Financial Analysis and Performance of Taste plc

The analysis reveals that Taste plc is operating efficiently in the market and has done proper financial planning. The company's profitability level has been enhanced through effective pricing decisions, leading to a rise in overall performance. Additionally, ratio analysis has supported the organization in knowing its liquidity position, which indicates that the company has sufficient cash to meet its short-term obligations.

Managing financial
resources
and Decisions
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Table of Contents
INTRODUCTION................................................................................................................................4
2.0 Identifying sources of finance available to business............................................................4
2.1 Types of business..................................................................................................................4
2.2 Sources of finance available to business...............................................................................4
The table consists of following sources of finance along with advantages and disadvantages-.4
2.3 Compare and contrast right issue of share and loan notes....................................................6
2.3.3 Implication of right issues and loan stock..........................................................................7
2.4 Appropriateness of source of finance for buildings and NCA............................................7
2.5 Working capital- Advising board of directors on a source of finance..................................8
2.5.1 Definition...........................................................................................................................8
2.5.2 Importance of working capital...........................................................................................8
2.5.3 Sources available for WC...................................................................................................9
3.1 Statement of profit and loss................................................................................................10
3.2 Statement of financial position...........................................................................................10
3.3 Statement of cash flow........................................................................................................10
3.4.1 WACC for each three options..........................................................................................10
3.4.2 Gearing for each three option...........................................................................................11
3.4.3 How did it impact financial statements............................................................................11
3.5 Earning per share................................................................................................................12
3.5.1 what information does this provides................................................................................12
3.5.2 Earning per share calculation..........................................................................................12
3.5.3 Explaining the answer......................................................................................................12
4 Investment appraisal..............................................................................................................13
4.1 Why it is important to appraise potential investment..........................................................13
4.2 What are the risks to future cash flow?...............................................................................13
4.3 Different type of techniques................................................................................................13
4.3.2 Calculating pay back period.............................................................................................13
4.3.3 net present value method of appraisal.............................................................................14
4.3.4 Calculation of net present value.......................................................................................14
4.4 Recommending board of directors......................................................................................15
4.5 Unit cost..............................................................................................................................16
5.0 Cash flow vs profit..............................................................................................................17
5.1 Main trends and messages contained within cash flow......................................................17
5.2 Importance of financial planning........................................................................................17
5.3 Explain why company may be profitable but run into liquidity problem..........................17
5.4 Users of financial statements and their needs....................................................................17
5.4.2 What information they need.............................................................................................18
6.0 Interpretation of the financial statements.....................................................................................18
6.1 Ratio Analysis.....................................................................................................................18
6.1.1 Profitability ratios............................................................................................................18
6.1.2 Liquidity ratio..................................................................................................................19
6.2 Overall opinion on the company’s current performance.....................................................19
7.0 Main difference in financial statements........................................................................................19
CONCLUSION..................................................................................................................................19
REFERENCES...................................................................................................................................21
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INTRODUCTION
Finance is regarded as one of the most crucial resource of the enterprise as it is directly
associated with the aims and objectives of organization. Further, initiatives are taken by
management of every company so that it is possible to deal with unfavourable situations such as
inadequacy of finance etc. Proper management of financial resources provides base to organization
in gaining competitive advantage and in turn acts as development tool. Moreover, different sources
of finance are available to business with the help of which company can satisfy its requirement. IT
is the first and foremost duty of management to decide which source to adopt for raising funds such
as internal or external one (Wahlen and et.al., 2011).
Apart from this to judge the feasibility of project investment appraisal techniques are
effective which involves net present value, internal rate of return etc. Such methods helps in
selecting the appropriate proposal and in turn funds can be allocated accordingly. For carrying out
the present study organization chosen is Taste which is a medium sized company and at present
management wants to expand its catering business which has been growing over the past six years.
Apart from this, the local authority has granted business planning permission to extend its current
premises. Various tasks have been covered in the report which involves sources of finance,
importance of financial planning, investment appraisal techniques etc.
2.0 Identifying sources of finance available to business
2.1 Types of business
There are different types of businesses such as public, private and partnership etc. which
carry out their businesses effectively in order to produce good quality of products and services. All
of these businesses have different requirement in conducting their business and completing all
business activities. However, it is highly depend on management that what kind of sources are
preferred to satisfy their business purpose.
