Financial Decision Making

This report is based on financial decisions which taken by the top management to evaluate the financial position of the company and make their decisions accordingly. Most of the issues related to the shareholder's equity, liabilities and issuing bonds which further useful in achieving organizational goals & objectives.

Financial Decision
Making

Table of Contents
EXECUTIVE SUMMARY ............................................................................................................3
MAIN BODY...................................................................................................................................3
Part 1 – Industry Review..................................................................................................................3
Part 2 – Business performance analysis...........................................................................................4
2.1 Statement of profit and loss account......................................................................................4
2.2 Statement of financial position..............................................................................................6
2.3 Statement of cash flow...........................................................................................................8
Part 3 – Investment appraisal and source of finance........................................................................9
3.1 Investment Appraisal.............................................................................................................9
3.2 Source of finance.................................................................................................................11
REFERENCES .............................................................................................................................13
APPENDIX....................................................................................................................................15

EXECUTIVE SUMMARY
This report is based on financial decisions which taken by the top management to
evaluate the financial position of the company and make their decisions accordingly (Brown-
Liburd, Issa and Lombardi, 2015). Most of the issues related to the shareholder's equity,
liabilities and issuing bonds which further useful in achieving organizational goals & objectives.
Management focus on financial issues in order to minimise the risk or make them able to survive
in the market for longer period. With the help of ratio analysis or capital budgeting method
managers of Starbucks able to make their decisions regarding acquiring Roast Ltd or not. It
further helps in analysing that company have enough liquidity or not to perform their daily basis
operational activities. After all the analysis of financial statement of the company, it has been
recommended that Starbucks should acquire Roast Ltd because its financial position is good
which help them to capture market share.
MAIN BODY
Part 1 – Industry Review
In the UK market there are similar type of consumers who love tea as well as coffee
because on the basis of survey it was found that every four adults out of five prefer coffee. Retail
sales of coffee reached around 69 million kg in 2019 which is increases around 8% from 2014.
because of inflation or trend in the culture provide 17% growth that is around £ 1.27 billion
(Growth in UK's Coffee market, 2019). Currently, coffee dominate the 65% share of the UK
market which included variety such as ground coffee, beans etc. UK's retailer or wholesaler
target the young age group because they have more craze in comparison to older group.
Coffee industry generate around £ 6 billion revenues in 2019 where number of business
continues raise and reached at 16199. Coffee industry face the huge growth from 2014 to 2019
duration and that is 6.1% which provide the approx. 101,034 employment. Figures of coffee
industry increases because of huge demand in the consumers (Trend in UK's Coffee Industry,
2019). Over the five years, industry revenue is expected to grow around annual rate of 4.8%. it
includes the current growth which is 1.9% and expected to reach £6.6 billion.
Key players of Coffee industry are Costa Ltd, Pret A Manger Ltd, Starbucks or Caffe
Nero Group Holdings Ltd. These are the biggest player of the coffee market which increase the
competitors but along with this, they also face various challenges which impact the production as

well as probability. Coffee industry of UK face the various opportunities such as Coffee is the
growing segment of European market because majority of people prefer to buy cheap
mainstream coffee. Along with this, they ready to pay high price for the high quality Coffee.
Increase in the interest in the coffee will maximise the number of coffee shops, roasters, small
brands and then it create the value of big competitors as well. Global demand for the coffee
increases around 2.5 % every year. On the other hand, change in the climate will impact the
agriculture which affect the coffee production. Increase in the temperature generate lower
altitude farms that is not suitable for coffee plants. Because of pest & diseases. they decrease the
yields & quality of coffee.
Part 2 – Business performance analysis
2.1 Statement of profit and loss account
Profit or loss statement is the financial statement of organizations which include the
various information regarding cost of products, revenues, expenses etc. on the basis of quarter or
annual. It is also called income statement which indicate the overall profit or loss of the business
from their operations (Brunsson and Olsen, 2018). It is used to analyse the financial performance
of Roast Ltd by using the items of income statements. Below mention calculation based on the
financial information of Roast Ltd which is mentioned below:
Calculation of ratio:
Gross profit ratio:
It is the profitability ratio which indicate the overall profit of the company and it is also
used to compare their own performance with previous one. Further analysis done by the
management in order to formulate strategies regarding future growth. Below mention calculation
based on the Roast Ltd and it helps in measuring their overall financial performance of the
company.
Formula: Gross profit ratio = Gross profit / Revenue * 100
Profitability Ratio 2018 (£'000) 2017 (£'000)
Gross profit 544 517
Revenue 2534 2022
Gross profit margin ratio 21.468034728 25.568743818

