and makes it suitable for Starbucks to acquire.
Part 3: Investment Appraisal and Sources of Finance
3.1 Investment Appraisal
Management Forecast: Roast Ltd's management has a long term investment expectation
of 500 million. Over the next 5 years between 2017 to 2021 the cash-flows forecasts of 60, 112,
148 and 180, 224 million pounds are estimated in this regard. It indicates a firm's ability to
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anticipate a rise in cash-flows over 5 years. All projections are focused on certain aspects and
considerations. Therefore, it is complex to achieve in reality.
Due to Brexit effect this forecast may be wrong but company's existing results and
performance point out that it will overcome from the adverse impacts of Brexit. Management has
to revise their forecast time to time because inflexible or rigid forecasts may lead to
misinterpretations.
Investment appraisal:
This is the approach adopted by the enterprise to assess the feasibility of any given
opportunities. Managers may adopt different techniques simultaneously to take feasibility
decisions about different projects. The following summary describes the various techniques that
Roast Ltd can use for evaluating its advantages and limitations:
Payback period: It's one of the efficacious techniques which allows the time needed to
retrieve investments to be defined. Analysing Exhibit 3 revealed that same could be retrieved
within 4 years if company Roast Ltd spends the value of 500 million pounds. The following are
the various advantages and constraints, as follows:
 Benefits: It will also enable managers to make decisions easily while also reviewing
various projects life and initial investments. Quick method to review different capital
projects by interpreting how much time it would take to recover costs initially incurred.
 Limitations: A significant concept in decision making approach named Time-value of
present money not taken into consideration here under it because of this accuracy level of
results can not attain a relevant decision-making.
Accounting rate of return: The key application of this approach is formed in the
budgeting-capital it may serve them to assess return on investment on their multiple investment
levels. According to the review of Exhibit 3, ARR would be 18 percent for the investment of
500-million pound. It represents the investment's reasonable return. Benefits and drawbacks are
described below:
 Benefits: This method assist to assess how much return the company will reasonably get
from any specified project investment.
 Limitations: Timing effect on value of money is not regarded here in it that several times
resulting in ambiguous outcomes.
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Net present value: It is determined by subtracting the current cash flow worth from the
organization's initial cost. Exhibit 3 shows the NPV for Roast Ltd, 110 if the organization's
investment is 500 million (WEBSTER, 2014). The numerous advantages and drawbacks of same
are described out below:
Benefits: More realistic and significant approach which also emphasises upon
consideration of timing factor in value of pound money.
Limitations: Guesswork of discounting factor is sometimes creates complexities as no
specific rates are described any where.
From above evaluation of Roast Ltd's project covering different techniques it has been
analysed that the investment of 500million GBP in project would be reasonable if all
things/factors remain constant.
3.2 Sources of fund:
For all the business entities it is very important to arrange funds to operate business in
systematic manner. As Roast Ltd is planning to expand business in Italy therefore it is very
important for managers to make sure that they use effective sources to generate finance for this
purpose. Looking at the scenario they have to seek some options to support them accomplish
their goal. In this scenario's context, here is a comprehensive evaluation of different sources for
acquiring funds, as follows:
Bank Loan: This is quickest way to raise funds through bank loans. A corporation like
Roast Ltd in order to make expansion in business could apply this source as it doest not take too
much time also fastest way to raise funds. Under it normally banks and financial institutions
provides loans to company against any security whether primary or collateral and repayment of
funds are made by company in instalment. This sum of instalment involves interest and principle.
However it has some disadvantage also along with benefits, as discussed below: Advantage: As compare to shareholders, lenders and borrowers have no right to make
interfere in workings and decisions of enterprise. Also company has sufficient time-frame
for making repayment of loans (Ujunwa, 2012).
 Disadvantage: It is one of the lengthy process to raise fund from banks where final
decision are taken by banks that whether they will allow the organisation to raise funds or
not.
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Crowdfunding: This is also an appropriate way for organisations to generate the fund, as
businesses primarily seek to obtain a small sum of capital from market for people, mostly using
the online sources/platforms. This allows the company to execute its daily work on a larger
platform that allows to achieve its goals explicitly. Whenever such support is required, it must be
recognized that combined initiatives by acquaintances, relatives and even stakeholders play a
major position in such. Here are a few of the benefits and drawbacks of crowd funding source, as
follows: Advantage: It is one of the easiest way to generate funding for investment opportunities
and the main benefit of it is that organisation is not required to provide any security to the
investors.
 Disadvantage: If the amount of crowd funding is very high then it bounds the company
to reach the predetermined goals because if these are not attained then it may result in
decreased interest of investors.
As Roast Ltd is planning to invest 400 million pounds in its business for the purpose of
expanding in Italy therefore the company is required to take all the above investment appraisal
techniques in consideration. With the help of all of them managers will be able to take effective
decision for betterment of business (Shouzhen and Su, 2015).
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Online
Current coffee house industry of United Kingdom. 2019. [Online]. Available through:
<https://www.ibisworld.com>
Employment generated by coffee house industry. 2019. [Online]. Available through:
<https://www.britishcoffeeassociation.org/assets/files/uploads/BCA%20CEBR%20-
%20The%20economic%20value%20of%20coffee%20in%20the%20UK
%2020%20April_FINAL.pdf>
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