Financial Decision Making

Financial decision making is considered to be one of the most effective procedures for making strategic decisions associated with equities, liabilities, and stakeholders. This article explores the importance of financial decision making in maximizing profitability and includes an industry review, business performance analysis, and investment appraisal. The subject is Financial Decision Making, and the document type is a study material.

FINANCIAL DECISION
MAKING

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................1
PART 1: INDUSTRY REVIEW.....................................................................................................1
PART 2 : BUSINESS PERFORMANCE ANALYSIS...................................................................3
2.1 Statements of Profit or loss....................................................................................................3
2.2 Balance Sheet Statement........................................................................................................6
2.3 Cash Flow Statement.............................................................................................................7
PART 3: INVESTMENT APPRAISAL..........................................................................................9
3.1.a Management Forecast ........................................................................................................9
3.1.b Investment Appraisal Techniques ....................................................................................10
3.2. Sources of Finance .............................................................................................................11
REFERENCES..............................................................................................................................13

EXECUTIVE SUMMARY
Financial decision making is considered to be one of the most effective procedure which
is highly responsible for making strategic decision associated with the equities, liabilities and
stakeholders of the company. It s considered to be an effective tool in order to maximize the
profitability of the company (Lu, Won and Cheng, 2016). Financial decision making is
considered to be very useful in gaining relevant in formation by effectively analysing the
financial reports of the company. This in turn helps in making investment decision, determine
financial position which in turn helps in making strategic decision. Starbucks is an American
coffee company which is headquartered in Seattle, Washington. It was founded in the year 1971
and has approximately 988 stores in UK.
 Roast Ltd. is considered to be in a very strong position because it has enough financial
capital. This in turn influences Starbucks to acquire Roast Ltd.
 The net profit margin of the company is increasing exceptionally which in turn states
that, Starbucks must acquire Roast Ltd.
 Roast Ltd expansion of business operations in Romania is considered to be an effective
opportunity for the Starbucks to carry out business across several parts of the globe.
 The profit of the company has been increasing which is one of the key reason for the
Starbucks to effectively carry out business operations.
 The return on equity of the company is increasing which in turn indicates the better
measure for the efficiency. This is one of the effective measure for Starbucks to acquire
Roast Ltd.
 The return on capital employed of the Roast Ltd is increasing which states that the
profitability of the company is increasing. This is one of the effective aspect for
Starbucks to acquire Roast Ltd.
 The current asset of the company is average which states company have enough cash to
mitigate its short term liabilities.
PART 1: INDUSTRY REVIEW
Roast Ltd is an independent chain which was established in UK, in the year 2008. It has
opened its first chain in Romania. They tend to focus on employing local people and also work
towards building a popular cafe culture which in turn leads to higher operational growth.
Britain is considered to be the nation of the coffee drinkers (Bradley and Botchway,
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2018). The coffee industry of the UK tends to be the fifth largest coffee consumer marketplace in
Europe. The British coffee market tends to grow at approximately 10% every year (The
Economic Impact of the Coffee Industry, 2019).
 The expected retail sales of the coffee in UK is about to reach 69 million Kg in the year
2019.
 The UK population consume around 70 million cups a day, around which 65% of which
is consumed at home, 10% at restaurants, bars and the remaining 25% at work.
 Around £17.7 billion of the UK coffee market is contributed into the UK economy
(Morland, 2017).
 The total turnover of the coffee products in the food industry is £3.2 billion in the year
2017.
 The UK coffee market supports around 210,325 jobs which is very beneficial for the
growth of the economy (Ferreira, 2018).
Key players within coffee house industry
Costa Ltd: It is a British multinational coffee house company which was founded in 1971
and is headquartered in Dunstable, Bedfordshire. As per May 2018, Costa coffee tends to operate
high number of coffee outlets i.e., 2467 outlets in the UK. On the other hand overseas it tends to
operate 1412 stores in across 31 countries.
