Financial Decision Making

This document provides insights into financial decision making and its impact on business performance. It includes an industry review, analysis of profit and loss statement, statement of financial position, and cash flow statement. Additionally, it discusses investment appraisal techniques.

Financial Decision
Making

Table of Contents

Executive Summary
The Project report defined that the industry of cafe is plays essential role with objective
that efficiently evaluate efficiency of business in Roast Ltd. As per the study summarises that
comprehensive analysis and analysis efficiency of entity which is helping to generate and
improve financial performance in present time as compare of previous year. The objective of the
presentation evaluation of Roast limited which is advised to Starbucks UK in decision of acquire
by Roast Ltd. The profits and loss statement present of the company that get net profit in the year
2017 & 2018, 36000 & 81000 respectively. The financial position analysis by total assets and
liabilities which is increasing in 2018 as compare of 2017. There is identified the facts of
approximately 25483 store as well as outlets in United Kingdom.
MAIN BODY
Part 1. Industry Review
As per the study, it is mentioned that UK coffee house industry is conducting different
things like:
 The primary possibility have UK coffee industry is to enhance their business operations
crosswise the countries and develop relation with the them. There are mainly focus those
countries where more consumption of coffee such as China and Asian countries.
 The whole UK coffee shop market generate about 10.1 billion and in UK there are
approximately 25483 store as well as outlets.
 In this industry identified different challenges that faced by them like Brexit, Financial
crisis, labour and property cost.
 In present time coffee shop sector has been risen about 7.9% per annum from last two
decades. But turmoil developed by Brexit economic volatility tends to cut off the sector.
 Branded coffee shops gained a strong development which is approx 8.7% that means
8149 stores during year 2018. Moreover, in the year 2019, the resilience of UK market is
a critical issues of particular industry (Cafe Industry: UK. 2019).
 In the year 2018, coffee shop industry come out to be troubled by continual confusion in
case of UK's future dealings with EU. In the last 18 months political statements has
supported to increase interest towards employment shortfall, accretive cost and
expending, wearing name holding.
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 Coffee industry generated gross value added in UK has been increasing every year. Such
as in 2016 it was 3298 million pound but in 2018 increase by 3707 million.
 Enhancing cost of house holding and see impact of Brexits.
Part 2
2.1 Analysis of profit and loss account statement
Every organisation prepare financial statements in order to present financial position
where consist of profit & loss statement, cash flow statement and balance sheet. The income
statements plays significant role to present profitability of the organisation. When total
expenditure less than to revenue than will be profit and more than so will be net loss. In this
statement consist of all non operating and operating expenditure to derive for net profit in certain
period of time. Evaluation of corporation's income statement supports to analysis that how
performance of the business increase and generate net profit after deducting all the business
expenditure. For this analysis set structure which is utilised to determine total cost system and
the performance of an organisation. The profitability level assess by the company in particular
financial period (Agarwal and Mazumder, 2013).
Roast limited organisation produce profit and loss account so revenue of the organisation
increase in the year 2017 and 2018 from 2022 to 2534 million pounds which is about 25.32%
growth. The production cost increase in 2017 & 2018 from 1055 million pounds to 90 million
pound (about 32.23% growth). In the year 2018 operating revenues of corporation identify about
60,000. While operating cost rose in the year 2017 by 466000 to 477000 in 2018. From the
amount of revenues less cost of sales and gain gross profit of the company which was 517 in year
2017 but increase 544 in year 2018. from gross profit less amount of other operating income that
arise in mid year in 2018 about 60 and less also operating expenses and get amount of operating
profit which is 51 in 2017 but increase in 2018 reached on 127. presenting ups & down of Roast
Ltd in respective manner and it is identified that in 2018 generate more net profit with compare
2017. In 2018 had about 81000 in 2017, 36000 (149 percent grew), reflecting an improvement in
total profitability.
To assess the actual financial position calculate ratio which is beneficial for efficient
interpretation of the business income statement. Ratio supports to understand the results of the
organisation by assessing the key ties of different aspects end-to-end on e or more period of
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profits (Kramer and Weber, 2012). There are calculated ration for Roast Ltd with the help of
income statement are as follows:
As per the Roast Ltd revenues growth ration analysis that in the year 2017 company have
gross profit about 517. However, in 2018 increased by 544 due to pay less tax. Because of tax
rate before the profit and interest decreased which is show impact on the net profit and increase
about 143% in 2018 as compare 2017. Assessment of corporation's gross margin linked with the
gross margin business attain in the year 2018, 21.47% which was 25.57% in 2017. So it is
advised that the efficiency of the business to generate gross profit without conducting any
operating and non operating expenditure has been reduced in certain period of time.