2.2 Sources of finance available to business
The table consists of following sources of finance along with advantages and disadvantages-
Sources Feature Advantage Disadvantage
Trade credit
(Short term)
It is considered as one of the
most effective practice of
vendors which allows
business to place and receive
orders without giving
immediate payment.
Main advantage of adopting
this source is minimal cash
outlay through which
shelves of business can be
stocked. Discount received
on the payment made within
Main disadvantage of
adopting this source is
fess and penalties when
supplier has right to
impose penalty on the late
payment made by
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certain number of days is
also another benefit
(Mumford, Schultz and
Osburn, 2001)
company.
Bank
overdraft
(Short term)
It is the facility granted by
bank to withdraw more
amount than those lying in the
account
Main advantage of using this
source is that it is flexible in
nature where one can take it
for whatever amount it is
required.
Main disadvantage of
using this source is that
high rate of interest is
charged by bank and in
turn it is costly for
company (Wahlen and
et.al., 2011).
Retain
Earnings
(Short Term)
Retain earnings are the part of
profit which is saved by the
organization to meet any
future contingency.
Using of retain earnings
does not required to incurred
any expenses related to
interest or even organization
does not have to repay this
amount.
Accessing of all the
financial source of fund
from retain earnings may
become disadvantage for
the business to meet any
uncertain or imperative
need of finance during
daily course
Bank loan
(Long term)
Taste Plc can take loan from
financial institutions present
in the market. Firm can take
loan from bank at an cheaper
rate of interest.
Main advantage of adopting
bank loan as a source of
finance is that it enhances
liquidity position of
company
Major disadvantage of
using this source is that it
increases expenses of the
company as firm has to
pay large amount in the
form of interest.
Issuing
shares
(Long term)
Taste plc can issue equity
shares in the market to general
public and can obtain funds
from investors (Wildavsky,
2006).
Main advantage of using this
source is that they are liquid
and can be easily sold in the
market. Further, company do
not have any obligation
regarding payment of
dividend.
Main disadvantage of
using this source is that
payment of dividend on
equity shares is not tax
deductible expenditure
and cost of equity is
highest among all the
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sources of finance.
Leasing
(Long term)
This long term source of
finance helps the company to
acquire the assets by paying
the lump sum amount.
Main advantage of leasing is
that it assists the business to
repay the amount in
instalment basis and also
does not require to pay
amount in immediate
manner.
Disadvantage of leasing is
that some it becomes
expensive for the business
and also the organization
is not the personal owner
of the assets purchased on
leasing.
So, these are some of the sources of finance which are appropriate for Taste plc. By selecting
the most appropriate source it is possible for management to extend its business premises and in
turn it is possible for carrying out overall operations in effective manner. Apart from this, selection
of right source of finance can enhance profitability level of the organization and in turn can save
major cost associated with the business.
2.3 Compare and contrast right issue of share and loan notes
2.3.1 Right issue
Right issue can be regarded as the form of dividend in which business enterprise grant rights
to its existing investors so that they can purchase shares of the firm at an discounted price. In this,
management offer shares to its present investors instead of others (Mohsin, 2013). Further, right
issues are mostly preferred by public limited organizations as they prefer to raise funds with the
help of equity shares rather than debt.
Implications
Therefore, it is beneficial for Taste organisation to raise funds with the help of equity shares. On the
other hand, loan notes are financial instruments in which borrower provides written form to the
lender which involves interest rate which borrower has to pay. It also takes into consideration the
time period in which company has to repay the entire amount of debt.
Right issue affects controlling power of the business because it has direct influence on
ownership structure. By this issue shareholders of the firm get right to make decision for the
business. Further, it also provide comparatively less funds to equity issue. It is because right issue is
made by company on the price lower than market value.
2.3.2 Loan notes
Taste plc can also issue loan notes which are easily convertible into equity shares after a
predetermined period of time. Raising funds with the help of right issue is regarded to be more
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effective for Taste plc as compared with debt issue. In case when business enterprise satisfies its
financial needs with the help of existing shareholders then it is not required by firm to incur extra
expenses for attracting them (Mumford, Schultz and Osburn, 2001).
