Financial Resources and Decisions for Sweet Island Restaurant

This report provides a comprehensive analysis of financial resources and decisions for Sweet Island Restaurant. It begins by examining internal and external sources of finance, including the implications of each source and their suitability for the restaurant's needs, particularly for expansion. The report then delves into the cost of different financing options, the importance of financial planning, and the information required by various decision-makers. It also explores the impact of financing choices on financial statements. Furthermore, the report analyzes budgets, calculates unit costs, and evaluates the viability of investment projects using investment appraisal techniques. Finally, it covers financial statements, different types of accounts, and the calculation of various financial ratios to assess the financial position of Sweet Island Restaurant and compare it with another restaurant. The report aims to provide a holistic view of financial management within the context of a restaurant business.

MANGING FINANCIAL
RESOURCES AND
DECISIONS

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Internal and external sources of finance available with the business to raise its capital.......1
1.2 Implications of various sources of finance............................................................................2
1.3 Appropriate sources of finance for Sweet Island Restaurant to requirement for cash..........3
TASK 2............................................................................................................................................4
2.1 Cost of different sources of finance for Sweet Island Restaurant.........................................4
2.2 Importance of financial planning for Sweet Island Restaurant.............................................5
2.3 Information needed by different decision maker of Sweet Island Restaurant.....................5
2.4 Impact of sources of finance identified on the financial statements of Sweet Island
Restaurant....................................................................................................................................6
TASK 3............................................................................................................................................7
3.1 Analyze of the budgets in order to make appropriate decisions...........................................7
3.2 Calculation of Unit cost and its relevant pricing decisions...................................................8
3.3 Viability of the two projects using investment appraisal techniques....................................8
TASK 4............................................................................................................................................9
4.1 Financial statements..............................................................................................................9
4.2 Different types of accounts prepared by different organization..........................................10
4.3 Calculation of various ratio.................................................................................................10
Conclusion.....................................................................................................................................13
References......................................................................................................................................13

INTRODUCTION
Finance is the science that identifies the management of funds, investments, banking,
credit and assets and liabilities made by company. In other words, it can be said that finance is
the management of all activities that take place in the organization on cash and credit terms.
Finance consists of financial system and financial instruments. The following report is going to
interpret about various internal and external sources of finance which company can undertake in
order to meet its long term, medium term and short term requirements of funds.
In this report, importance of financial planning for Sweet Menu Restaurant is discussed.
Along with that, impact of various sources of finance on financial statements is explained. In
addition to this, budget of Blue Island Restaurant is going to be analysed in order to find out
company’s position. Unit cost of firm is calculated as well. In this, various different types of
financial statements used by different types of business are also discussed. At last, in this report,
various ratios related to profitability, solvency, etc. are calculated in order to compare the
financial position of Sweet Menu Restaurant and Blue Island Restaurant.
TASK 1
1.1 Internal and external sources of finance available with the business to raise its capital
Internal sources of finance:
 Sale of Stock: - This is one of the methods which are used by company to generate cash
by selling out the available assets. Cash generated by selling the stock is used by the firm
for financing the capital needs. This method can be used by the organization to meet its
both short and long term requirement of cash. But it mainly depends on the type of assets
sold.
 Retained profits: - It is one of the easiest methods which can be used by company to
meet its urgent requirement of funds. This is a type of liquid cash which is kept as a
reserve by the firm for future use. Retained profit is collected by deducting a small
amount of profit margin that is earned by company every year (Beaver, McNichols and
Rhie, 2005).
External sources of finance:
 Share capital: - This is the source of finance in which company issues new shares or
raises the price of existing shares in order to raise the funds to meet its long term
3

