Financial Analysis of Two Restaurants

This assignment presents a comparative financial analysis of Sweet Menu Restaurant and Blue Island Restaurant. It utilizes various investment appraisal techniques to evaluate the reliability and validity of proposed initiatives, ultimately aiding in informed decision-making. Ratio analysis is also employed to assess the overall financial positions of both restaurants, revealing insights despite differences in profitability.

Managing Financial Resources and
Decision

Table of Contents
Introduction......................................................................................................................................1
Task 1...............................................................................................................................................1
1.1 Different sources of finance for Sweet Menu Restaurant......................................................1
1.2 Implications of Sources.........................................................................................................2
1.3 Appropriate source of finance...............................................................................................2
Task 2...............................................................................................................................................3
2.1 Costs associated with different means of funding.................................................................3
2.2 Importance of Financial Planning..........................................................................................3
2.3 Information needs of different decision makers that are associated with Sweet Menu
Restaurant....................................................................................................................................4
2.4 Impact of finance on the statements......................................................................................5
Task 3...............................................................................................................................................5
3.1 Analyse budget......................................................................................................................5
3.2 Unit costs calculation.............................................................................................................6
3.3 Investment Appraisal Techniques..........................................................................................7
Task 4...............................................................................................................................................9
4.1 Discuss the main financial statements...................................................................................9
4.2 Different between major financial statements.....................................................................10
4.3 Ratio Analysis......................................................................................................................11
Conclusion.....................................................................................................................................12
References........................................................................................................................................1

INTRODUCTION
In the current corporate scenario, every business requires adequate amount of funds or
money to carry out operations appropriately. However, increasing competition has also enforced
the companies to enhance their level of operations to attain future sustainability. Thus, financial
resources are the integral part of business enterprise and it is the duty of senior authority to
ensure that they make optimum utilisation of available resources and generate desired results and
outcomes (Cunningham, 2006). In this context, current report focuses on economic analysis of
Sweet Menu Restaurant Ltd which is one the its own kind of restaurant in Gants Hills in East
London. With recent success top level management of restaurant are planning to open two new
branches in popular places of London with the aim of attracting large number of customers
through hygiene and delicious intercontinental offerings. In this regard, various sources of funds
has been analysed to raise the amount between £300000 and £500000. Further, implications
associated with the different sources has been focused on and importance of financial planning
for the betterment of business operations. Thereafter, different stakeholder of cited restaurant has
been identified and their importance in decision making. Along with this, investment appraisal
techniques have been used to evaluate the feasibility and reliability of the proposals for the future
expansion and lastly, with the help of ratio analysis performance of cited firm is compared with
its competitor (Blue Island Restaurant).
TASK 1
1.1 Different sources of finance for Sweet Menu Restaurant
As per the present provided case, Sweet Menu Restaurant is planning to enhance its
business functioning by opening two new branches in popular places of London. In order to do
so, huge amount between £300000 to £500000 is required by the management and for which
they can make use of following sources of finance:
 Bank Loan: At present in UK there are several financial institutions which provide
corporate loan to the firms so that they can enhance their business operations and attain
long term sustainability (Narayananand Nanda, 2004). Considering the debt financing it
is one of the most feasible options available to the management of Sweet Menu
Restaurant. The main benefit of this source is that it is available on the basis of mere
formalities as well as repayment of loan is based on monthly instalment which is feasible
for the SME like Sweet Menu Restaurant to repay.
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 Hire purchase and leasing: These are the sources categorized under short and medium
term financing. With the use of this, restaurant can easily acquire machinery of their
choice and enhance the technological aspect so that customers of restaurant get new
experience (Thomas, 2008). However, the main advantage of these sources is that they
are available at feasible monthly instalments.
 Venture Capitalist: Owners of the cited restaurant has the duty to influence venture
capitalist so that investment can be raised. One of the major benefits of this source is that,
capitalist have lesser interest in the functioning of business as compared to shareholders
(Curry, 2013). But it is essential to provide accurate and reliable information to these
people so that they can make smart decision regarding future investments.
 Retained earnings: It is another major internal source that top level management of Sweet
Menu can use in order to raise funds for the future expansion. However, advantage of this
source is that it is already kept reserved for the future contingency and does not raise any
debt. Along with this, firm does not raise any liability of repaying it.
