Financial Statement Analysis and Management

This assignment focuses on the analysis of financial statements, exploring key concepts such as ratio analysis, sources of finance, and management accounting. It delves into how financial statements are used to assess a company's performance and financial health. The assignment also examines various factors influencing financial reporting and the role of different stakeholders in interpreting financial information.

MFRD

Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
1.1 Available sources of finances.....................................................................................................3
1.2 Implication of the sources..........................................................................................................4
1.3 Evaluation of most appropriate sources.....................................................................................4
TASK 2.................................................................................................................................................5
2.1 Analysing cost............................................................................................................................5
2.2 Importance of financial planning...............................................................................................5
2.3 Assessing information of stakeholders......................................................................................6
2.4 Impact of the sources of finance................................................................................................6
TASK 3.................................................................................................................................................7
3.1 Analysing budget and proposing recommendations..................................................................7
3.2 Unit cost and pricing decision...................................................................................................7
3.3 Assessment through investment appraisal technique.................................................................8
TASK 4...............................................................................................................................................10
4.1 Financial statements.................................................................................................................10
4.2 Comparison between financial formats...................................................................................10
4.3 Ratio Analysis..........................................................................................................................10
CONCLUSION...................................................................................................................................11
REFERENCES...................................................................................................................................12

INTRODUCTION
Management of financial resources refers to effectively allocating monetary fund in a
business. The financial manager is responsible to manage the resource in a way so that it can be
utilised to their maximum capacity. Managing finance is a crucial aspect for the financial manager.
Due to the fact that finance is the main element help to operate business activity. For managing the
finance, the manager makes different strategies so as to effectively achieve his/her objectives.
Another aspect of financial management is decision making ability of a financial manager. The
organisation must make accurate decision regarding management of financial resources of the
company.
The report discusses the financial management of Sweet Menu restaurant and Blue Island
restaurant. The main objective of the research is to identify appropriate financial resources for
Sweet Menu restaurant. It is vital for the restaurant owner to select a financial source to raise the
capital. As the organization wants to raise €300,000 and €500,000 for its branches in Central
London and Croydon various options are evaluated in order to choose correct source to raise
finance. On the other hand, the research also highlights the importance of financial statement for the
Blue Island restaurant. The owner of the restaurant wants to evaluate the effectiveness of a financial
statement. This report conducts a study to properly analyte various statements and their significance
to an organization.
TASK 1
1.1 Available sources of finances
Available sources of funds refer to the current accessible funds for a business. Source of
finance are bifurcated into two types i.e. long term finances and short term sources of finance. Long
term sources provide financial assistance that can be used for more than one year whereas short
term is supposed to be used within a year. Sweet menu restaurant wants to expand its business on
two locations, thus the first step must be to identify appropriate source of finance. They are as
followed.
Long term source are-
 Retained Earnings- The business can use the earning that has been retained by it. Each
year the business can store a portion of its earnings from the profit or may distribute it to the
shareholders or the debenture holders. These earnings can be saved by reducing the dividend
given to the shareholders.
 Long term loan- A loan is an amount which is taken on credit basis from the financial
institution or a bank. The business which is applying for a loan has to agree to deposit a
security in order to acquire loan as well as the company is entitled to pay for an interest

amount in each instalment.
 Share Capital or Debenture- The business can also raise an IPO i.e. initial public offering.
In this, the public invests a portion of their income in the business by acquiring ownership of
business in the form of shares or debentures. The company does not have to pay interest
over the raised amount but each year they can pay back profit in the form of dividend to the
shareholders. Venture Capital- A venture capitalist is a person who is eager to invest his/her income in
other business. These individual are generally bothered to receive the ownership or a certain
amount of profit in return to their investment.
Short term sources are-
 Trade/Cash Credit- This credit is given by traders or the banker on the basis of cash or
inventory. The trader or the banker may lend money or goods to the business on credit
business. The business is entitled to pay back the amount to the respective person within a
period of 90 days.
 Hire purchase and leasing- These are loans which are provided to the business while
purchasing inventory or machinery for the organization. The business can purchase
machinery or inventory and can pay the amount either in instalment or on lease basis.
1.2 Implication of the sources
Sources Legal Implications Financial Implications Dilution of
ownership
Share Capital/
Debenture
All the facts and
figure and
rules/regulations must
be stated to the
investors. The
formulation made by
the legal framework of
the country is
mandatory to be
followed so as to
avoid any fine or
charge.
As shareholder does not
agree to retain earnings,
the business is not able
to save for future use.
Also in the case of
insolvency the investor
may cease companies
retained earnings to
recover their dividend
amount.
The ownership of the
shares/debentures
passes to the
respective purchaser
only.
Retained Earning The shareholders in The profit in the There is no dilution to

