Financial Decision Making for Starbucks: Acquiring Roast Plc

Financial decision
making

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
PART 1: INDUSTRY REVIEW.....................................................................................................1
Review of coffee house industry.................................................................................................1
PART 2: BUSINESS PERFORMANCE ANALYSIS....................................................................2
2.1 Statement of profit or loss......................................................................................................2
2.2 Statement of financial position..............................................................................................3
2.3 Statement of cash flows.........................................................................................................6
PART 3: INVESTMENT APPRAISAL..........................................................................................9
3.1.a Management forecast..........................................................................................................9
3.1.b Investment appraisal techniques.........................................................................................9
3.2 Sources of finance................................................................................................................10

EXECUTIVE SUMMARY
Present report is based upon financial decision making of Starbucks which is planning to
acquire Roast Plc. FDM can be defined as the procedure forming effective decisions for
betterment of business so that efficiency of business could be improved. Main purpose of it is to
grow the business and attain sustainability for long run in future. While planning to acquire a
new company then it is very important for the organisation to make sure that all the elements of
financial position of the other entity is analysed properly. If the decisions of acquisition are
formed without any appropriate analysis of financial position then it may result in failure of
whole project. While performing the assessment different statements are analysed by the finance
department of the enterprise. These are profit and loss account, balance sheet and cash flow
statement. In order to determine the growth level of sector analysis of industry is conducted.
Different types of investment appraisal techniques are used to determine the financial viability of
the company which will be acquired in future. The key elements that are also required to be
focused are sources of funds as they are used to fulfil all the monetary requirements.
PART 1: INDUSTRY REVIEW
Review of coffee house industry
The sector in which different coffee houses are operating business is considered very big
and it is analysed that it contributes in development of economy. In order to conduct the industry
review different elements regarding the whole sector are required to be determined. Some of the
key elements that are discovered while conducting industry review of coffee house sector of UK
(Barth, Papageorge and Thom, 2017). All of them are as follows:
 Coffee house industry of UK have experienced the growth of 7.9% in year 2018 which
shows the development of it.
 The key players in the industry are Soho Coffee, Coffee Republic, Café2U, Muffin
Break, AMT Coffee, Starbucks, Roast Ltd., Costa Coffee etc.
 The GDP contribution of coffee industry for year 2017 was around 3.7 billion pounds. It
shows that the level of growth of the industry is very high.
 The major challenge which is faced by the sector is increasing number of fitness freak
individuals. They do not consume coffee because of higher level of sugar in it. They
avoid all the drinks that are affecting their health.
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 The opportunity for the coffee house industry is to expand the business in those countries
where it is not operating. Another opportunity for the sector is to make sure that it
introduces such drinks in the market which are specially for fitness freak people. It will
help to retain the customers and grow the business.
PART 2: BUSINESS PERFORMANCE ANALYSIS
2.1 Statement of profit or loss
The statement which is formed by business entities for the purpose of keeping detailed
information of all the incomes and expenses is known as statement of profit and loss. With the
help of it, the stakeholders can analyse that business is able to generate appropriate amount of
profits or not to meet all the future goals. It is mainly used for the purpose of determining
profitability of the company. As Starbucks is planning to acquire Roast Ltd., therefore it is very
important for it to analyse its profit and loss account properly. The exhibit 1 is showing that for
year 2017 revenues of Roast Ltd were around 2022 and in year 2018 these are increased up to
2534. On the other hand, due to increment in revenues cost of sales is also increased from 1505
to 1990. Gross profit of the company is also showing positive changes in 2018 as it is inclined
from 517 to 544. In year 2017 the entity did not have any operating incomes but in 2018 the
operating income earned by the company was around 60 (Consigli, Kuhn and Brandimarte,
2017). The elements that are included in operating expenses of the company are director’s
remuneration, bad debts, depreciation, utility cost, store maintenance, distribution cost,
marketing and advertising, legal and professional fees etc. At the end of 2017 and 2018 the
profits of the company were 36 and 81 respectively.
In order to analyse the statement of profit and loss different ratios are calculated which
are as follows:
Gross profit ratio: While analysing the percentage of direct profits this ratio is
calculated. With the help of it, the managers of a company can determine the operational
performance of the company. It guides to analyse the relationship between revenues and gross
profits of the company.
Operating profit ratio: When an organisation is willing to assess the ability to create
profits in the accounting period this ratio is calculated. In order to calculate it the profits that are
used for the calculations should be before interest and taxes.
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