Implications
Apart from this, Taste plc is having sound financial position and therefore it is easy for
enterprise to attract existing investors in short period of time. Business entity can satisfy its
financial needs with the help of debt issue. In case when loan notes are issued then management has
to pay interest to its holders after regular interval (Jury, 2012) . Moreover, as compared with equity
sources, raising finance with the help of loan notes imposes high cost in front of company. For loan
notes company has to provide security in against of loan. For this financial source company has to
pay interest cost in regular time period. In addition to this organization has liability to repay the
principle amount as per the described contract. This source does not affect controlling power of the
business.
2.3.3 Implication of right issues and loan stock
The implication of right issues can be understood in term of cost and time take to issue of
shares. Also, management need to pay the dividend on right time so as to determine long run
success of the firm with increased rate of return. Furthermore, loan is the another imperative aspect
of finance which take high interest rate on loan. Accordingly, corporation need to pay cost on right
otherwise credit rating of organization get affected.
2.4 Appropriateness of source of finance for buildings and NCA
Equity finance
Advantages
On the other hand main advantage of equity financing is that it enables company to have
more cash in hand, it is less risky as compared with loan. The right business angels and venture
capitalist can bring value and they can explore growth ideas. Further, investors are often prepared to
provide follow up funding as business expands. All these are main benefits of employing equity
financing and is beneficial for the business.
Disadvantage
Further, main disadvantage of this source is that time is required to search for right investor of firm.
After analysing both the sources of finance right issue of shares and loan notes it has been
found that appropriate source for company is issuing shares in the market for purchasing building
and non current assets. By issuing equity shares in the market firm can attract large number of
investors and main advantage of this source is that it does not creates financial burden on the
enterprise as compared with debt financing (Murphy, 2001). Depending on the type of investors
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business losses power to to take effective management decisions and sometime company has to face
legal along with regulatory issues to comply with the raising finance. Moreover, it is possible for
enterprise to better satisfy need of its shareholders and in turn it will have positive impact on brand
image of firm. Taste plc is having good financial position in the market and due to this basic reason
business enterprise can easily provide good return to its investors as per their expectations. Apart
from this, in near future firm can easily accomplish its desired goals along with objectives which is
beneficial for the enterprise in every possible manner. This source of finance has been selected for
firm by considering its pros and cons. Financial needs of enterprise can be easily satisfied when
shares are issued in the market and this provides large number of opportunities to business in terms
of rise in profitability level along with sales. Main implications of choosing issue of shares as
source of finance is that firm has to pay dividend to its investors and voting rights along with major
share in the decision making is transferred to shareholders of organization. This is one of the major
implication of this source of finance which company has to consider necessarily.
Debt finance
Advantages
Main advantage of debt financing to Taste plc is that interest on loan is tax deductible, loans
can be taken for both short and long term and business relationship ends when money is paid back
(Broadbent and Cullen, 2012). It supports business in satisfying short term needs. Further, loan
repayment is quite simple along with interest on loan. Debt does not dilute ownership of the
businesses especially those who are operating on smaller basis.
Disadvantages
Main disadvantage of this source is that money has to be paid within a fixed period of time
and in case if company focuses on too much debt then management has to deal with cash problems.
Further, other cons of this source is that mostly of the lenders provide severe penalties for late
payment which takes into consideration charging fees, late fees etc.
Issue of shares
Company can issue shares in the market through which it is possible to satisfy financial needs of the
business and in turn it acts as development tool for the business (Nofsinger and Varma, 2005)
Advantage
Main advantage of considering this source to business is that it supports in satisfying financial
needs of the business and large amount of funds can be obtained easily for carrying out operations
in the market.
Disadvantage
Main drawback of this source is that it increases overall cost of the company where company has to
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pay dividend to its investors along with voting rights. Therefore, it is unfavourable for the business.
2.5 Working capital- Advising board of directors on a source of finance
2.5.1 Definition
The term working capital refers the fund available to business for carrying out operation or
production activities. It is calculated by getting difference of current assets and liabilities.
Furthermore, Working capital is regarded as the cash which company uses in order to successfully
carry out its business operations. Key components of working capital are debtors, creditors and
stock. This source of finance is most appropriate as through this liquidity position of enterprise can
be enhanced easily and in short period of time and company can easily cover all the major
expenses.