many instances do not
agree to retain
business earning as
this way they do not
get dividends. Thus
they legally bound
the business.
financial statement
reduces if the business
does not retain its
earning. This is not
considered as an ideal
situation for the
business.
ownership as retained
earnings are part of
compan’s own
earnings unless paid to
the shareholders.
Loan All the major
formalities must be
clearly read and
understood by the
business before
agreeing to the terms
of the banker. Loan
has to be paid on time
so as to not let the
banker cease the
property of the
business to recover
their amount.
Bank or the financial
institution will cease
company’s property to
claim their amount
loaned to the business.
The loan amount can
be used but it has to be
paid back with interest
to the banker. Thus,
the ownership of the
money still stays with
the banker or the loan
giver.
Venture Capital The right or
ownership given to the
capitalist must be
limited to a certain
extent. So as to avoid
any issue regarding
legal rights of the
company for the
future.
The company is entitled
to pay for the venture
capitalist his/her share
of ownership despite
facing losses or deficits.
The venture capital
receives a share in the
business in exchange
of his/her investment.
Trade/ Cash credit All the paper work
regarding interest and
time period must be
understood very
properly. Legal action
The banker or the debtor
may charge extra in case
of late payment this will
increase the cost for the
business.
The ownership of the
money stays with the
banker as the money
or credit given must be
paid back.

can be taken if the
credit is not returned
on time.
Hire purchase/
Leasing
The lessor is entitled
to ownership thus the
business must
carefully take care of
their property leased
to the business for a
particular period of
time.
The business is entitled
to pay for all instalments
as well as maintenance
charges for the
machinery or the
inventory. This adds the
cost which is not
considered a good
financial decision for the
company.
The ownership of the
inventory or the
machinery still
remains under the
owner. Thus, after the
completion of the
lease period the
organization must
return back the
machinery.
1.3 Evaluation of most appropriate sources.
As per the above evaluation of the available financial resources few sources are considered
to be most appropriate for the Sweet Menu restaurant. The restaurant requires to raise €300,000 and
€500,000 for two new location in Central London and Croydon, thus it must exercise to raise capital
through issues of shares and a bank loan (Drake and Fabozzi, 2012). As the company is already
listed, thus it can issue shares to rise its finances through investment from shareholders. This will be
a accessible option for the company as it is working from past 10 years, thus the organisations
would have good loyalty amongst its investors. Bank loan is another feature that will help the
company to raise a large amount. The banker will easily sanction the loan amount due to companies
good reputation in the market. Apart from this Sweet Menu restaurant can also take trade credit
from its suppliers against the purchase of day to day item. Instead of paying the suppliers on daily
the company can pay them back in a period of 90 days. This will, save the restaurant from a heavy
outflow of cash. Apart from this organization can also use hire purchasing of machinery (Keller,
2013). The electronic items of the kitchen can be taken on lease thus it will save the restaurant from
heavy purchasing.
TASK 2
2.1 Analysing cost
Each source of finance have its own advantages and disadvantages associated with them.
Bank loan, issue of shares, trade credit and hire purchase are the methods selected by Sweet me nu
restaurant to raise finance. These methods are accessible by the company but also their is certain