Above mention calculation represent that gross profit of the company decrease in 2018
and remain 21.46%. On the other hand, gross profit of 2017 was 25.56 % and it will happen
because gross profit & revenue both are increases but not in the same proportion. GP of the
company reduces in 2018 which not good.
Operating profit ratio:
It is also one of the type of profitability ratio which is used to calculate in order to
identify that how much profit company earn after deducting their operational expenses from the
total sales (Carvalho, Meier and Wang, 2016). Calculation of ratio based on Roast Ltd which is
used to measure the financial performance of the company.
Formula: Operating profit ratio = Operating profit / Revenue * 100
Profitability Ratio 2018 (£'000) 2017 (£'000)
Operating profit 127 51
Revenue 2534 2022
Operating profit margin ratio 5.01183899 2.522255193
From the above table, it has been observed that operating profit of the company increases
from 2.522% to 5.011% from the duration of 2017 to 2018. GP of the company reduces but
Operating profit increases because nominal change in the operating expenses for the years.
Operating expenses was 466 in 2017 and 477 in 2018. Increase in the operating profit ratio
means company maximise their earning through reducing operational expenses which is
beneficial for their growth.
Net profit ratio:
This ratio calculated in order to identify the overall net profit from the business
operations (Collier, 2015). Every organization calculate this ratio to measure their financial
performance and compare with their own previous performance.
Formula: Net profit ratio = Net income / Revenue * 100
Profitability Ratio 2018 (£'000) 2017 (£'000)
Net income 81 36

Revenue 2534 2022
Net profit margin ratio 3.19652723 1.78041543
With the help of above calculation, it has been observed that net profit of the company
increases from 1.78% to 3.19% from the duration of 2017 to 2018. In a year, sales increases as
well as net income also increases which help the Roast Ltd to maximise their profitability. It help
the organization to maximise their revenue which further influence the external parties such as
investors or shareholders to invest in their business. With the help of these ratios a person make
their financial decisions regarding future decisions.
From the overall analysis of financial performance of Roast Ltd on the basis of profit and
loss statement of the company. Overall performance of Roast Ltd is good and it was clearly
indicated with the help of ratio analysis which used to major the performance of company in
terms of profitability (Hoffmann and Post, 2014). Gross profit of the company increases from
2017 to 2018 that is 517 to 544 but the proportion was not the same in comparison to total sales
that's why gross profit margin ratio decreases and remain 21.46% in 2018.
Operating profit of Roast Ltd was 51 in 2017 and 127 in 2018, it will provide the overall
profit which is beneficial for the company. GP ratio of the company decline but Operating profit
margin ratio increases from 2.522% to 5.011% in the period of 2017 and 2018 respectively.
Along with this, net profit of the company also increases from 36 to 81 in the duration of 2017 to
2018. With the help of ratio analysis, management will make decision in order to enhance their
productivity as well as profitability.
It has been critically evaluated that financial performance of Roast Ltd is good due to
increase in the net profit margin which indicate the profitability of the company. It means,
organization is profit making which grow in the market. On the basis of profit and loss statement,
Starbucks can acquire this company because it is profit making or have popularity in the UK
market.
2.2 Statement of financial position
Financial position of the company evaluated with the help of balance sheet which include
the assets or liabilities of the company. It include various items which required to measure the
liquidity as well as financial performance of the company (Kingsford-Smith and Dixon, 2015).