Starbucks: It is an American coffee company which was founded in the year 1971 and is
headquartered in Seattle, Washington. As per the year 2018, Starbucks tends to have a total of
around 988 stores in UK. The key opportunity associated with the Starbucks is that, it has the
possibility to expand its business operations across the globe in various diversified market.
Caffe Nero group: It is a European style private limited company which was founded in
the year 1997 and is headquartered in London, England. Caffe Nero group has around 566
outlets in the United Kingdom. It has business opeartions in acros s 11 vountries by running
around 1000 coffee houses in UK, Turkey, Ireland, Croatia, UAE, Oman, US, Cyprus, Poland
and Sweden (Bradley and Botchway, 2018).
Key challenges faced
 The major challenge faced by the coffee industry is rise in the rents and cost of the
property which in turn has de-established several high street brands.
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 Strongly maintaining the customer footfall is considered to be vital for the boost in the
sales of the coffee house chain. Rise in the price of material associated with the coffee industry results in major challenge
for the business.
Key opportunities
 The key opportunity with the coffee industry in UK is that, consumers tend to spend more
on food industry (Yang and et.al., 2016).
 Higher growth in the coffee industry results in high degree of employment opportunities
for the individuals.
 High degree of prominent rise in the UK coffee industry helps in expansion of business
operations within various developing countries.
PART 2 : BUSINESS PERFORMANCE ANALYSIS
2.1 Statements of Profit or loss
The profit or loss statements represent the financial transaction of company. They are
also known as income statements. They are prepared by organisations to know the results of
operating a business or activity. It records all the expenses carried out during the year as well as
the income generated during the year. They shows whether carrying out business generated
profits or loss for the company. It is part of financial statement and are prepared according to the
requirement of regulatory authorities.
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The profit or loss statement of Harridge ltd represents significant profit for the current
year in comparison to last year. Company earned profit of £ 81 during current year that was £36
last year. This shows that business have made significant growth from last year. Company along
with profits should also have growth in the business. For attracting the new investors it is
important to show the growth in the business. There has been increase of 25% in its revenues
from last year. This is seen after the new strategies adopted by the company for promoting the
sales and revenues. Company this year has earned other operating income of £60 that was not
earned last year this has raised the profit levels for the year. Operating expenses have not
increased with the same proportion as that of revenues as it has saved the cost of remuneration of
directors. On of the director has left and its roles and responsibilities will be managed by the
chief executive director without any additional pay. Also the legal cost related to the purchase of
property were paid in last year therefore the company had reduced legal costs this year. Business
has shown improved performance which could be seen through its revenues and efficient control
over its operating expenses.
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Ratio analysis is used for identifying the financial health of organisation. The financial
performance of the business can be analysed using profitability ratios. This ratio helps in
measuring the health and position of company. Theses ratios include ROCE, ROE, Gross profit
margin and net profit margins.
Return on capital employed is used for measuring the returns generated utilising the
resources of company. Capital is employed in the business for earning maximum possible
returns. ROCE of company is 8.80 and has shown a significant increase of 75.50%. Company
has not high returns over the capital employed as per the industry standards. Also the significant
cause of high return is other operating income (Hausmann, Kokkinaki and Leng, 2019). The
returns should be high as it shows the efficiency of company in managing its operations.
Return on equity is calculated for measuring the return that company is able to generate
over its equity. Equity refers to the investment in share capital and retained earnings. This ratio is
similar to ROCE as both measures the efficiency of company to to effectively utilise its
resources. Investments are made for earning reasonable rate of return therefore it is important for
company to earn reasonable rate of return over its equity. It has earned return of 9.42% for
present year which was 4.62%.