The particular ratio analysis the relationship among business's operating profits, net
revenue generated by its operation or net sales figures. It is defined as a type of profitability ratio
that present in percentage way. In the year 2017 & 2018 the operating ratio in the business was
5.01% and 2.52%. It is highlighting on operating business operations have increased capability
of business to generate profits. It is mainly based on the business cost have been deducted and
operational profit increase in positive manner (Lusardi, 2012).
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As per the above calculation present relation in between net amount of revenues which is
generated by business and net sales by overall business activities. It is clearly defined net
profitability level increased and depute in certain percentage. Company had net profit about 36 7
81 in year 2017 & 2018. Net sales of the business in 2017, 2022 which was increased in 2018
and reached about 2534 so it impact on the profit ration in positive manner. Through calculation
with particular ratio in year 2018 and 2017 were 3.2% and 1.78%. It is indicated that level of net
profitability has been improved. While the net margin creation potential of an organisation has
been increased and beneficial to get chances of acquisition.
2.2 Statement of financial position
The balance sheet of any business is last step that present actual position and show total
assets and liabilities which is forward in net year. Assessment of balance sheet is important
because it presents broad analysis of business and present entire performance. A balance sheet
shows the carious items of assets as well as liabilities which is classified into different sub
section like current assets/liabilities, non current assets/liabilities (Lu, Won and Cheng, 2016).
As per the evaluation of balance sheet focus on every item by comparison and recognising
trends. This type of leadership supports to recognise various financial and non financial items to
present efficiency of business in certain period of time.
As per the financial statement of Roast Ltd it is analysed that company made capital
expenditure for purchasing stocks fixed assets and equipments as increase PPE cost of the
business raised from £670000 to £996000 in 2017 to 2018. These items can recoded in the
financial statement of Roast Ltd. Cash and cash equivalents was 134 in 2017 but in 2018 become
zero due to utilise into other business activities. Current assets utilise by the business within 12
months and after calculated both types of assets get total assets in 2017 about 1017 & increase in
2018 by 1443. Equity and liabilities of the business presents that share capital of the business
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remain same both year because company do not share to public which is 200. Retained earning
increased in 2018 as compare 2017 which is 579, 660 respectively. So total equity of the
business about 779 & 860 in 2017 & 2018. In non current liabilities identified only long term
borrowings which was 100 in 2017 but company take more loan and increased in 2018 by 275.
In the section of current liabilities consist of trade payable, bank over draft which were increased
in 2018. Trade payable increase because company take goods on credit such as 138 & 235 in
2017 & 2018 and withdraw amount from bank over limit such as 0 to 73. At the end total
liabilities and equities of the business same of total assets (Gamble, Boyle, Yu and Bennett,
2014).
The above amounts shows that the particular ration mainly based on the current assets
and current liabilities. If both are deceasing and increasing as compare of past years activities.
These are increasing in 2018 as compare 2017 which was 347 to 447 & 138 to 308 in positive
manner. So after calculation get results 2.51 in 2017 & 1.45 in 2018.
This ratio applied by the business to asses the long term profitability and efficiency of the
business. As per the figurers shows that debt to equity ratio of the business risen from 0.3055in
the year 2017 and reach 0.6779 in 2018 due to changes in debts which was 238 in 2017 and
reached 583 in 2018.
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As per the above table analysed the efficiency of the business which is utilise for the fund
and employed for business activities. It is important ratio for shareholders because they want to
know how much money they received after investment in particular business. The ROCE
presents that in 2017 have operating profit about 51 which is increased about 127 in 2018. so it
shows impact on the ratio and increase in 2018 as compare of 2017 such as 5.80% to 11.19%.
2.3 Statement of Cash flow
Cash flow statement prepare by the organisation top track record of cash inflows and cash
out flow to analysis the liquid position of the business. According to that business take decision
where invest money to get back with interest. The liquidity and longer term solvency is complex
for the business to calculate (Hoffmann and Post, 2014).. On the basis of accrual accounting cash
flow report usage by business for balance and income statement.
In the context of Roast Ltd, there is analysing of cash flow statement for year 2018 to
present actual situation of cash through operating activities which is GBP 24000 (negative). In
the operating activities consider different items such as operating profit, deprecation, interest,
income tax and more. In the investing activities of Roast Ltd consider property, plant &
equipment and in financing activities involve long term borrowings. Through investing activities
calculate about GBP (358) and financing activities by 175.