requirement of finance. This method is normally used by company to raise a large
amount of capital. But at the same time, high rate of interest and dividend need to be paid
to the shareholders.
 Loan capital: - This is one of the most common methods used by companies in order to
raise its finance (Bellas, Toudas and Papadatos, 2007). It is a form of loan or overdraft
facility which is considered by the organization in order to meet its long, short and
medium term requirement of cash. In this case, overdraft facility is available for short
period of time only. Rate of interest charged on this type of loan is very high.
1.2 Implications of various sources of finance
SOURCES LEGAL DILUTION BANKRUPTCY
Sale of assets In case of sale of assets,
company needs to follow
the legal procedure. A
contract or agreement will
be made between two
parities which in turn
increases the cost of
company (Brigham,
2013).
Once assets have been
sold out to another
person, the owner also
changes. An individual
who has purchased the
assets became the actual
owner of assets.
In case of bankruptcy,
assets of company can be
sold out in order to pay
cash to all creditors.
Retained
profit
Company is not required
to follow any legal
procedure while using the
retained profit. It is
because of the reason that
it is company’s own
property.
In this case, ownership
will never change. It
will always remain with
the firm itself.
In case of bankruptcy,
company will be left with
no retained profit. It is
because; if retained profit
is available then in that
case, condition of
bankruptcy cannot occur.
Share capital A proper legal procedure
need to be followed by the
firm at the time of issuing
Once shares are issued,
ownership changes
(Broadbent and Cullen,
In case of bankruptcy,
company will not be able
to pay dividend to the
4

shares. This in turn
increases the cost of
company.
2012). Those individuals
who hold the equity
shares are given with the
right to vote in the
decision making process
of organization.
shareholders.
Loan capital In this case also, company
needs to follow a legal
procedure in order to avail
loan from the bank. At the
same time, firm also needs
to provide collateral
security to the bank. This
in turn increases the cost
of organization because
company need to pay high
rate of interest.
Ownership of the
amount withdraws by
company from bank as a
loan changes. Company
is now liable to use the
fund collected from
bank in any manner.
In case of bankruptcy,
bank will sell out the
collateral security
provided by the firm in
order to recover the
amount paid to company
(Butters, 2004).
1.3 Appropriate sources of finance for Sweet Island Restaurant to requirement for cash.
There are various sources of finance that are available with company to meet its short and
long term requirement of cash. But the most appropriate source which will aid the Sweet Island
Restaurant to meet its requirement of £3,00,000 to £5,00,000 in order to expand its business by
opening new branches are as follows:-
If Sweet Island Restaurant wants to raise its capital by using the internal sources of finance
then in that case, company can move on by selling assets. Similarly, if firm wants to raise its
finance by using external sources then it can move on with the share capital.
SOURCES ADVANTAGES DISADVANTAGES SUITABILITY
Sale of assets Finance can be
generated without
Loss can be faced by company
at the time of sale of assets.
For purchasing new
assets or for expanding
5

developing any extra
borrowing (Chandra,
2011). This method is
best used to raise finance
by disposing the under
used assets.
For example- firm purchased
the machinery for 3, 00,000
and after deducting its
deprecation, its value is 2,
65,000 but company is able to
sell its asset at only Rs. 2,
00,000.
the business.
Share capital Sweet Island Restaurant
can use this method in
order to raise its capital.
In this method, company
is not at all required to
pay back the sum of
money collected by the
shareholders in lieu of
shares issued to them.
This is one of the safe
methods to raise the
capital.
Dividend and interest need to
be paid to the shareholders
every year (DRURY, 2013). In
this case, a fixed rate of
interest needs to be paid to the
preference shareholders
irrespective of the fact
whether the company has
earned profit or has faced the
loss condition. Voting rights
are also provided to the equity
shareholders.
This type of sources of
finance is suitable for
business who wants to
expand its business or
to purchase the heavy
machine whose
purchasing cost is very
high.
TASK 2
2.1 Cost of different sources of finance for Sweet Island Restaurant.
In order to open the proposed new branches, Sweet Island Restaurant can sale its available
assets or can issue shares in the market. But at the same time, use of these both sources of
finance company cost will be affected.
 Share capital: - By using this source of finance, company is able to meet its long term
requirement of finance within short period of time. But at the same time, it increases the
cost of company (Eccles and Holt, 2005). Firm needs to pay regular interest to the
preference and debentures shareholders and dividend to the equity shareholders. This in
turn increases the cost of company. Organization needs to pay interest to the shareholders
6