cost associated with them (Nicholson and Aman, 2012). For example while getting a bank loan the
company will have to block its assets to deposit them with the bank as a form of security. Apart
from this the company will also have to pay a certain rate of interest mandated by the bank. In the
end company will end up paying the principal as well as the interest amount which will raise cost
for the company. Although issue of shares is also a risky method. The restaurant may or may not
receive the subscribed amount from the allocation of shares. This may create a shortage of funds for
the business. Trade capital is a easy way to block outflow of cash from the organisation but in order
to do it company will have to maintain a cordial relations with the suppliers. If the company failed
to do the same it will be entitled to pay the amount right away to the suppliers. This will be an
unwanted invitation of expense for the company. Hire purchase system also requires the restaurant
to pay for a interest amount tat has to be paid by each instalment (Reid and et. al., 2008). Thus it
can be easily analysed that every source of finance has certain limitation and cost associated to
them.
2.2 Importance of financial planning
Financial planning is the method to identify the potential objective of the business to meet
the market demands. Financial planning is a tool to analyse the current position of the organization
with the expected market demand. The importance of planning is described as below-
 With the help of planning the organization can set certain targets that has to be achieved by
the business in the respective time period planning enhances the analytical kills of the
manager in ascertaining the appropriate demand of services in hospitality industry (Ryan,
2009).
 Planning involves identifying the sources of finance available and accessible to the business.
Thus it helps in analysing the financial resources of the organization (Nicholson and Aman,
2012). Thus way the organization can evaluate the departments which require financial
assistance for smooth running.
 Manager creates certain strategies assist him/.her in planning of the financial decisions of
the business (Palepu and Healy, 2007). The business is benefited from these strategies as
they bring competitive advantage for the organization over its competitors.
 Proper utilisation of resources is also done with the help of financial planning. This is very
important for the manager to check where the procured resources are utilized up to their
maximum capacity or not (Cortes, 2009). It is very important for the business as to
optimally use the resources to increase their productivity.
 Cash flow is another aspect that is benefited with the help of financial planning. The
business on day to day basis requires cash for outflow and inflow of business activities
(Sources of finance, 2012). Thus the manger with the help of financial planning can manage

the cash flow required by the organisation.
2.3 Assessing information of stakeholders.
Stakeholders are the factors that affect the decision making process of the organization. Each
business has a set of stakeholders who have intention in the profitability of the organisation. The
stakeholders at Sweet menu restaurant are as followed.
1. Supplier: In hospitality industry, suppliers play a very crucial role. They are the core pillars
for a restaurant business as they provide day to day itinerary item to the business (Brandon
and Welch, 2009). The business must ensure to pay the suppliers on time so as to maintain
cordial relationship with them.
2. Investors: They must be very well informed with the financial information so as to build
trust among them (Managing financial resources, 2014). The investors are the persons who
invest money into companies business thus it is vital for the business to provide them with
greater return on investment.
3. Customers: The customers are the most important aspect for a restaurant business. The
restaurant has to incorporate customer satisfaction to increase its quality and brand image
among the consumers (Mason, 2007). It is important to understand consumer’s needs and
wants to achieve higher loyalty from them.
4. Employees: The employees are responsible to perform their task and responsibilities allotted
to them. They are the service provide who perform the major task to achieve customer’s
satisfaction and loyalty (Sabău, 2013). The employees must be provided with monetary and
non-monetary incentives so as to boost their confidence.
2.4 Impact of the sources of finance.
As Sweet menu restaurant has decided to issue shares and bank loan as a form of loan term
loan. The company must make sure to ensure that it is in a position to return the banks amount on
the time period allotted to the business (White, 2006). By issuing share companies capital will
increase but the financial position of the company will not look as attractive as it should be. By
raising shares companies liabilities will increase which is considered as a debt which the company
is entitled to pay. Bank loan also raises liability if the company as well as adds cost in terms of
interest amount. Purchasing machinery from hire purchase also will hamper the goodwill of the
company. This is not considered as an ideal situation for the business. The cash outflow of the
business will also be disrupted as the company will have to pay a token amount to person providing
hire purchase facility to the business. A disrupted cash flow is not considered ideal for the business
it is due to the fact that net profit decrease due to high amount of cash outflow (Stolowy and Lebas,
2006). Trade credit will also raise debtors of the company which will further increase liability of the
restaurant. In total the impact of the above selected sources will also result in increasing the