2.5.2 Importance of working capital
Working capital is required by business for conducting day to day operations and is the
difference between current assets and liabilities. Main components of working capital are inventory
which takes into consideration raw material, work in progress and finished goods. In case of
excessive stock it will have high burden on cash resources of enterprise and can lead to decline in
sales volume. In order to keep better inventory control it is required to keep a track of stocks for all
the major items of inventory (Wildavsky, 2006). Receivable is another major component of working
capital which contributes large portion of current assets. Investment into receivables requires certain
costs such as opportunity and time value that business has to bear. Further, to manage receivables in
better manner management must have control on credits and must develop effective credit policies.
Cash and cash equivalents is also major component where proper management of cash supports in
determining the optimal size of the firm's asset balance. It represents correlation between
maintaining adequate liquidity with minimum cash in bank. So, these are some of the key
components of working capital and supports firm in conducting operations in better manner.
2.5.3 Sources available for WC
Different sources of finance are present for working capital of Taste plc which organization
can easily consider for satisfying its financial needs and in turn it acts as development tool. Further,
the major sources of working capital are bank loan, retained earnings etc which are appropriate for
taste plc in every possible manner (Nofsinger and Varma, 2005). Moreover, to meet working capital
requirement it is beneficial for company to adopt retained earning as source where internal savings
of the firm can be utilized. Apart from this taking loan from financial institution is also appropriate
as it can support management to deal with unfavourable situations and can assist in effective
utilization of financial resources. It can boost overall productivity and can enhance profitability of
the business in effective manner.
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On the other hand, company like taste plc is financially strong and its savings are quite high
due to which retained earning can be considered as most appropriate source which can support in
satisfying financial needs. Apart from this, if business enterprise is earning higher amount of profits
then sometime it is not possible to pay dividend to the investors and in turn it is having negative
impact on the firm (Jin, Yu and Mi, 2011). In case when taking loan from bank is considered as an
option by firm then organization has to pay large amount in the form of interest which is also an
major expense. Therefore, this are some of the major reason due to which retained earning and bank
loan has been considered as the sources for satisfying financial needs of the enterprise.
Through effective management of working capital it is possible for enterprise to meet its day
to day expenses and in turn raises overall profitability level of the organization. By appropriate
management of working capital organization can manage their liquidity in order to pay their current
obligation in timely manner. In addition to this, they can avail trading opportunity in order to
enahcne their profitability.
Most effective source of finance for working capital is bank overdraft as it is the facility
granted by bank to withdraw more amount than those lying in the account. Moreover, firm can
easily satisfy its financial requirement by considering this financial source. For this financial source
organization is required to pay bank charges i.e. interest on the additional amount withdrawn
(Kastantin, 2005). In addition to this, they can manager their components of working capital to
generate financial source. For this aspect, they can delay their creditor payment and can make
policies to recover amount from debtors early. For this they are required to provide cash discount to
the debtors so they will be influenced to make cash purchase instead of credit one.
3 Financial statements
3.1 Statement of profit and loss
The statement of profit and loss is prepared for meeting the business requirement by
calculating the profitability. It facilitates to record the transaction related to indirect income and
expenses to be incurred.
3.2 Statement of financial position
Balance sheet is known as statement of financial position which consists detail information
related to liabilities, assets and liquidity of corporation. This assists investors to take right decision
with regard to investment. Thus it aids to assess the performance of corporation in the marketplace
and meet need of different stakeholders in an effectual manner.
3.3 Statement of cash flow
This is another important statement which reflect financial information related to three
major activities of business. This includes income from operating activities, investing as well as
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financing activities. Under this transaction regarding payment of loan and sale of old assets all are
recorded so as to analyse the actual performance of corporation.
