Financial Decision Making

This report provides insights on financial decision making, including industry review, business performance analysis, investment appraisal techniques, and more. It covers the case study of Roast Ltd, a popular UK coffee house, and offers study material and solved assignments on Desklib.

Financial Decision Making

EXECUTIVE SUMMARY.............................................................................................................2
PART 1: Industry Review...............................................................................................................2
PART 2: Business Performance Analysis.......................................................................................3
2.1 Statement of profit & loss......................................................................................................3
2.2 Statement of financial position..............................................................................................5
2.3 Statement of cash flow...........................................................................................................7
PART 3 Investment Appraisal Techniques...................................................................................10
3.1 (a) Management forecast.....................................................................................................10
3.1 (b) Investment appraisal techniques....................................................................................10
3.2 Sources of finance................................................................................................................12
REFERENCES..............................................................................................................................13
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EXECUTIVE SUMMARY
This report summarised the Roast Ltd, that is one of the popular UK coffee houses. The staff
of the Fund Department of Starbucks asked by the Chief Financial Officer to reassess the
spending plan and the elegance of their business in order to acquire it after that. With this
function, all statements are evaluated, and that is why ratios such as net ratio, gross and operating
profit ratios, debt fairness, current, fast ratios along with side operating cycles are all determined.
The Roast Ltd organisation has also decided to invest approximately 500 lbs. from the
corporation in order to determine the efficiency of the various investment strategies used. The
point must organise for the investment to spend in the planned work, which is why the way is
proposed to get a financial loan from the bank so that the employment-related goals might
probably be finally implemented. Starbucks Company should acquire Roast ltd which helps the
organization to maximise their market shares and revenues.
PART 1: Industry Review
 Since coffee is really only efficiently grow near the equator, the national value chain
starts with distributors and sales people at the entry point into the United Kingdom.
 Green coffee is the single biggest coffee type imported into United Kingdom (Cook and
Sadeghein, 2018). However, the supplier mechanisms in location mean that imported
goods from the EU, mostly roasted coffee and dissolved coffee, are of higher benefit than
imported goods from the rest of the globe.
 A huge number of retail coffees are distributed by supermarkets and convenience stores,
making up for 35% and 37% of all coffee retailers, respectively.
 The United Kingdom is typically known for the intake of instant coffee. Standard instant
coffee produced revenue of approximately 810 million in 2017, comparable to 54 %
of total turnover of £ 1.5 billion created by all coffee goods purchased in the retail
industry.
 Even after this, the amount of instant coffee sales declined following the arrival of
broader products available in the market, such as coffee makers, roasted and dried coffee
and blended coffee.
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 Fresh coffee grounds pods produced revenue of approximately 305 million in 2017,
second only to daily instant coffee (Bangma, 2019). Whereas the regular fresh ground
coffee had a profit margin of£214 million that same year.
 This pattern is attributed to the growing coffeehouse cultural identity in the United
Kingdom and the increasing preference for 'barista quality' coffee at home.
 At current situation, this industry is expanding its business operations at world stage,
such as China, Australia and other markets.
 Industry revenues are expected to raise from 2019-20 by about £6.6 billion at a
cumulative annual rate of 4.8 per cent over five years, plus 1.9 % growth over the
existing year.
PART 2: Business Performance Analysis
2.1 Statement of profit & loss
Analysis of Profit and loss statements includes the review of the different line components
in the document, and also the creation of unique items that have been observed over a given
interval. This approach is being used to understand the company's market structure as well as its
ability to make profits. All the variables of the company produce annual financial report on the
basis of the task of documenting much of the direct, indirect, operational and non-operational
expenditures together, with the result that maturity might probably be expected.
In order to attract many shareholders, it is important for the company to be certain that its
own invoice is rendered in an organised way to maintain that outside stakeholders are able to
measure the possible returns that might probably be produced by them (Erkut,
2018). Throughout this context, the income-statement review of Roast Ltd explains the firm's
net growth from £2022000 to £2534000 that is 25.32 % between 2017 to period 2018, whereas
the firm's sales costs increased from £1505000 to £1990000 during 2017 and 2018.