Operating cash cycle: To analysis the cash flow, this ration helps to present actual image
of the business regarding to cash and related activities. The operating cycle present information
regarding to business productivity and in short span of time become more efficient and
productive sector. So business can easily recover cost in stock and accomplish all the liabilities.
When an organisation use operating cycle for longer period of time so create many issues related
to business. So that time business can covert buyers into client cash receipts. The analysis of
cash flow apply OCC and present how effectively a business handle different activities in
particular period of time (Nga and Ken Yien, 2013).
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As per the above calculation Roast Ltd have present the proper cycle which is related to
cash and get result in13 days. Lower operating present a take turn by business to make money
quickly and 13 days is enough time for the cafe industry.
Dividend policy: A business's dividend policy indicate the amount of net income paid
out to its stakeholders and ratio which the dividends are paid out (Seshan and Yang, 2014). If an
organisation make profit so required to make effective decision regarding to invest profit at right
place. The experts are advised that dividend policy might be theoretically and irrelevant
regarding to particular stakeholders can sell out the equities for the funds. Roast Ltd did not pay
any dividend to its investors in 2018.
Part 3 Investment Appraisal techniques
3.1 a Management forecast: Management forecast:
Roast Ltd management unit is focusing on the raise amount of the capital approx £500
million. As per the analysis of financial statement from 2017 to 2021 create a cash flow
statement to predict amount of cash inflow and outflow. On the basis of predication the cash
flow or cash acquiring will impart to £60, £112, £148, £180 and £224 million. But many time
these estimation goes wrong due to sudden activities. It was going wrong in the year of 2017
and 2018. Moreover, gross margin and adverse cash flow presents that particular assumption of
management would not be accomplished. Thus, the assumption should be readjusted as per the
particular results of organisation (Duclos, 2015.
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3.1 b Investment appraisal technique:
Investment appraisal technique is defined as a collection of technique which is utilised by
business to recognise quality of an investment. The main aim of these techniques to assess the
viability of project, programme or portfolio decision and generate effective value. There are
different types of techniques such as NPV, internal rate of return, payback period, accounting
rate of return etc. When company wants to increase profitability so invest in new venture like
merger, acquisition etc. There are mentioned techniques in detailed manner with merit and
demerit such as:
Pay back period: It is the time in which initial outlay of an investment is expected to be
recovered by the cash inflows and invested amount in particular project. Pay back period known
as one of the easiest technique of investment appraisal. The concept of this technique mainly
applied in financial and capital budgeting but also applied to assess the cost savings of energy
efficiency technology. If any company invest money in any project and take time 4 years for
return so pay back period known as 4 years (Carvalho, Meier and Wang, 2016). Merit: It is simplest method of investment because in this method apply particular
formula without any equation or hypothesis.
 Demerit: Ignore the value of money which is most serious problem of this method. Due
to uncertainties increase time and cash flow received during the early basis of a particular
project. There are ignoring particular factors such as inflation rate etc.
Accounting rate of return: It is indicated as percentage rate of return awaited on
investment or assets which is compared with the initial investment cost. ARR categorised the
average income from an assets through initial investment and calculate the ratio of particular
assets. If company have three projects and ARR is about 15%. So the percentage is more than a
particular project. ARR is 15% is efficient, indicating the investment and provide profits as per
the expectations (Chowdhuri, Yoon, Redmond, and Etudo, 2014). Merit: It is most effective technology which supports foe explicitly in each planning or
proposal's level of profit margin.
 Demerit: This approach based on the profit rather than of cash flows so it influenced in
subjective manner on non cash item like depreciation rate and utilise for compute profits.
The ARR fails when take into account due to have proper timing regarding to profits.
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Net Present Value: This technique show difference between present value. For this less
amount of cash out flow from the cash inflow in certain period of time. Net present value mainly
utilised by business for the planning of investment and capital budgeting to evaluate the
profitability of a particular investment or project. The enterprise investment proposal NPV is
£110 million at cash flow discounting rate of 5% which is defined in particular figure to present
in exhibit 3. A positive outcome of NPV presents any investment proposal viability (Yalcin,
Bayrakdaroglu and Kahraman, 2012). Merit: The particular method takes into account as a basic idea for future dollar is worth
less than a dollar today. So for each period the cash flow are discounted through other
period of time of capital cost.
 Demerit: The main disadvantage of this method that some guess work related with the
firm and cost of capital. If suppose that cost of capital which is too low and result make
as suboptimal investments. And if assume that it is high so outcomes in forgoing too
many good investments.