Gross profit and net profit margins are for assessing the efficiency of business in
managing its operating costs. Gross profit margin of company is 21.47% which was 25.42% last
year. The scale of gross margin has sloped downward despite of increase in revenues and
incomes (Kogadeeva and Zamboni, 2016). The reason behind decrease is increase in cost of
imported raw material. There has been rise in prices of raw material and the labour charges. The
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increase was higher than the proportionate increase in revenues that let the gross profit to move
downwards.
Net profit margin of company has increased from last year to 5.02% from last year. This
also shows the significant increase in the profits. Net profits is arrived after the other operations
that are essential for running the business are met like salaries, administration and selling
expenses. Companies must use adequate measures for controlling the costs so that net profits of
company are high. Also the revenues should be given focus using appropriate promotional
strategies for boosting the sales (Zavadskas and et.al., 2018).
2.2 Balance Sheet Statement
Balance is prepared for presenting all the assets and liabilities of business. It is prepared
for presenting the wealth and financial position of the business. Company is required to include
all the items of assets and liabilities under their respective heads. All the contingent liabilities are
required to be shown in the notes and provisions should be made for material amount. Investors
use balance sheet for assessing the financial health of business and the risks associated before
investing in the company.
The liquidity ratios measures the liquidity of company whether company is able to meet
its obligations using the available resources. It is essential for the enterprises to have strong
liquidity position for running the business smoothly without interruptions.
Current ratio of company is 1.45 for the year that has declined from 2.51. current ratio
represents the ability of company to meet its shot term obligations using the current assets. If the
company is not able to meet its short term obligation than the business operations will be
affected. It is essential to have enough assets so that current liabilities do not affect the position
of company (Choi and et.al., 2018). Company can improve the current ratio by using the long
tern debts instead of short term borrowings for meeting the capital requirements. Ration has
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declined as cash position of the company is negative and has given rise to bank overdraft
increasing the short term liability.
Quick Ratios measures the liquidity without including inventory in its current assets. As
the inventory cannot realise immediate cash when sold in market. The Quick ratio of company is
0.48 decrease is high due to the inventory levels and bank overdraft in current year. These should
be improved as early as possible as the stakeholders are influenced because of these ratios.
Solvency ratio represents the capital structure and financial risk associated with business.
It includes debt to equity ratios. Debt represent the interest bearing debts including loans and
debentures. The equity of company represents the equity capital of company. The debt to equity
ratio of company is 31.98% which was 12.84% last year. The increase is because of the loan
undertaken for the expansion plan to Romania . Company do not have high financial risks as
ratio is lower. Company can further raise funds using leverage instead of equity as company has
already raised high funds through equity and cost of equity is higher than the cost of debt.
Company can avail tax benefits by raising funds through debts (Perini and et.al., 2018).
2.3 Cash Flow Statement
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Interpretation: Cash flow statement is referred to as a financial report which is very
useful in managing the cash flows of the company. It tends to state the fiscal position of the
organisation. The net operating cash flow from the operating activity for the year ended 2018 is
-£24,000. A negative cash flow from operating activities tend to state that, the company is not in
a good position to pay off its bills without raising any additional capital. Negative cash flow
from operating activity tends to reflect, poor management of the income and expenses (Lu, Won
and Cheng, 2016). The net investing cash flow from the for the year ended 2018 is -£358'000. A
negative cash flow from investing activities tend to state that, significant amount of money of the
business has been invested in the long term plans of the organization. The net cash flow from the
financing activity for the year ended 2018 is £175'000. A positive cash flow from financing
activities tend to state that, large amount of money has been flowing into the business (Knežević
and Mitrović, 2018). This in turn largely increases the assets of the company. It has been
interpreted that, the net decrease in the cash and cash equivalents of the company is -£207,000.
The negative cash and cash equivalent states that, more money is flowing out of the business
than into the business.