irrespective of the fact whether company is able to generate profit or not. At the same
time, enterprise also needs to provide voting rights to the equity shareholders. Therefore,
payment of interest and dividend will reduce the profit margin of company.
 Sale of assets: - By using this source of finance, Sweet Island Restaurant will be able to
meet its both short term and long term requirement of finance. Requirement of cash
depends on the type of assets sold. But at the same time, it affects the cost of company
(Efendi, Srivastava and Swanson, 2007). Assets of the firm will be reduced. Company
can also face the loss if proper value of assets is not able to be availed. For example, firm
purchases the assets for £5, 00,000 whose value after deprecation was £4, 50,000 but sold
at £3, 50,000. Therefore, it can be said that company faces loss of £1, 00,000.
2.2 Importance of financial planning for Sweet Island Restaurant
Planning of all the financial activities in advance will prove to be very beneficial for the
Sweet Island Restaurant in the following manner.
 Able to maintain the flow of funds from the restaurant: - Financial planning of all the
activities in advance will assist the Sweet Island Restaurant to maintain the inflow and
outflow of the funds from the organization (Hursti and Maula, 2007). It will also aid the
company to maintain the balance between inflow and outflow of the funds.
 Able to achieve maximum utilisation of resources: - Financial planning by the Sweet
Island Restaurant will assist them to utilise the available resources to the full extent. This
in turn will aid the company to reduce the wastage of the resources.
 Able to distribute finance properly to each and every department: - Proper financial
planning will assist the Sweet Island Restaurant to distribute the funds available with the
company in each and every department according to the requirement in the following
departments. This in turn will aid the company to avoid the condition of excess
availability of funds and low availability of funds.
 Reduce uncertainty: - Financial planning will also help the Sweet Island Restaurant to
reduce the condition of uncertainty which could be faced by them at the time of change in
various internal and external environmental factors (Muradoglu and Harvey, 2012).
 Avoid shocks and surprises: - Financial planning will aid the Sweet Island Restaurant to
avoid the condition of shocks and surprise which can be occurred due to sudden change
in the environment especially in the internal organization.
7

2.3 Information needed by different decision maker of Sweet Island Restaurant
Different types of information needed by the stakeholders of the company are as follows:-
 Shareholders: - shareholders are most valuable persons to the organization. They invest
their personal saving in the company in order to gain high rate of return on the investment
made. Therefore, in order to decide whether they should invest or not certain type of
information are required by them (Paramasivan, 2009). They need financial statements,
cash flow statement and income statements to decide whether company is growing or not
and whether they will be able to gain high return or not.
 Suppliers: - Suppliers are the distributors of raw material to the company. They supply
goods to the company in order to develop the finished goods. Therefore, in order to
decide whether the suppliers should supply goods to the company or not they want
financial statements of the company. These suppliers simply want to see whether the
company is in a position to pay them for the goods supplied by them or not.
 Managers: - Managers are the individual who work for the betterment of the company.
This decision maker requires all type of financial accounts and company audit report in
order to conclude the actual position of the company and to prepare various strategies
(Ryan, 2005).
 Government:- Government is the another decision maker of the Sweet Island Restaurant
who wants different types of financial accounts and company audit report in order to
calculate the amount of tax need to be paid. At the same time they also want to see the
financial position of the company in order to grant permission on various matters.
Thus, these are some of the information which is required by the decision maker of Sweet
Island Restaurant in order to make various decisions.
2.4 Impact of sources of finance identified on the financial statements of Sweet Island Restaurant
 Sale of assets: - Entry of sale of assets will be made at two sides in the balance sheet.
One it will be deducted from the asset that is sold out and secondly cash of the company
will increase.
 Retained profit: - Entry of retained profit will be made in liability side of the balance
sheet under the head of Equities. Retained profit is calculated by the company after
paying dividend to the shareholders (Shahrokhi, 2008).
8

 Share capital: - Entry of share capital will be made at the liability side of the balance
sheet under the head of Equity. At the same time dividend paid to the shareholders will
be recorded in the profit and loss account. Dividend paid by the Sweet Island Restaurant
will be deducted from the profit after tax.
 Loan capital: - Entry of loan capital will be made at the liability side of the balance sheet
under the head of Non-current liability. At the same time interest paid will be recorded on
the debit side of the profit and loss account (Stolwy and Lebas, 2006). Interest paid by the
Sweet Island Restaurant will be deducted from the operating profit in order to calculate
the profit before tax.
Profit and loss account for the year ended 31st December, …..
Operating profit
Less: interest paid
Profit before tax
Tax
Profit after tax
Dividend paid
Retained profit for the year
….
…..
….
….
…..
….
…...
Balance sheet as at 31st December,.......
NON-CURRENT ASSETS
Furniture
less:- sale of asset
…...
…...... …....
CURRENT ASSETS
Cash(+) ….....
EQUITIES
90,000 ordinary share capital
@ £10 per share
Revenue reserves(Retained
profit)
….....
9