3.4 Impact of financial statements
3.4.1 WACC for each three options
Taste plc has three option for the investment i.e. issue of equity, issue of loan stock and issue
from equity and loan options. Financial evaluation of these options through WACC is as follows:
WACC = Weight of equity X Cost of equity + Weight of debt X cost of debt
Particulars Option 1 Option 2 Option 3
No of issue MV No of issue MV No of
issue
MV
500000@2 1000000 1000000 250000 @
2
500000
from loan
1000000
Profit before interest
and tax
(12/100)*1
000000
120000 (12/100)*1
000000
120000 (12/100)*
1000000
120000
PBIT
120000 120000 120000
Less: Interest 0
60000
30000
PBT 120000
60000
90000
Tax 30% 36000
18000
27000
PAT 84000
42000
63000
Dividend coverage
ratio
PAT/
Dividend
paid to
shareholde
rs
2 - - PAT/
Dividend
paid to
shareholde
rs
2
Dividend for equity
shareholders
PAT/2 42000 - - PAT/2 31500
No of shares 42000/500
000
8.40% - - 31500/325
000
9.69%
Re D0/p0
(8.4/200)
4.20% - - D0/p0
(9.69/200)
4.85%
Cost of debt - - I(1-t)/Pd
(6(1-.3)/3)
1.40% I(1-t)/Pd
(6(1-.3)/3)
1.40%
WACC 4.2*(4000/ 4.20% 4.2*(3000/ 3.50% 4.85*(350 4.42%
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4000) 4000)+1.4(
1000/4000
)
0/4000)+1
.4(500/40
00)
It is recommended to the board of directors of Taste plc to adopt second alternative which is
beneficial for management. By adopting this option it is possible for business enterprise to raise
funds by taking loan of 1000000 @ 6%. It supports in granting more balance upon the financial
obligations of the business enterprise. This source will provide tax shield to the company and they
have less financial cost (Jury, 2012).
3.4.2 Gearing for each three option
According to the above table in the first option debt financial resources are not available to
raise the finance. Owing to this, cost of equity is considered as cost of capital and the gearing ratio
cannot be calculated due to abase of debt in the capital structure. On the other hand, debt to equity
is 3:1 and 7: 1 in second and third option respectively. Thus, second option is feasible for
corporation in order to mitigate risk and to ensure stability.
It can be suggested from to board of directors that second alternative is the most optimal
option for the organization as it proves to be effective to raise loan of 1000000 @ 6%. Furthermore,
this option facilitates to provide tax shield and accordingly balance will be created in financial
structure of corporation.
3.4.3 How did it impact financial statements
By using second option of debt financial changes can be seen in balance sheet and income
statement of corporation. This is because long term obligation of company will be increased due to
access to debt financing. Similarly, cash equivalence will also be increased. Apart from this income
statement will be affected because profitability decreases due to financial cost.
3.5 Earning per share
3.5.1 what information does this provides
Earning per share is the most important information for shareholders because by this they
come to know regarding rate of return. Earning per share is regarded as the dividend or income
which shareholders of the enterprise receives by investing funds into the shares of company.
Further, investors of the organization are highly interested in knowing about income of the business
as through this they get idea regarding the level of return. Apart from this, taste plc is receiving high
income due to which it is possible for company to satisfy need of its shareholders in effective
manner (Mayer, Schoors and Yafeh, 2005). Further, investment decisions taken by investors are
directly linked with the growth and development aspect of the business enterprise. In order to
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determine the level of return profit after tax is divided by number of shares which they usually
receive from organization.
3.5.2 Earning per share calculation
Profit before interest and tax= 720000
Profit after interest= 720000 – 60000 = 660000
Profit after interest = 660000*(1-.3)
=462000
= PAIT/ no. of equity shareholders
=182/3000
=6.06%
Assuming option only debt has been used
£ 1000000 of 6% loan stock
Interest = 6 /100 * 1000000
= £ 60,000
No of ordinary shares = 3000000
EPS = 462000 / 3000000 = 0.154 p
3.5.3 Explaining the answer
So the calculation of earning per share represents that company is profitable on a
shareholder basis. Further, this is assisting enterprise in satisfying need of its target market in
efficient manner. Moreover, with the help of this it is possible for business to well satisfy need of its
target market and can act as development tool. This can allow business to attract large number of
investors and business can easily deal with the challenges present in business environment. On the
other hand, it is well known fact that every shareholder expects high return from company and this
need can be satisfied by management only when higher profits are earned and this in turn acts as
development tool for the entire company (Penman and Penman, 2007). Moreover, taste plc has to
apply larger efforts in enhancing its profitability level so that more return can be provided to the
target market and it can become easy for management to enhance overall performance of firm in the
market.
4 Investment appraisal
4.1 Why it is important to appraise potential investment
In order to know feasibility of the proposal investment appraisal technique has been applied
through which appropriate project can be adopted in which funds can be easily allocated. Further,
investment decisions are crucial in nature as large amount of funds are allocated by company with
aim to receive good return (Diefenbach, 2006). In short it directly leads to accomplishment of
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desired goals and objectives of business and is fruitful for business in every possible manner.