The company's operating revenue in 2018 was 60,000. From the other hand, running costs
increased from £466,000 in 2017 and £477,000 in 2018. In 2018 and 2017, Roast Ltd posted an
operating profit of 127000 pound and 51000 pound, both of which reflect an upward trend. In
2018 and 2017, the gross net profit of the organisation was 81000 and 36000, which also
indicates that the amount of economic profit of the business has increased. For the aim of
evaluating the overall position of the company, the following ratios are calculated:
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Gross profit ratio: This ratio is calculated for the aim of establishing the relationship
between the gross income and revenue. The main purpose of its use is to determine the
operational performance of an organisation. This proportion can be calculated in order to identify
whether or not Roast Ltd is capable of generating significant profits.
Formula:
Gross Profit ratio = Gross profit / Revenues * 100
Particulars 2017 2018
Gross profit 517 544
Revenues 2022 2534
Gross profit ratio 25.57% 21.47%
Operating profit ratio: In this ratio, organisation calculates the capacity to generate
profits when paying all expenses. The managers should also determine the potential of Roast Ltd
to generate revenue in the future.
Formula:
Operating profit ratio = Operating profit / Revenues * 100
Particulars 2017 2018
Operating profit 51 127
Revenues 2022 2534
Operating profit ratio 2.52% 5.01%
Net Profit Ratio: This ratio is calculated in order to measure the payment of all taxes,
interest, dividends and profits in order to calculate the total percentage of sales received during
the year (Hirshleifer, Jian and Zhang, 2018). This will be used to determine that Roast Ltd will
achieve their goal of earning profits or not.
Formula:
Net profit ratio = Net profit / Revenues * 100
Particulars 2017 2018
Net profit 36 81
Revenues 2022 2534
Net profit ratio 1.78% 3.20%
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From the above analysis of ratios, it has been interpreted that gross margin ratio was
higher in 2017 compared to 2018, which suggests that the operating performance of the company
in this year could have been substantial compared to 2018. Operating and net profit statistics
indicate that the output of Roast Ltd in 2017 is poorer as of 2018. It reveals that the company
produced improved returns in 2018 compared to the previous year. These statistics indicate that
the popularity of the company is high at the current time but that it can attract a large number of
enterprises.
2.2 Statement of financial position
Business organisations report the financial condition for the intent of disclosing that the
company will or may not have been able to support the industry. It is important for several
companies to produce it on a yearly basis so that internal or external parties can analyse the
financial condition. In addition to external participants such as creditors, staff, investors,
customers, government, etc., can monitor the success of business enterprises (Kimmel,
Weygandt and Kieso, 2018). There seems to be a variety of features that may require value-
added and clarity, accuracy, usability, etc. In this context of Roast Ltd, based on the evaluation
of the parts of the budget described in Roast Ltd's Statement of Financial Condition, the
company generated capital expenditure on the purchase of machinery, plant and equipment
(PPE) as the corporation's PPE value increased from £670,000 to £996,000 between 2017 and
2018.
Another interesting point with this is that the company's cash transactions, and this in 2017
amounted to £134,000, were reported to be zero in 2018, suggesting that the company already
used its financial capital throughout 2018. However, overall existing rate of assets managed to
hit a peak of 447,000 pounds in 2017, and that was 347,000 pounds. Corporate entity did not
issue any ownership stakes during 2018 as the total share capital was £200,000 in both periods.
In 2018, the retained earnings of net profit and other assets company were estimated to be
£660,000, but in 2017 they were £579,000. As a result, total equity funds are rising from
£779,000 to £860,000.
Long term corporate borrowings are dramatically changing, although the company's long-
term loans increased to £275,000 in 2018, and that was £100,000 in 2017. In 2018, the company
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also purchased a bank overdraft service worth £ 73,000. Company's commercial creditors shifted
from 138000 to 235000 mostly during 2017-2018 eras. Over the period 2017 to 2018, the
cumulative average liabilities are increased by £ 345000 (from £238000 to £583000). The
purpose of the examination of the project after ratios would also be determined in the
circumstances of Roast Ltd. The definitions of most of them are as follows:
Debt Equity Ratio: This is among the most common ratios used to calculate financial
leverage (Park and Cho, 2019). It is necessary to use external commitments instead of internal
assets for all businesses in order to increase the capacity to generate higher income. This ratio
must be calculated in order to determine the same capacity of Roast Ltd.