NON-CURRENT LIABILITY
Loan …....
TASK 3
3.1 Analyze of the budgets in order to make appropriate decisions
From the following cash budget of Sweet Island Restaurant it could be analysed that
financial position of the company is not good. Company inflow of goods is less as compared to
its outflow. In other words it can be said that company payment are more as compared to its
income. In month company suffers a high change loss. Its payment was more than double of the
income generated. Thus, in the month of October and November Company was able to manage
its follow of cash. In that month only company payment was less as compared to its receipt. But
again in the month of December Company’s payment was more than its receipts. Therefore, the
reason behind could be that company is not able to properly plan its financial activities. Due to
which it is not able to utilise its available resources to the full extent, which is resulting in
increase in payment and decrease in income.
3.2 Calculation of Unit cost and its relevant pricing decisions.
Particular Cost
Cost of meal £10
Mark up pricing 40.00%
VAT 20.00%
Cost of meal £10
Mark up pricing £4
VAT £2
Final price £16
Unit price = 16-4-2= £10
From the following calculation, it could be analyzed that unit cost of the company is £10.
This is value which is calculated after deducting mark up price and VAT from the final price.
10

3.3 Viability of the two projects using investment appraisal techniques
Payback period
Year Proposal 1
Cash flows
Proposal 2
Cash flows
0 (£1,200) (£1,200)
1 £800 (£400) £300 (£900)
2 £600 £200 £400 (£500)
3 £400 £600 £500 £0
4 £200 £800 £600 £600
5 £50 £850 £500 £1,100
Residual Value £0 £850 £50 £1,150
Payback period: - After calculating the payback period it could be analysed that
payback period of proposal 1 is better as compared to proposal 2. Therefore, it could be said that
Sweet Island Restaurant should move on with the proposal 1 because company will be able to
recover its initial investment invested in only 2 years. This method is used by the company to
calculate in which year it will be able to recover its money back.
Net present value
Proposal 1 DF @10% Present value Proposal 2 DF@10%
Present
value
Initial
investment (£1200) (£1200)
1 £800 0.909 £727.2 £300 0.909 £272.7
2 £600 0.826 £495.6 £400 0.826 £330.4
3 £400 0.751 £300.4 £500 0.751 £375.5
4 £200 0.683 £136.6 £600 0.683 £409.8
5 £50 0.621 £31.1 £500 0.621 £310.5
Residual Value £0 0.621 £0 £50 0.621 £31.1
NPV £491 £530
11

Net present value: - This method is used by the company to calculate the cash flows by
considering the rate of discounted factors. From the following calculation it could be analysed
that net present value of proposal 2 is more as compared to proposal 1. Therefore, it could be
said that Sweet Island Restaurant should move on with proposal 2. Because proposal 2 will give
better return to the company on the amount invested.
TASK 4
4.1 Financial statements
 Profit and loss account: - Profit and loss account includes all types of income and
expenditure made by the company at the end of the every financial year. These
statements are also used to calculate the net profit or net loss generate by the company.
These statements are used by different types of stakeholder like managers, employees,
government and so on (Thomas, 2008). They prefer these statements in order to calculate
the amount of tax need to be paid by the company and to form various strategies.
 Balance sheet: - Balance sheet includes all types of asset available with the company and
the liabilities made by the company. Liabilities are recorded on the left hand side of the
balance sheet and assets are recorded on the right hand side. These statements are
prepared by the company in order to know the actual position of the company. These
statements are used by the manager (in order to develop various strategies) and
shareholders (in order to know the company's actual position). Increased in liabilities of
the company indicates that company position is not good.
 Cash flow statements: - This statement indicates the flow of cash and cash equivalents
from within and outside the organization (Tulsian, 2002). These statements are divided
into three different types of activities that indicate the follow of cash. The activities are
operating activity, investment activities and financial activities. Therefore, these
statements are used by the shareholders, board of directors and investor in order to find
out the follow of cash from the organization. And at the same time it also helps to find
out the actual position of the company.
o 4.2 Different types of accounts prepared by different organization
 Private organization: - This firm is the firm who’s all the operation and activities are
managed and controlled by the private individuals. In this type of organization there is no
12