The operating cash cycle is considered to be as the average number of time required by
the company to make initial outlay of cash in order to produce and sell goods (Smith, Driver and
Matthews, 2018). The inventory days for 2017 is 29 and for 2018 is 55. The % change in the
inventory days is estimated to be 88.44%. This states that, company has purchased more
products than it can be sold. This results in higher cost and overstocking of the inventory. This
results in additional outflow of the cash and significant drop in the sales of the product. The net
asset turnover for the year 2017 is 2.30 and for 2018 is 2.23. The % change in the inventory days
is estimated to be -2.94%. This in turn states that, Roast ltd. business has over invested in the
equipments, plants and various other fixed assets. Decline in the net asset turnover also indicates
that, company is not efficiently utilizing its assets in order to boost sales.
Higher the Asset turnover ratio the better it is, because it leads to higher operational
efficiency and productivity. The receivable days for the year 2017 is 16.79 and for 2018 is 21.32.
The % change in the receivable days is estimated to be 26.99%. This in turn states that, the
organization is more effectively processing its credit. This in turn results in higher generation of
cash within the business for long term sustainable growth (Lu, Won and Cheng, 2016). The
payables payment period for the year 2017 is 33.47 and for 2018 is 43.10. The % change in the
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payables payment period is estimated to be 28.79%. This in turn states that, company is taking
longer time to pay off the debts. This in turn results in higher interest payment and liabilities for
the company.
The dividend paid by the Roast Ltd. in the year 2017 was £30 million. But no dividend
has been paid in the year 2018 by Roast Ltd. The company made the right choice by not paying
the dividend in the year 2018 because dividend are considered to be the corporate earnings which
the company tends to pass on to the shareholders of the organization (Knežević and Mitrović,
2018). Roast Ltd. Is still growing because it wants to invest in the different projects for higher
future growth perspective. The cash and cash equivalents for the year end 2018 is -£73,000
million. Hence, negative cash and cash equivalents is considered to be as the good sign to not
pay dividend for the year 2018.
PART 3: INVESTMENT APPRAISAL
3.1.a Management Forecast
The management can make forecast about the expansion projects to Romania using
appropriate capital budgeting techniques. They are used for identifying the viability of the
projects before making the investments. Company wants to spread its business over global scale
scale and it has planned to expand over Romania by opening new outlets. Company for
expansing its business will be requiring an initial investment of £ 500 million. Management
wants to raise the funds ff the expansion. It is involving significant amount therefore the capital
budgeting techniques are used before investing in the projects. It has used techniques like NPV,
IRR and payback period for identifying the returns from investment and its profitability.
As per the forecast of management it is identified that project is viable and should be
adopted. All the outcomes are positive and show that investment will be profitable for the
company. Project involves purchase of new coffee machines that are manufactured as per the
requirements of company (Alkaraan, 2017). This machine involves Italian process of preparing
the coffee. It will be completely new Italian taste and experience to its customers. Forecast is
based over the revenues generated by the coffee outlets established in other nation. People have
accepted the taste and cafe services that helped it to generate significant revenues. Adoptions of
new project will be contributing significantly in the growth of business in Romania. The
performance of the company is significant and will help the company in raising the funds for
investments. All the property and equipments for the expansion have already been purchased by
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the business. Expenditure is to be made only for the new project and company will show growth
of 20% by adopting this project.
3.1.b Investment Appraisal Techniques
Pay Back Period
Payback period is used in capital budgeting for identifying the viability of project. This is
calculated for knowing the time within which company will be able to recover its initial cost of
investment. This project will recover the cost of investment inn 4 years. The cost will be
recovered by the company within the time fame therefore the project is viable (Harris, 2017). If
the pay back period is higher than company may refuse the project.
Advantages
 It is simple and easy to understand method and therefore used by number of investors and
business before investing the funds. The method is most beneficial in case of uncertainty and business is prone to uncertainty.
Disadvantages
 This method also ignores time value of money.
 The method do not covers all the cash flows and ignores profitability.