Formula:
Debt equity ratio = Total debts / Total equities
Particulars 2017 2018
Total debts 238 583
Total equities 779 860
Debt equity ratio 0.31 0.68
Current ratio: It is a type of liquidity ratio that is calculated to evaluate if a person or
organization will be able to handle all of the short term liabilities of current properties over the
year though. This could be helped by calculating the amount of liquidity of Roast Ltd.
Formula:
Current ratio = Current assets / Current liabilities
Particulars 2017 2018
Current assets 347 447
Current liabilities 138 308
Current ratio 2.51 times 1.45 times
Quick Ratio: Existing resources are determined on the basis of this equation for estimation
purposes in order to determine resources for the fulfilment of short-term liabilities with the help
of marketable securities. This ratio would be calculated in order to assess if Roast Ltd would be
in a position to protect the retained earnings with quick money or not.
Formula:
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Quick ratio = Quick assets / Current liabilities
Particulars 2017 2018
Quick assets 227 148
Current liabilities 138 308
Quick ratio 1.64 times 0.48 times
From the overall ratio analysis of Roast Ltd, it has been concluded that in 2018, Roast Ltd
used more liabilities instead of equity markets, which shows that the outcome of the business
increased over time (Rai and Lin, 2019). Current ratio results indicate that the stabilisation of the
entity is weak in 2018 compared to 2017. The Quick ratio is also very low in 2018 duration. Both
suggest that the versatility of the person is very limited. The performance of Roast Ltd is not
good leading to decreased profitability, as stated in the Financial Statement. Therefore,
irrespective of this ability, the company is reduced to pay for the amount of the short term
liabilities.
2.3 Statement of cash flow
All of the business factors create an official statement to catch recommendation about future
cash inflows and out flows that money supply of such organisation can probably be conclusively
proven that it is called update of cash flows. Primary reason for its methodology would be to
analyse that the venture can fulfil most of the lengthy-term targets but maybe not. With aid of
this, the managers will decide that they should spend less on potential operation instead of on it.
When shaping it, there are various activities that are running, funding and spending. Even by
conclusion full effort is required to ensure that it can be conclusively proven that the company
has made money or paying it to external parties.
This could be revealed in Roast Limited Company’s perspective that the cash flows from
operating activities were depressed £24,000 in the year-2018. This indicates more actions have
become provoking cash flows. Operational activities, caused by the cash outflow of inventories,
amounted to approximately £179,000 but improved by £55,000 in industrial receivables (Stewart
and et.al., 2018). While the financial structure of the capital spending is unfavourable, as a result
of substantial capital spending, to the purchase of land, plant and equipment by the company.
Increasing long-term debts have resulted in a rise of £175,000 in cash flows from financing
operations.
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Operating Cash cycle: This is also considered as cash conversion cycle that's primarily
utilised by organisations with the intention of determining how fast an organisation can have
their liquid resources in the incident the investment of inventory is heading to be increased. With
the aid of such restriction of bandwidth can be reversed which may potentially occur due to
various plans of growth. With the support of such managers, Roast Ltd will be able to determine
the time needed by its own company for the development of initial cash outlays to conduct
practical activities such as marketing, advertisement, etc. It's very essential for organisation as it
will definitely help in decision that positive or Negative cash flow. If the duration is incredibly
long afterward it shows that present Resources were not really likely to be integrated
immediately into cash quickly. Equations of this cycle are as follow:
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
From the above calculation, it has been interpreted that operational cash cycle for the period
of 2017 was 13 and of 2018 it is 32 which means company unable to convert their stock into
cash into less time (Stewart and et.al., 2019). In 2017, company perform very well in comparison
to 2018 because in company is more efficient in 2017 to convert their stocks into cash. It has
been analysed that, individual performance of the organization reduces in period of 2018.