3.2 Source of finance:
To expand business activities at large level require to different source of fund to invest
amount in different business operations. Without fund any organisation do not run a day. Thus, it
is essential for the business to have different sources of fund. These sources based on the
particular amount of cash, the quality of a business, the framework of refund, the assortment of
debts & liabilities etc. The selection of sources based on the organisation structure and mainly
funding important for the purchase of machinery, land & building etc. with the help of these
sources run business about 5 to 10 years. The medium term of funding is required for the more
than one year but less than 5 years. Through funds coverage daily cost through short term
sources which is achieved in certain period of time. There is doubt about the forecasted figures
and assumption as these are not marching with current business environment as well as operating
scale. Thus to an certain extent assumptions seems not so much relevant for company. In case of
Roast Ltd wants more investment during to 2019 which is around £400k. Such as huge amount
can invest by the organisation to take benefits from different sources but also receive some
drawbacks, as follows:
Equity Financing: The particular source known as company security and stocks that sold
by the business to get funds. It is most important sources which is applied by the business to
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generate short term funds to accomplish long term objectives (Forbes, Hudson, Skerratt and
Soufian, 2015). Some times it work effectively and provide many ways to improve the entire
wealth of business. There are mentioned some merit and demerit of particular sources such as: Merit: The main advantage of this sources that company generate profit easily and do not
liable to repay with interest. Equity funding does not effectively drive due to cash out
from the business. Thus, entire business have required to control of the liquidity situation
due to come more cash.
 Demerit: The main drawback of this equity financing to share profit with the investors
who become part of the business and other board of directors who linked with the
business. Another one that loss of control on leverage on business activities.
Debt Financing: It is a type of source of finance which is adopted by the organisation
when an organisation raise money for working capital and notes to individual/institutional
investors. For repay the amount to financial institution and individual so thy become creditors
and receive a promise to pay back actual amount with interest on debt. So in this type of finance
sources require to bills of notes (Baker and Ricciardi, 2014). There are discussed different merit
and demerit in detailed manner such as: Merit: Te main benefit of this source that it is the ability to repay high cost amount of
debt and deducting from monthly instalments by hundreds or more thousand of dollars.
Due to decrease cost of capital can show positive impact on the business cash flow.
 Demerit: Business are liable to pay amount with principal acquired with the particular
interest. So business face different types of issues related to cash flow to repaying the
money. There is also paying penalties if delay to pay.
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REFERENCES
Books and journals:
Agarwal, S. and Mazumder, B., 2013. Cognitive abilities and household financial decision
making. American Economic Journal: Applied Economics. 5(1). pp. 193-207.
Kramer, L.A. and Weber, J.M., 2012. This is your portfolio on winter: Seasonal affective
disorder and risk aversion in financial decision making. Social Psychological and
Personality Science. 3(2). pp. 193-199.
Lusardi, A., 2012. Financial literacy and financial decision-making in older
adults. Generations. 36(2). pp. 25-32.
Lu, Q., Won, J. and Cheng, J.C., 2016. A financial decision making framework for construction
projects based on 5D Building Information Modeling (BIM). International Journal of
Project Management. 34(1). pp.3-21.
Gamble, K.J., Boyle, P.A., Yu, L. and Bennett, D.A., 2014. Aging and financial decision
making. Management Science. 61(11). pp. 2603-2610.
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.
Nga, J.K. and Ken Yien, L., 2013. The influence of personality trait and demographics on
financial decision making among Generation Y. Young Consumers. 14(3). pp. 230-243.
Seshan, G. and Yang, D., 2014. Motivating migrants: A field experiment on financial decision-
making in transnational households. Journal of Development Economics. 108. pp. 119-
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Duclos, R., 2015. The psychology of investment behavior:(De) biasing financial decision-
making one graph at a time. Journal of Consumer Psychology. 25(2). pp. 317-325.
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
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Yalcin, N., Bayrakdaroglu, A. and Kahraman, C., 2012. Application of fuzzy multi-criteria
decision making methods for financial performance evaluation of Turkish
manufacturing industries. Expert Systems with Applications. 39(1). pp. 350-364.
Forbes, W., Hudson, R., Skerratt, L. and Soufian, M., 2015. Which heuristics can aid financial-
decision-making?. International review of Financial analysis. 42. pp. 199-210.
Baker, H.K. and Ricciardi, V., 2014. Investor behavior: The psychology of financial planning
and investing. John Wiley & Sons.
Chowdhuri, R., Yoon, V.Y., Redmond, R.T. and Etudo, U.O., 2014. Ontology based integration
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Online:
Cafe Industry: UK, 2019. [Online]. Available through:
<https://www.worldcoffeeportal.com/Latest/News/2019/UK-coffee-shops-achieve-20-
years-of-sustained-grow>
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