 Sale of fixed assets: Considering the short term financial needs, sales of fixed assets is
appropriate source of finance. It is the duty of senior authority of Sweet Menu Restaurant
to focus on those assets which are of no use or less use in the functioning of business
should be sold to raise the money for buying new technology or machinery for the new
restaurants. But contradicting to this, once the asset is being sold management cannot
make use of it again.
 Third party investment: In order to raise funds from the market it is important for the
senior authority of Sweet Menu Restaurant to influence investors for investing the
money. The advantage of this source is that third party investors have very little interest
in the functioning of firm but despite of this, management has to provide them accurate
and reliable information about the functioning so that they can assess risks and
uncertainties and accordingly make smart and effective decisions.
 Government grants: It is considered as the legal system in which government of UK
provide monetary rewards to those entrepreneurs who are starting a business or
expanding the operations. But in order raise the funds from grants wide range of past and
current information of Sweet Menu Restaurant has to be provided to the government
authority so that they can analyse and accordingly make the decisions.
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 Issue of shares: Operating at small and medium sized business, top level management can
issue the shares of the firm within the market. In this Sweet Menu Restaurant needs to
register as the IPO (Initial Public Offerings). Through the help of this firm can attract
numerous amount of shareholders to buy shares and raise funds for the firm. The main
pros of this source is that large amount of funds is raise without raising major liabilities.
However, there is liability of paying dividends but that in case when Sweet Menu
Restaurant generates profits.
1.2 Implications of Sources
Different sources have different implications but it is the duty of senior authority to make
sure that they evaluate each and every sources and then make smart decision. Following are the
implications of above stated sources:
 Bank loan: In terms of legal, with the help of legal formalities cited restaurant can raise
funds but have to deposit collateral security. While after the completion of legal
documents, money can be used by owners in any form. But for raising it management has
to deposited collateral security.
 Venture capitalist: There is no legal implications but on the basis of terms and conditions
ownership will vary (Ismail and et.al, 2005). Whereas, liabilities of third party are not
fully settled company is considered as insolvent.
 Hire purchase and leasing: There are no major legal implications associated with it as
management has to complete legal paperwork. Whereas, after the last instalment is settled
ownership is transferred to the owner. Along with this, if Sweet Menu is unable to pay
the leasing amount it may lead to the loss for hire purchasing institution.
 Retained earnings: The major legal implication associated with this source is that,
restriction from shareholders may cause hindrance for the management to make use of
reserved amount. However, it is because it will reduce the return on investment
(Dividend) for the shareholders. Along with this, if accompany is unable to make
optimum utilisation of this source that it can be considered as the loss for firm.
 Sale of Fixed assets: There are not legal implications imposed on this source as it is the
decision of management whether to sell the asset or not. But after selling the asset
company will lose its ownership and will not be able to make use of it again.
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 Government grants: Top level management has to prepare appropriate and reliable
proposal and should be presented to the associated authority so that they can allow to
raise the funds. But once the proposal is rejected it is very difficult for the firm to raise
the funds again through this source.
 Issue of shares: Company has to register in IPO to issue the shares as well as at the initial
stage attracting shareholders is quite tough as people invest in those shares which have
the reputation of generating higher returns. Along with this, restaurant is liable to pay the
dividends to its shareholder for satisfying their needs and wants.
1.3 Appropriate source of finance
In the present case, owners of cited restaurant are focusing on expanding business by
opening two new branches in popular places of London. For this variety of sources has been
analysed out of which the best suitable sources are bank loan and venture capitalist. Rationale
behind electing bank loan is that, in order to raise expected amount of capital this source can be
helpful. Furthermore, monthly instalment of repayment is feasible for SMEs to carry out
business operations and generate desired results and outcomes (Andersonand Coleman, 2000).On
the other hand, venture capitalist will be feasible because operating in such an attractive industry
as well as demand of inter-continental food in London is increasing day by day. Therefore,
influencing investor will be easy for the owners. Moreover, the interest of capitalist in business
operations is lesser then the shareholder therefore, Sweet Menu Restaurant can make use of
funds in suitable and reliable manner. Henceforth, these are the sources of funds recommended
to top level management of cited restaurant with the help of which they can easily carry out
expansion process.