Balance sheet indicate the net worth of the company and they have to balance their assets with
their obligations. Ratio analysis will be done with the help of balance sheet figures.
Current ratio:
This ratio is used to calculate to measure the liquidity of the company and how they
efficiency meet their short term obligations. Current ratio calculated by dividing current assets to
the current liability.
Formula: Current Ratio = Current assets / Current liabilities
Liquidity Ratio 2018 (£'000) 2017 (£'000)
Current assets 447 347
Current liability 308 138
Current ratio 1.451298701 2.514492754
Current ratio of Roast Ltd of 2017 was 2.51 which is higher than the ideal ratio. On the
other hand, CR of 2018 was 1.45 times which is lower in comparison to ideal ratio that is 2:1.
Decrease in the current ratio means they reduces their liquidity as well as flexibility to pay their
short term obligations. Management should show their concern in respect of maintain their
current ratios otherwise it create difficulty in performing their operational activities.
Quick Ratio:
It also the part of liquidity ratio which calculated in order to identify that how quick
company can pay off their debt of short durations. It is required quick assets which exclude the
inventory or prepaid expenses from the current assets which divided by current liability of the
company.
Formula: Quick ratio = ( Current assets – Inventory ) / Current liability
Liquidity Ratio 2018 (£'000) 2017 (£'000)
Quick Assets 148 (447 – 299) 227 (347 - 120)
Current liability 308 138
Quick ratio 0.480519481 1.644927536
It has been observed that quick ratio of the company was 1.64 in 2017 and 0.48 in 2018.
both are not nearby its idea ratio that is 1:1. Decrease in the Quick ratio means business unable to

meet their obligations because of lack of liquidity to pay. Company need to pay attention and
improve their liquidity position.
Debt Equity ratio:
It is the financial ratio which indicate the proportion of shareholder's equity or total debt.
It is used to evaluate the risk of the company through borrowing money from external sources
(Klychova and et.al., 2014). It is calculated by dividing total equity to the total liabilities.
Formula: Debt Equity ratio = Total liability / Total shareholder's equity
Financial Ratio 2018 (£'000) 2017 (£'000)
Total Liability 583 238
Total equity 860 779
Debt Equity ratio 0.677906977 0.305519897
As per the above calculation of Debt Equity ratio, it has been observed that Roast Ltd
have enough resources to meet their long term obligations. In 2017, ratio was 0.30 and 0.67 in
2018 which increases but still they does not meet the ideal ratio that is 2:1. Basically every
organization should maintain 2 times of debt in comparison to equity. It make them able to run
their operations in well manner.
From the overall evaluation, it has been concluded that financial position of the Roast Ltd
is overall good. As per the comparison of their own performance with the previous one, it is
observed that company having growth in single year but in very less proportion. Company dies
not match with their ideal ratios such as debt to equity or quick ratio. Performance will be
measured in terms of liquidity or finances (Klychova and et.al., 2014). liquidity of the company
was low which further affect the operational activities of the Roast Ltd.
With the help of balance sheet, it is observed that total assets as well as total liabilities
increases from 2017 to 2018. Total assets in 2017 was 1017 and 1443 in 2018, increase in the
total assets due to raise in the debtors, non current assets etc. On the other side, company borrow
money which increase the overall obligations of the company from 2017 to 2018. On the basis of
these changes, management should formulate strategy and try to maintain liquidity as well as
flexibility in the operational activities.

2.3 Statement of cash flow
As per cash flow statement of Roast Ltd of 2018 it vis observed that company facing
negative cash balance which is not good for the company (Kotlar and et.al., 2014). Cash balance
become negative in 2018 because increase in inventory which means company purchase the
assets such as property, plant etc. Roast Ltd purchase the assets of amount 358 (£'000) which
reduce the cash balance of the company. In addition, they paid interest and income tax which
also reduce the cash balance.
Operating Cash Cycle (OCC):
Formula: Operating cash cycle (OCC) = Day's Sales of Inventory + Day's Sales Outstanding –
Day's payable outstanding
Formula 2018 (In days) 2017 (In days)
Day's Sales of Inventory 29 55
Day's Sales Outstanding 17 21
Day's payable Outstanding 33 44
Operating cash cycle (OCC) 13 32
Working Notes:
Day's Sales if Inventory = (365/ Purchase) * Average inventory
Day's Sales Outstanding = (365/ Receivable) * Average accounts receivable
Day's payable outstanding = 365 / Payable turnover
* Further calculation mentioned in the Appendix:
With the help of operating cycle calculation, it is analyse that, in 2017 there was 32 days
and 13 days in 2018. Performance of Roast Ltd is better in 2017 as compare to 2018. In 2018,
company is less efficient to generating cash.
Dividend policies developed by the company for the payment of dividend to the
shareholders. In context of Roast Ltd, they paid dividend in 2017 but it is found that company
does not pay any dividend in 2018. in 2017 they paid £ 30 million but in 2018 they pay nothing
and it was not right decision because in 2018 they earn enough profit in comparison to 2017. it
will disappoint shareholders and further can be impact the organization.
From the above analysis it has been recommended that, Starbucks should acquire this
company and operated their functions as per their strategies.