liability of the business.
TASK 3
3.1 Analysing budget and proposing recommendations
Budget analysis enables thee manger in creating a budget for the goals and objectives
of the business. The process of the budget analysis includes formulating, estimating and report
making of the proposed budget of the company (Sources of finance, 2012). In the case study it
present financial statement of the Blue Island restaurant were presented. From these statements it
was identified that the restaurant is expensing more and earning less. It is also reducing company’s
profitability. Although cash and credit sales of the company are good but the expenses re very high
in comparison. The balance between earning and expenses is clearly not maintained which is
depicting a poor financial condition. Restaurant is not able to make god revenue due to the same
issue. In the month of November and December specifically the sales are low in comparison with
the high number of expenses. There is a negative net balance which shows that company must
make improvements in the present situation. The restaurant must make strategies and reduce
resources that are increasing cost of the company’s services (Mason, 2007). The management must
try to reduce prices of the services so as to attract higher number of customers . Apart from this un-
necessary expense must also be analysed and removed immediately.
3.2 Unit cost and pricing decision
Cost per Items Cost (£)
Non vegetarian Item 3
Vegetarian elements 1.5
Cost of making 3.5
Overhead Expenses 2
Total Cost 10
Mark Up (40%) 4
Value Added Tax (VAT) 2
Total Selling Price 16
Formula for Food Cost Percentage=
Total Costs of Ingredients/ Selling Price * 100

Percentage of Food Cost = 10/16*100
Total Percentage = 62.50%
The unit cost analysis is done to identify the profit made by the company after the
calculation of the cost its products and services (Management accounting, 2014). After levying 20
% VAT and service tax charges the restaurant is estimated to make 40% profit from the cost
analysis. The selling price of each menu is £16 and the food cost percentage is 62.50%. This depicts
that the company will be able to generate a reasonable amount of profit from the sale of its services.
The restaurant must plan for the rice of its items so as to increase the profit margin. Already the
restaurant is making 40% profit from the cost analysis (Palepu and Healy, 2007). It can increase the
profit by reasonable pricing the products and lowering the cost of its services.
3.3 Assessment through investment appraisal technique
The investment appraisal technique is used to identify the feasibility and profitability of a
certain project created by the manager (Palepu and Healy, 2007). The initial investment for first
proposal is £1200 and for second proposal it is £1200. Net present value and payback period are the
techniques used under investment appraisal.
Net Present Value-
Proposal 1:
Year Inflow PV Factor @10% Inflow
1 £800 0.909 £727
2 £600 0.826 £496
3 £400 0.751 £300
4 £200 0.683 £137
5 £50 0.62 £31
Residual value £0.00 0.62 £0.00
Total inflow £1,691.00
Less: Initial
investment £1,200
Net present value £491.00
Proposal 2:
Year Inflow PV Factor @10% Inflow
1 £300 0.909 £273
2 £400 0.826 £330

3 £500 0.751 £376
4 £600 0.683 £410
5 £500 0.62 £310
Residual value £50 0.62 £31
Total inflow £1,729.00
Less: Initial
investment £1,200
Net present value £529.00
From the above assessment of net present value it was found that project 2 is more feasible
(Brandon and Welch, 2009). Higher NPV shows that the business will recover its profitability and
will be more valuable on the business.
Pay Back Period-
Proposal 1-
Year Inflow Cumulative inflow
0 -£1,200 -£1,200
1 £800 -£400
2 £600 £200
3 £400 £600
4 £200 £800
5 £50 £850
Residual Value £0 £850
Payback Period 1.5 Years
Proposal 2-
Year Inflow Cumulative inflow
0 -£1,200 -£1,200
1 £300 -£900