TASK 2
2.1 Costs associated with different means of funding
While acquiring the funds through different means of sources there are several costs that
company has to bear. However, it is the duty of senior authority to make sure that they analyse
each and every aspect of sources as well as carry out cost benefit analysis of the sources to make
the best possible selection. Herein, bank loan and venture capitalist has been recommended as
the sources (Brighamand Houston, 2009). Therefore, managers of Sweet Menu Restaurant have
to bear certain costs associated with both of these sources. Bank loan assist in generate large
amount which is the need of restaurant but management have to bear the costs of monthly
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instalments of interest. Payment of principle amount is based on yearly basis which can affect the
entire financial position of the restaurant. Furthermore, it will raise the debt position of cited firm
as compared to the equity financing which is not suitable for the longer period of functioning.
On the other hand, venture capitalist will not raise major concerns but management have
to provide adequate and accurate information to the capitalist so that he/she can make decisions
regarding future contingency. Furthermore, capitalist requires equity of business so that in any
adverse situation he/she may regain mount through equity. As well as the control because
venture capitalist wants to mitigate risk that is associated with the future expansion of Sweet
Menu Restaurant.
2.2 Importance of Financial Planning
In general it can be defined as the process of meeting goals of business enterprise by
making proper management of funds or money. It is the process of defining objectives, policies,
procedures and budgets regarding different activities of business concern. Herein, top level
management of Sweet Menu Restaurant is planning to expand business thus; financial planning
is of great use (Jury, 2012). Operating in such a competitive environment it is important to
manage and make optimum utilisation of funds for which financial planning is necessary.
Through the means of financial forecasting finance managers of Sweet Menu Restaurant can
easily identify the suitable reliable sources of funds available and accordingly make decisions
regarding selecting the appropriate sources for raising funds and carrying out expansion process
effectively. In addition to this, it will also assist in analysing the risks and uncertainties
associated with two locations so that potential measures can be employed accordingly. The
significance of financial planning is that it helps in managing the income generated by Sweet
Menu Restaurant more efficiently. Along with this, it leads to increase the cash inflow and
monitor the spending habits of managers so that expenses can be controlled (Kwok, 2002). In
context to capital of Sweet Menu Restaurant it will assist in building long term capital and
shaping the financial future. Furthermore, it assists in identifying different investment
opportunities so that expansion of business can be made and long term sustainability can be
achieved.
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2.3 Information needs of different decision makers that are associated with Sweet Menu
Restaurant
In order to carry out the operations of business there are several stakeholders associated
with the firm. However, the main purpose of these stakeholders is to carry out their part in
effective manner so that overall aim and objectives of the business can be achieved. But for that
they require adequate amount of information on the basis of which they can be carry out their
part (Jakhotiya, 2002). Following are the stakeholders associated with Sweet Menu Restaurant
and the information required by them for making suitable decisions:
 Employees: These are the integral stakeholder of business and require accurate and
appropriate financial information of business so that decision regarding future growth
opportunities can be made. Through the means of financial statements, employee
understands about the retention, salaries and other monetary information (Kawai,
Mayesand Morgan, 2012).
 Management: Top level management are responsible for carrying out the operations of
business in effective and efficient manner. In this context, managerial level people
requires adequate amount of accurate information of Sweet Menu Restaurant.
Information is related to position of working capital, debt to equity position and
availability of assets etc. so that strategies can be developed accordingly and fruitful
results can be achieved.
 Suppliers and Trade Creditors: Dealing in such a competitive environment, Sweet Menu
Restaurant has to maintain its relationship with suppliers in order to acquire quality of
raw materials. With the aim of serving fresh and hygiene inter-continental food to
customers it is important for maintain relationship with suppliers (Weil, 2012). In against
to it, suppliers require the information to judge the capability of Sweet Menu Restaurant
in paying its debt as well as deciding the credit period terms.
 Lenders: Bank and other investors critically analyse the position of Sweet Menu
Restaurant through its financial statements in regards to understand the ability of firm in
repaying the borrowing within the specific period or not. Investors evaluate the
statements to understand inflows and outflows of the firm so that they can make decision
regarding return on investments.
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2.4 Impact of finance on the statements
In the present given scenario, top level management of Sweet Menu Restaurant is
planning to open two new branches within the London and for that they have been recommended
to bank loan and venture capital as the source of finance. Therefore, it is important to understand
the impact that these sources of funds will make on financial statements of the firm. In case of
bank loan, the amount raise will be recorded in the liability side of balance sheet which increases
the debt position of business (Brigham and Houston, 2009). Furthermore, the interest paid in
terms of monthly instalments will be shown in expenditure side of income statement. On the
other hand, venture capital source will increase the amount of share capital within balance sheet
as well as amount of cash will be increased the same. However, in against to its stakes of the
company are provided to capitalist which are written in the annual report for the future record.