Working notes 1:
Day’s inventory outstanding:
Formula: Day’s inventory outstanding = 365 / inventory turnover
Particulars 2017 2018
365 days 365 365
Inventory turnover 12.54 6.66
Day’s inventory outstanding 29.11 54.8
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Day’s sale outstanding:
Formula: Day’s sale outstanding = 365 / receivable turnover
Particulars 2017 2018
365 days 365 365
Receivable turnover 21.74 17.12
Day’s sale outstanding 16.79 21.32
Day’s payable outstanding:
Formula: Day’s payable outstanding = 365 / payable turnover
Particulars 2017 2018
365 days 365 365
Payable turnover 10.91 8.47
Day’s payable outstanding 33.46 43.09
Working notes 2:
Formula: 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
Formula: Receivable turnover = Net sales / account receivables
Particulars 2017 2018
Net sales 2022 2534
Account receivables 93 148
Receivable turnover 21.74 17.12
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Formula: Payable turnover = Cost of sales / account payable
Particulars 2017 2018
Cost of sales 1505 1990
Account payable 138 235
Payable turnover 10.91 8.47
Dividend Policy:
It is the method that a corporation uses to manage its dividend payments to investors.
Most of the researchers suggest that dividend policy is meaningless, technically, since investors
may sell a part of their stock or portfolios when they need money (Zaleskiewicz and Traczyk,
2020). The financial reports of Roast Ltd show that in 2018, the undertaking had never provided
any kind of dividends to its shares holders. This determination of course was not necessary as
they had sufficient funds that could be allocated to investors as expenditure.
PART 3 Investment Appraisal Techniques
3.1 (a) Management forecast
It is known as systematic assessment where supervisors detect possible scenarios and then
understand it better. Its principal purpose was to evaluate evolving business strategies instead
and respond to situations in order to accomplish lengthy term goals. Roast Ltd. employees are
intending to spend 500 million in a business venture in the year behind. They have expected
capital gains of 60, 112, 148, 180 and 224 million pounds from 2017 to 2021. Through
measuring it, it was concluded that in the five-year term, leaders from the inside of the
corporation perceive a growth in the cash flow. All the assumptions that render are not founded
on any value of the asset, so obtaining certain cash inflow would be very challenging for them
(Barbić, Lučić and Chen, 2019).
3.1 (b) Investment appraisal techniques
All the corporations use multiple types of ideas to make thinking of having about engaging
in a particular project. There are NPV, Pay Back Date, ARR etc. that can also be used by Roast
Ltd's administrator to make a decision to invest 500 million pounds in a task. Definition among
them all with their advantages and disadvantages is as described in the following:
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Payback period: It can be described as a tool and may be used by corporations including
such Roast Ltd. to calculate the time it takes to pay for the costs they are investing in a company.
Exhibit 3 suggests that in 4 years the company will rebuild the valuation therefore demonstrates
that it is a reasonable idea to spend 500 million pounds. Most of the other advantages and
disadvantages of this approach include:
Benefits: This is one of the easiest calculations that can help managers decide if the
investment strategy is attractive or not. With the aid of this, numerous alternatives could be
easily assessed
Limitations: Administrators cannot decide with the aid of that the expenditure would
succeed in the company's increased metabolic worth. Besides this value of the business is also
neglected in this methodology that could lead to human error (Barth, 2018).
Net present value: The method of comparing the distance between some of the
accumulated expected revenue and actual expenditure can be described. Only with support of it,
Roast Ltd's managers should be able to assess the project feasibility they expect to invest 500
million pounds into. Exhibit 3 indicates that the development's net present value is 110 which
reflect a positive number. Below are some of its advantages and drawbacks.
Benefits: Using this methodology, consistent and accurate assessment of profit margins
could be carried out, since cost of capital is factored into the equation. It supports the
organization to make decisions, since it delivers consistent readings.
Limitations: The measurement process is very complex so management can need to spend
all that time on their estimates.
Return rate of accounting: It is used in fundamental analysis in order to assess the rate of
return that will be obtained for that same length of time on a company (Hajiaghaei-Keshteli and
Fathollahi-Fard, 2018). Exhibit 3 indicates that ARR would be 18 per cent for the expenditure of
500 million pound so it will be a successful option for Roast Ltd. Their advantages and their
drawbacks are as tries to follow:
Benefits: by using ARR method, the company managers would be able to gain a good
image of the requirements of the project wherein they decided to spend. It is the only approach
accordance with the principles of reporting and consists in reliable and successful outcomes.
Limitations: Extenuating influences which have a negative effect on the performance of
the company are overlooked when using this approach.