2 £400 -£500
3 £500 £0
4 £600 £600
5 £500 £1,100
Residual Value £50 £1,150
Payback Period 3 Years
It is very clear from the above that proposal 1 yields and early return on the investment
(Brandon and Welch, 2009). Thus it is feasible for the business to choose this proposal to achieve a
higher return on the investment in 1.5 year’s only.
TASK 4
4.1 Financial statements
Financial statements are used to record all the financial transactions of the business. The
Blue Island restaurant presents information about business financial position in the following
statements.
 Balance Sheet- The restaurant prepares balance sheet to identify its financial position. The
assets and liabilities are calculated to calculate the profit and revenue earned by the
company (White, 2006). The balance sheet also depicts the balance which is created
between assets and liability so as to maintain the financial position for the business.
 Cash Flow statement- All the information about the inflow and outflow of cash is
represented in the cash flow statement (Management accounting, 2014). Cash received or
earned and cash paid in any expense or investment activity is noted in this statement. This is
helpful for the business in identify the position of cash in the business.
 Income statement- The profit and loss earned by the business is mentioned in the income
statement (Drake and Fabozzi, 2012). The income statement basically depicts the income
earned by the business and is useful in identifying the net profit of the business.
4.2 Comparison between financial formats
Businesses are divided on the basis of their ownership. They are sole proprietor, limited
company and partnership firm. Each business maintains different financial formats, they are as
followed. Sole Proprietor- A sole proprietor is a business owner who individually operates and mange
business. In sole proprietorship the owner is not entitled to maintain all the financial
statements (Palepu and Healy, 2007). Only in final assessment of tax the proprietor is
required to maintain the record of earnings.

 Partnership- In a partnership firm two or more owners operate the business activity
(Financial ratio and Analysis, 2013). Te liability of the shares is dependent on the profit
sharing ratio of the business. The partnership business requires to maintain all the financial
statements including profit and loss account and partners individual statement.
 Limited Company- A limited company is separate from its owners (Nicholson and Aman,
2012). Thus the organization is strictly required to maintain all the financial statements like
the balance sheet, profit and loss statement and retained earnings statement. It is mandatory
for the company to maintain all the financial statements as per the financial year.
4.3 Ratio Analysis
Analysis of financial ratio is important to identify the financial position of the business.
Ratios Formula
Sweet Menu
Restaurant
Blue Island
Restaurant
Profitability
Net Profit margin Net profit/sales 0.01 0.13
Gross Profit
margin Gross profit/sales 0.63 0.66
Liquidity
Current Ratio
Current assets/ current
liabilities 1.78 0.63
Quick Ratio
Current assets –
Inventory/ current
liabilities 0.63 0.15
Efficiency
Asset Turnover Net sales / net assets 1.79 2.4
Solvency ratio
Debt/equity ratio Debt/Equity 0.41 0.58
The financial position of Sweet Menu restaurant is better than Blue Island. The liquidity
ratio of Sweet Menu is 1.78 whereas the other restaurant is only at 0.63. This shows that the former
restaurant has a better liquidity position in terms of its assets and liabilities (Ryan, 2009). Blue
Island restaurant has higher liabilities to be paid by the business in respect the Sweet Menu. It has
better solvency ratio at 0.41 i.e. it has to pay less debt then the other restaurant. Apart from this

profitability ratio of Sweet Menu is less but in compare to Blue Island (Sabău, 2013). But the
restaurant is earning efficiently in terms of net sales. Thus after the ratio analysis it is clear that Blue
island is making more profitability but has a low financial position in comparison with Sweet menu
restaurant.
CONCLUSION
From the above research it is clear that financial management plays a vital role for an
organisation. The Sweet menu restaurant was able to evaluate the appropriate sources of finances
from the available sources. It could be done with the help of financial management only. This is
evident that Blue Island restaurant was able to understand its financial position with the analysis of
financial statement presented in the case study. Thus it is evident the financial manager must
understand aspect of companies finances so as to identify its financial capacity . Financial
management plays an important role in management of finances and decision making related to
companies monetary activities.