Therefore, these are the impacts that these sources of finance will make on the financial
statement of Sweet Menu Restaurant if they adopted to raise funds for the future expansion.
TASK 3
3.1 Analyse budget
In general budget can be defined as the tool with the help of which managers can easily
analyse the inflow and outflow of the cash during the financial year. Further, it assists in
evaluating the risks and uncertainties associated with the functioning of firm in near future.
Herein, investigator concentrates on analysing the budget Blue Island Restaurant with the aim of
understanding the actual financial position (Broadbentand Cullen, 2012). On the basis of cash
budget it can be said that, the products offered by cited restaurant are generating reasonable
demand due to which fluctuating sales figures has been generated. In context to the outflow
during the month of September, Blue Island Restaurant was unable to meet the expenditure
through the cash sales because of increasing expenses like Van, furniture and fittings etc. But in
the October month restaurant was able to generate good sales which led in generating positive
closing balance of £3870. While in the month of November, increasing demand of food helps in
maintaining the positive closing balance which is feasible in maintaining position in such
competitive environment. Lastly, increasing expenditure again cost the Blue Island Restaurant to
attain negative closing balance. Therefore, it important for the senior authority of cites
Restaurant to indulge appropriate and feasible sales strategies so that revenue can be increased.
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3.2 Unit costs calculation
Items Costs £
Steak 3
Vegetables and other ingredients 1.5
labour 3.5
Overheads 2
Total Costs 10
Mark Up (40%) 4
VAT 2
Selling Price 16
Food Cost Percentage = Total Costs of Ingredients/ Selling Price * 100
Food Cost Percentage = 10/16*100
Food Cost Percentage = 62.50%
With the help of cost computation it has been clearly identified that, around 62.50%of the
costs that Sweet Menu Restaurant has to bear in terms of carrying out its operations successfully.
However, on the basis of costs, management has defined £16/meal selling price through the
means of which restaurant will generate the profit of £6. Furthermore, Blue Island Restaurant is
expecting 40% profit on the basis of Mark-up cost and 20% of value added tax which is imposed
by the government of UK to charge form the consumers.
3.3 Investment Appraisal Techniques
These are most feasible tools and techniques with the help of which management focuses
on analysing the reliability and suitability of the investment proposal. There are different types of
investment appraisal techniques that are used to analyse the appropriateness of the proposals so
that smart and effective decision can be made (Management accounting. 2014). Herein, net
present value and payback period has been selected for the analysing two proposals available to
Blue Island Restaurant.
Initial Investment:
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Proposal 1: £1200
Proposal 2: £1200
Net Present Value:
Proposal 1:
Year Inflow PV Factor @10% Inflow by considering pv factor
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 by considering pv factor
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
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Net present value £529.00
Payback 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
Interpretation:
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From the means of above computation it has been analysed that, top level management
Blue Island Restaurant should invest in Proposal 2 as compared to Proposal 1. Rationale behind
this is that, net present value of proposal 1 is lower than the proposal 2. While making
investment decision, managers undertakes time value for money which indeed is undertaken by
the net present value. However, payback period of proposal 1 is lower than the proposal 2 despite
of this management should invest in recommended proposal. Furthermore, NPV is considered as
the most feasible method for computing the reliability and feasibility of the project. Henceforth,
proposal 2 is recommended to the senior authority of Blue Island Restaurant for the future
investment.
TASK 4
4.1 Discuss the main financial statements
Considering the principles and standard set by different financial authorities there are
several essential statements that an organisation has to prepare in order to record each and every
transaction taken place during the reporting period (Subramaniam, 2010). The main aim of
preparing all these statements is that, different stakeholder of the company can easily understand
the actual position of firm and accordingly make decisions regarding future functioning.
 Balance sheet: This is the main statement of a company because it assists in providing
information related to financial position of the firm. It is prepared with equation of Assets
= Liabilities + Equities. In addition to it, stakeholders through the means of balance sheet
can understand the position of assets and liabilities of the firm as well as the debt to
equity position so as to make future investment decisions.