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3.2 Sources of finance
It is very crucial for a corporation to manage sufficiently funds to carry out certain
administrative and arises due practices. As Roast Ltd aims to spend 500 million pounds, it
includes management to purchase property for that very same. There are numerous sources that
could obtain financial capital from. Definition of every one of them and their strengths and
weaknesses are as chooses to follow:
Issue shares in the markets: It is among the investor's lengthy-term source that can help a
company secure financing for business activities. Roast Ltd may use it for funding the 500
million pound investment programme. It has different advantages and disadvantages that are as
wants to follow:
• Benefits: It is a simple and long-term fund source that helps the organisation to correctly bring
out certain company processes. The decision to pay dividends is focused on the earnings that the
company is not obliged to make available to investors on an annualized basis.
• Drawbacks: When a company issues bonds, the holder must divide the decision-making
authority with the outside stakeholders (Gopeekrishna and Geetha, 2018).
Taking a bank loan: It is a sourcing of funds business companies use to take on grant
financing. If Roast Ltd takes it to finance its expenditure of 500 million pounds then making
payments to the institution on a fixed rate is very necessary for all of it. Many of this document's
advantages and disadvantages are as continues to follow:
• Benefits: Interest charged to the bank by the investor is taxable by income tax act, thereby
helping to minimize costs and raise profits.
• Drawbacks: The interest rate on bank loans is very high, due to whom the borrower would be
forced to pay a certain sum of income.
From both these sources of financing mentioned above, selecting bank loan was
suggested to Roast Ltd 's administrators so if it is chosen by them then the holders don't have to
compromise their decision-making power with the bank. Besides that, it will also significantly
boost the debt to equity ratio as it would expand the use of foreign money in continuing
operations. The best reason for this decision is that within a short span of time and afterwards the
balance will be kept as benefit, a bank loan would be charged out.
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REFERENCES
Books & Journals
Bangma, D. F., 2019. Financial decision-making in adults with ADHD. Neuropsychology.
Barbić, D., Lučić, A. and Chen, J. M., 2019. Measuring responsible financial consumption
behaviour. International Journal of Consumer Studies. 43(1). pp.102-112.
Barth, M. E., 2018. The future of financial reporting: Insights from research. Abacus. 54(1).
pp.66-78.
Cook, L.A. and Sadeghein, R., 2018. Effects of perceived scarcity on financial decision
making. Journal of Public Policy & Marketing, 37(1), pp.68-87.
Erkut, B., 2018. A fresh look on financial decision-making from the plasticity
perspective. International Journal of Ethics and Systems.
Gopeekrishna, S. and Geetha, K. T., 2018. A study on financial decision making and
management among shg women in Kerala. Asian Journal of Multidimensional Research
(AJMR). 7(1). pp.12-20.
Hajiaghaei-Keshteli, M. and Fathollahi-Fard, A. M., 2018. A set of efficient heuristics and
metaheuristics to solve a two-stage stochastic bi-level decision-making model for the
distribution network problem. Computers & Industrial Engineering. 123. pp.378-395.
Hirshleifer, D., Jian, M. and Zhang, H., 2018. Superstition and financial decision
making. Management Science, 64(1), pp.235-252.
Kimmel, P. D., Weygandt, J. J. and Kieso, D. E., 2018. Financial accounting: Tools for business
decision making. John Wiley & Sons.
Park, I. and Cho, S., 2019. The influence of number line estimation precision and numeracy on
risky financial decision making. International Journal of Psychology, 54(4), pp.530-538.
Rai, D. and Lin, C. W. W., 2019. The influence of implicit self-theories on consumer financial
decision making. Journal of Business Research, 95, pp.316-325.
Stewart, C. C. and et.al., 2018. Correlates of healthcare and financial decision making among
older adults without dementia. Health Psychology, 37(7), p.618.
Stewart, C. C., and et.al., 2019. Healthcare and financial decision making and incident adverse
cognitive outcomes among older adults. Journal of the American Geriatrics
Society, 67(8), pp.1590-1595.
Zaleskiewicz, T. and Traczyk, J., 2020. Emotions and financial decision making.
In Psychological perspectives on financial decision making (pp. 107-133). Springer,
Cham.
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