government interference. These organizations are required to prepare all the financial
statements if this organization is listed on stock exchange (White, 2006). If size of the
firm is small than in that company can only prepare the income statements.
 Public Organization: - these firms are the firms who are all the operations and activities
are controlled and managed by the government. These organization need to prepare all
the financial statements along with the company audit report. These organization need to
follow all the policies and norms imposed by the government.
 Non-profit organization: - These organization work for the betterment of the society.
These organizations are also known as charitable institution. These organizations are
managed by the individual or a group of person (Sabău, 2013). Therefore, these
organization need to prepare only receipt and payment account. These organizations
record all its daily transaction in the form of journal only.
4.3 Calculation of various ratio
Ratios Sweet Menu
Restaurant Blue Island Restaurant
PROFITABILITY
RATIO
Gross profit £222,500 £198,000
Net sales £350,000 £299,000
Gross profit ratio
Gross profit
ratio=Gross profit/Net
sales*100
63.57% 66.22%
Net profit £85,000 £94,800
Net sales £350,000 £299,000
Net profit ratio Net profit Ratio=Net
profit/Net sales/100 24.28% 31.70%
LIQUIDITY RATIO
Current assets £68,000 £41,000
13

Current liability £195,000 £123,000
Current ratio Current ratio=Current
assets/Current liability 0.35 0.33
Liquid assets £24,000 £10,000
Current liability £195,000 £123,000
Quick ratio
Quick ratio=Current
assets-Stock/Current
liability
0.12 0.081
SOLVENCY RATIO
Sales £350,000 £299,000
Stock £44,000 £31,000
Stock turnover ratio
Stock turnover
ratio=COGS/Avg
inventory*100
0.12 0.10
Debt £31,000 £5,000
Equity £164,000 £118,000
Debt equity ratio Debt equity
ratio=Debt/Equity 0.19 0.04
Debt £31,000 £5,000
Assets £233,000 £188,000
Debt to assets ratio Debt to assets
ratio=Debt/Total assets 0.13 0.02
Profitability Ratio
 Gross profit ratio: - From the following calculation it could be concluded that gross
profit of Blue Island restaurant (i.e. 66.22%) is more favourable as compared to Sweet
14

Menu restaurant (i.e. 63.57%). The reason behind could be that company is able to reduce
the cost of its production.
 Net profit ratio: - The following calculation shows that net profit ratio of Blue Island
restaurant (i.e.31.70%) is more than that of Sweet Menu restaurant (i.e. 24.28%). The
reason behind this could be that Blue Island Restaurant is effectively managing its
operational costs and cost of production. This in turn have direct impact on the
profitability of the company.
Liquidity Ratio
 Current ratio: - Current ratio indicates the liquid cash available with the company.
Therefore, from the following comparison it could be concluded that capability of
meeting short term requirement of Sweet Menu Restaurant is better than that of Blue
Island Restaurant. This in turn also indicates that current liabilities of the company is
more that its current assets.
 Quick ratio: - This ratio shows that liquidity of the organization including the current
assets and current liabilities but excluding the stock (Sources of finance. 2012).
Therefore, from the following comparison it could be concluded that Quick ratio of
Sweet Menu restaurant is higher than that of Blue Island restaurant. The reason behind
this could be that company is able to meet its short term obligations.
Solvency Ratio
 Stock turnover ratio: - This ratio shows the efficiency of the company to crook its stock
into sales. Therefore, by comparing the both the company ratio it could concluded that
efficiency of changing the stock is better of Sweet Menu Restaurant as compared to Blue
Island restaurant.
 Debt equity ratio: - higher debt equity ratio of Sweet Menu Restaurant indicates that
debt of the company is lower and investment made by the owner is high. Similarly, on the
other hand Blue Island Restaurant indicates that debt of the company of the company is
more as compared to the investment made by the owner.
 Debt to assets ratio: - this ratio shows the proportion of debts over the total assets of the
company. Therefore, it can be concluded that ratio of Sweet Menu restaurant is better
than Blue Island restaurant.
15

Thus, after comparing the overall position of the both the companies it could be calculated
that market position of Sweet Menu Restaurant are more favourable than that of Blue Island
Restaurant.
CONCLUSION
The following report emphasis on the various sources of finance available with the
company. In these report appropriate sources of finance for the Blue Island Restaurant to expand
its business is concluded. In this importance of financial planning are also concluded. In this
report cash budget of the company is analyzed in order to find out its actual position. In this
various techniques are used in order to decide which proposal will be beneficial for the company.
In this report unit cost of the company is also calculated. At last, various profitability, solvency
and liquidity ratios are calculated in order to compare the financial position of both the
companies (i.e. Blue Island Restaurant and Sweet Menu Restaurant).
16

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