Net Present Value
NPV is used by business for identifying whether adopting any business enterprises. NPV
uses discounting factor for knowing whether the cash future ash flows from the project will be
adequate for covering the cost of project. Project should be adopted by the enterprise if the NPV
after discounting the cash flows is positive. Negative cash flow represents that project will not be
profitable for the company and therefore should not be adopted (Throsby, 2016). NPV in the
present case is positive and project should be accepted.
Advantages
 It represents whether company will exceed the initial investment of cash or not at present. It takes into account time value of money and factors risks.
Disadvantages
 There are not set guidelines for determining required rate of return.
 It cannot be used to compare projects with different sizes.
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ARR
Accounting rate of return is also a financial ratio that is used in capital budgeting. It is
used for calculating the returns generated from income of capital investments. It calculates return
in percentage terms. The ARR of the project is 18% and is adequate and therefore should be
accepted by company.
Advantages
 It is easy to calculate and for understanding and considers total profits over the entire
period of economic life cycle (Jibril and Jagun, 2018). Method considers accounting concept of profits for calculation of accounting rate of
return.
Disadvantages
 Time factor is not considered in this method.
 The method do not considers the external factors affecting the profitability of the
company.
3.2. Sources of Finance
Personal Finance
It refers to raising funds from personal sources like home, friends and relatives. These sources
have obligations to the business and high risks over personal assets of owner.
Benefits
 Self financing provides better control over the operations of business.
 Owners are aware about the money which is available for running the business. Ownership of business is in full control of owners (Kengatharan and Nurullah, 2018).
Drawbacks
 Using personal sources of finance will be putting the personal life and family in strain.
 On business failures personal holdings may have to lose.
Share Capital
It involves raising funded from market by giving a share in ownership of the business. This is
highly adopted source of finance.
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Benefits
 Equity capital gives the company funds without requiring to pay any fixed amount of
interest. Company provides ownership to its investors therefore its operations are monitored by it
shareholders that prevents company from self interested decisions (Harris, 2017).
Drawback
 Biggest drawback of using equity finance is share in profits.
 Company has to share the ownership of the business and therefore cannot solely control
its operations.
Recommendation
From the above bot sources of finance company should adopt for equity finance as theis
will not involve fixed amount of payment of interest from the business. This will be representing
better financial position of company.
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REFERENCES
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in the coffee industry: an examination of indicators disclosed. Sustainability Accounting,
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Choi, K.B. and et.al., 2018. Amplification ratio analysis of a bridge-type mechanical
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Ferreira, J., 2018. Fostering sustainable behaviour in retail: Looking beyond the coffee
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Harris, E., 2017. Strategic project risk appraisal and management. Routledge.
Hausmann, N., Kokkinaki, O. and Leng, M.J., 2019. Red Sea palaeoclimate: stable isotope and
element-ratio analysis of marine mollusc shells. In Geological Setting,
Palaeoenvironment and Archaeology of the Red Sea (pp. 725-740). Springer, Cham.
Jibril, J.D. and Jagun, Z.T., 2018. Risk Identification Techniques in Valuation and Investment
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Kengatharan, L. and Nurullah, M., 2018. Capital investment appraisal practices in the emerging
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projects based on 5D Building Information Modeling (BIM). International Journal of
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Morland, L., 2017. Rounton Coffee and Bedford Street Coffee Shop: From rural coffee roaster to
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Perini, M. and et.al., 2018. Stable isotope ratio analysis of different European raspberries,
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Smith, J.M., Driver, R. and Matthews, W., 2018. The Real Options Lattice: An Alternative to
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Throsby, D., 2016. Investment in urban heritage conservation in developing countries: Concepts,
methods and data. City, Culture and Society.7(2). pp.81-86.
Yang, N and et.al., 2016. Determination of volatile marker compounds of common coffee roast
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Zavadskas, E.K. and et.al., 2018. A novel multicriteria approach–rough step-wise weight
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through:<https://www.market-inspector.co.uk/blog/2019/09/uk-coffee-market>
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