 Income statement: The main purpose behind preparing income statement is that it assist
in evaluating the income and expenditure occurred by the company during the reporting
period (Pour, 2011). Furthermore, it is essential for the firm to manage its expenditure on
the basis of income in order to balance the financial preposition of the firm. Therefore, it
is important for the management to prepare income statement so that expenditure can be
maintained and sources of income can be enhanced.
 Cash flow Statement: Through the means of this statement, top level management of Blue
Island Restaurant can evaluate and analyse the actual position of cash and cash
equivalents within the firm. Furthermore, it helps in evaluating cash inflow and outflow
of the funds during the accounting period (Curry, 2013). Cash flow statement is
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categorised in three sub-segments such as: cash flow from operating, financing and
investing activities.
4.2 Different between major financial statements
In UK, there are various types of businesses that operate at different level. However, each
of the firm is with the aim of generating higher profits and attaining long term sustainability. All
these corporations require preparing different financial statements as per their requirement and
necessity so that activities can be recorded effectively. These organisations are categorized under
three different categories such as sole traders, partnership and limited companies. Following is
the difference between financial statements of these firms:
 Sole proprietorship: This type of business is owned and managed by individual who is
responsible for making all the decisions regarding the future contingency. However, there
is no compulsion of the entrepreneur to prepare all the statements as with the help of
profit and loss account also he/she can take smart and effective decisions (Anderson and
Coleman, 2000). With this statement, owner record all the transaction taken place during
the reporting period.
 Partnership: These are the firms which are owned and managed by two or more
individuals who mutually agreed the terms of sharing profit and loss of the business.
According to the standards it is important for the finance manager to prepare all the major
statements as well as should prepare partner’s capital account so that performance of each
individual can be judged and monitored in effective and efficient manner (Jakhotiya,
2002).
 Limited Companies: This type of company operates at large level to satisfy needs and
wants of diversified target market. Furthermore, as per the IFRS and GAAP it is
important for the finance manager of limited company to prepare all the major accounts
such as income statement, cash flow statement, balance sheet and equity shareholder’s
account so that stakeholders associated with the firm can analyse and evaluate the
performance of business in the best possible manner (Weil,2012).
4.3 Ratio Analysis
In general, ratio analysis is considered as the tool through the means of which managers
can easily analyse the actual financial position of firm. However, ratio analysis assists in
evaluating different aspects of business which are related to profitability, efficiency, liquidity and
12

solvency. Through the means of this, management can easily compare the performance of
business against its competitor (Brighamand Houston, 2009). Herein, it has been used to
compare the financial performance of Sweet Menu Restaurant with Blue Island Restaurant:
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
Interpretation:
From the above analysis of ratio various aspects of both restaurants has been evaluated.
Considering the profitability position of both the firms it can be said that, constantly increasing
competition is affecting the course of both the restaurants adversely. This is due to which net
profit and gross profit ration are showing declining results. In addition to this, evaluating the
capability of firm in meeting its short term financial needs it can be said that, Sweet Menu
Restaurant is more capable in comparison to Blue Island Restaurant because its current is
showing higher result of 0.63 as compared to the competitor’s.
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While on the other hand, comparing the liquidity ratio of both the restaurants it has been
identified that, Sweet Menu Restaurant is more capable as its ability to convert assets into cash is
more powerful which indeed assist in maintaining the short term financial needs. Furthermore,
considering the solvency position of both the restaurants it can be said that, with debt to equity
ratio of 0.41 Sweet Menu Restaurant is capable in meeting liabilities through the use of assets.
On other hand, Blue Island Restaurant has debt to equity ratio of 0.58 which is higher than Sweet
Menu Restaurant.
Therefore, it is essential to undertake reliable strategic option for both the firms so as to
make sure that they maintain the sales position and attain the long term sustainability in such
competitive environment.
CONCLUSION
In summing up the present report it has been observed that, financial resources play
crucial role in managing the operations of business. In order to carry out the functioning,
management has to make optimum utilisation of available resource so that desired results and
outcomes can be achieved. Herein, financial position of two restaurants has been analysed with
the help of different financial tools and techniques. Furthermore, use of investment appraisal
techniques has been shown to analyse the reliability and validity of available proposal so that
best suitable decision can be made. Lastly, with the help of ratio analysis it has been analysed
that despite of having low profitability Sweet Menu Restaurant is having overall better financial
position than the Blue Island Restaurant.
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