Part 3 – Investment appraisal and source of finance
3.1 Investment Appraisal
Management forecast: Forecasting is the process of managing future activities where
they make decisions for future on the basis of previous projection (Petersen, Kushwaha and
Kumar, 2015). In context of Roast Ltd, company make decision to invest £ 500 million for the
expansion of their operation in Romania. Company forecast the figures from 2017 to 2021
where cash outflow from this project will be £62, £112, £148, £180 and £224. managers of Roast
Ltd expected to increase their revenue over the years. But they have to make sure that in the
initial stage they have to expect less because there are various complications company face due
to in favourable circumstances. Initial investment of the Roast Ltd company is £ 500 million and
they estimate the revenue of £ 300 million, £ 560 million, £ 740 million, £ 900 million and £
1120 million for the next five years respectively.
UK market already face the various challenges in respect of change in climate which
impact the production of coffee. So they need to analyse the weather condition of Romania and
select the suitable time which is beneficial to produce. Along with this, they need to identify the
interest of Romania's citizens regarding coffee. If they interested or prefer to consume coffee
then it is suitable expansion for the company.
Investment appraisal technique:
Payback Period: It is the time period which required to recover the initial investment in
the project. Lower the period is beneficial for the company because high payback period take
longer time to recover. Before making any investments they need to evaluate the duration and
select the best alternative for future investment. In context of Roast Ltd, for the expansion of
their operation in Romania they invest £ 500 million which estimated to recover in next five
years along with huge revenue. Payback period of this project will be 4 it means Roast Ltd can
recover their cost in 4 years and further it provides the more benefits. This technique has some
benefits as well as drawbacks which mentioned below:
Benefits: It is the simplest method of capital budgeting techniques which helps the
organizations to choose the best alternative for the investment.
Drawbacks: Most of the time it happen that final outcome is irrelevant due to ignorance
of some factors such as time value of money, inflation etc.

Accounting Rate of Return: It is the financial ratio where organizations evaluate the
accounting rate of return for the specific project. Under this method, percentage value represent
the return of their investments (Shepherd, Williams and Patzelt, 2015). So in multiple options,
business select the higher return project for the investment. In context of Roast Ltd, accounting
rate of return of the company will be 18% which is good in figures. With the help of investment
appraisal technique, management able to evaluate that expansion of any project is beneficial or
not. This project is look beneficial because it provides 18% accounting rate of return which is
good.
Benefits: This method is beneficial for the organizations because they able to measure
the profitability of each project and make their decisions accordingly.
Drawbacks: It exclude the critical factors such as time value of their investment and
considered cash flows which was not discounted.
Net Present Value: This capital budgeting method implement of the range of cash flows
which generated at different time period. It is used for investment planning where they have to
analyse the profitability of each project. Management of Roast Ltd required to evaluate that net
present value of the project which is £ 110 million. Company use the 5% cost of capital for the
evaluation of this project.
Benefits: It is the most accurate technique which provide the effective outcomes and here
cash flows are discounted.
Drawbacks: It is totally based on the assumption where they guessing cost of capital as
well as cash flow of project.
With the help of investment appraisal technique business able to forecast which help
them to make decision for further expansion. Managers of Roast Ltd evaluate that, with the help
of £ 500 million initial investment company able to recover their cost in 4 years. Along with this,
net present value of the company will be £ 110 million and accounting rate of return is 18%.
Expansion decision of Roast Ltd was right because as per appraisal technique company
get the enough revenue as well as they perform well in order to achieve their business goals &
objectives.
3.2 Source of finance
There are different types of sources of finance that utilise by the organisation to receive
fund to conduct different types of activities in the business (Sunder, 2016). In the context of the

Roast Ltd can expand to their business on big level so for this required to more fund that invest
in the business and prepare budget how to increase business and invest money in right things.
There are two source of finance which mentioned below:
Banks: It is one of the major sources of the fund that use by most of the organisation to
get money. To get money from this source required to give in deposit something because in case
of not paid money in particular time so take that particular thing. Most of the companies select
that particular sources because company get in lower interest on amount of fund that provide
effective outcomes as effective finance cost. The particulate sources of fund provided by the
bank on the basis of credit score and brand image. The bank provide fund in both manner long
term and short and according to that charge interest amount. The Roast Ltd wants to expand the
business activities at big level so for this required to fund. The cafe disclose their annual reports
which include the various financial statements which make them able to provide credit score and
take loan from banks. This source of fund have some benefits and drawbacks that discussed
below:
Advantages: The main benefit of this sources that it provides loan at cheap interest and
provide safety of public wealth (Valentine and Hollingworth, 2015).
Disadvantages: It is limited sources and provide amount according to credit score if
company have not good score so they don't get amount of loan.
Business angles: It is type of the source of the fund which is selected by the organisation
of fund. In this company take decisions for wealthy individual and make investment in business
venture. These individual helps to organisation to take appropriate financial decision and guide
as financial assistance. The aim purpose of the business angles to supports to entrepreneurship
individual succeed with particular business idea due to invest the own money in right business
and generate more money (Zietlow and et.al., 2018). The Roast Ltd wants to generate more
profit so they are investing their amount in business venture where they get huge money and use
in further activities. There are discussed different advantages and disadvantages of this sources
such as:
Advantages: There is company get amount without any interest and beneficial due to
individual make invest according to their interest.
Disadvantages: Many times company does not find out healthy business angle that
provide right suggestion regarding to business.

From the above mention sources of finance Roast Ltd choose the banks and fulfil their
financial requirement through borrowings.

REFERENCES
Books & Journals
Brown-Liburd, H., Issa, H. and Lombardi, D., 2015. Behavioral implications of Big Data's
impact on audit judgment and decision making and future research
directions. Accounting Horizons. 29(2). pp.451-468.
Brunsson, N. and Olsen, J. P., 2018. The Reforming organization: making sense of
administrative change. Routledge.
Carvalho, L. S., Meier, S. and Wang, S. W., 2016. Poverty and economic decision-making:
Evidence from changes in financial resources at payday. American Economic Review.
106(2). pp.260-84.
Collier, P. M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Hoffmann, A. O. and Post, T., 2014. Self-attribution bias in consumer financial decision-making:
How investment returns affect individuals’ belief in skill. Journal of Behavioral and
Experimental Economics. 52. pp.23-28.
Kingsford-Smith, D. and Dixon, O., 2015. The Consumer Interest and the Financial Markets.
In The Oxford Handbook of Financial Regulation.
Klychova, G. S. and et.al., 2014. Management reporting and its use for information ensuring of
agriculture organization management. Mediterranean Journal of Social Sciences. 5(24).
p.104.
Klychova, G. S. and et.al., 2014. Management reporting and its use for information ensuring of
agriculture organization management. Mediterranean Journal of Social Sciences. 5(24).
p.104.
Kotlar, J. and et.al., 2014. Profitability goals, control goals, and the R & D investment decisions
of family and nonfamily firms. Journal of Product Innovation Management. 31(6).
pp.1128-1145.
Petersen, J. A., Kushwaha, T. and Kumar, V., 2015. Marketing communication strategies and
consumer financial decision making: The role of national culture. Journal of Marketing.
79(1). pp.44-63.
Shepherd, D. A., Williams, T. A. and Patzelt, H., 2015. Thinking about entrepreneurial decision
making: Review and research agenda. Journal of management. 41(1). pp.11-46.
Sunder, S., 2016. Better financial reporting: Meanings and means. Journal of Accounting and
Public Policy. 35(3). pp.211-223.
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.
Zietlow, J. and et.al., 2018. Financial management for nonprofit organizations: policies and
practices. John Wiley & Sons.
Online
Growth in UK's Coffee market. 2019. [Online]. Available Through
<https://store.mintel.com/uk-coffee-market-report>

Trend in UK's Coffee Industry. 2019. [Online]. Available Through
<https://www.ibisworld.com/united-kingdom/market-research-reports/cafes-coffee-
shops-industry/>

APPENDIX
Calculation of Operating Cash Cycle (OCC):
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