4.2 What are the risks to future cash flow?
There are several kind of risks associated with future cash flow of project. This is because of
change sin number of customer can have direct impact on raw material and operational cost.
4.3 Different type of techniques
4.3.1 Pay back period
At present information has been given regarding investment in hotel china in Asia whose
feasibility can be easily known by applying payback period as a technique and in turn it is effective
for taste plc in every possible manner.
4.3.2 Calculating pay back period
Pay back period for hotel chain in Asia
Initial investment = $7500000
Pay back period = 2 years
Calculation of pay back period for European investment opportunity
Project A
Cumulative
frequency
Initial
Investment $-8000000
Year 1 2595000 -5405000
Year 2 2845000 -2560000
Year 3 3175000 615000
Year 4 3513800 4128800
Pay back period= A+B/C
2+2560000/3175000
2.81years
After applying investment appraisal technique it has been found that payback period of
project is 2 years when taste plc takes decision regarding investment in project of Asia costing
$7500000. In this time period firm can easily recover the amount of investment. Further, after 2
years organization can generate higher profits and this can assist in gaining competitive advantage.
In short, company will take time period of 2 years and 8 months in order to recover the entire
amount of investment costing $8000000.
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4.3.3 net present value method of appraisal
Net present value is regarded as one of the most effective technique with the help of which it
is possible for business enterprise to know feasibility of the investment proposal. Further, different
proposals are present in which management of firm can allocate funds but main issue is to decide
specific project in which funds can be allocated. Through this method business is able to determine
inflow and outflow of cash along with the discounting factor (Revsine, Collins and Johnson, 2005).
Main advantage of adopting this method to company is that it gives direct importance to time value
of money, profitability along with risk of project is given major preference and it supports in
maximizing value of enterprise.
On the other hand this investment appraisal technique has some disadvantage which
involves it is difficult to determine appropriate rate of discount, correct decisions are not taken
when projects are of unequal life and it is difficult to use. So, these are some of the advantage along
with disadvantage of using net present value as a technique to analyse viability of the proposal. At
present taste plc is planning to invest in different projects for which it is necessary for enterprise to
use NPV as technique as through this comparison in between the projects is easy and in turn
proposal having higher return can be selected easily. In short NPV as a technique provides long
term benefit to the business enterprise where it becomes easy to enhance profitability level of the
organization by investing in right project keeping in view overall aims and objectives of company
(Broadbent and Cullen, 2012).
4.3.4 Calculation of net present value
Calculation of net present value European investment opportunity
Year Revenue Net profit ($) Depreciation Cash inflow($)
1 25000000 2500000 95000 2595000 0.926 2402970
2 27500000 2750000 95000 2845000 0.857 2438165
3 30800000 3080000 95000 3175000 0.794 2520950
4 34188000 3418800 95000 3513800 0.735 2582643
Total present value 9944728
Less- Initial investment 8000000
Net Present value $1944728
Year
1 (1+0.08)-1 0.926
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2 (1+0.08)-2 0.857
3 (1+0.08)-3 0.794
4 (1+0.08)-4 0.735
Net present value for hotel chain in Asia
Initial investment = $7500000
Net present value = $1875000
After doing various calculations it has been identified that NPV of taste plc is $ 1875000
when management takes decision to allocate funds in Asia. On the other hand, when investment
decision is taken in favour of Europe then net present value of project is $1944728. This directly
indicates that organization is receiving $1944728 in return for investment which has been made
before 4 years after involving the discounting factors.
4.4 Recommending board of directors
After applying investment appraisal techniques it has been found that Asia project is more
feasible for taste plc rather than Europe and business enterprise can easily allocate funds in this
project so as to satisfy its need (Garrison, Noreen and Brewer, 2003). Further, payback period of
project Asia is more than and the entire amount of investment can be recovered in time period of 2
years which is beneficial for organization. In case when decision is taken by management to
allocate funds in project of Europe then time period required for recovering funds is 2 years and 8
months which is considered to be high as compared with the project of Asia. In short this project is
profitable for organization and can support to accomplish desired goals along with objectives of
company.
On the other hand, taste plc can receive higher return if decision is taken by management to
invest money in Europe rather than in Asia. In case if funds are allocated in the hotel chain of Asia
then management can receive $1944728 and in case if investment decision is taken by organization
in favour of Europe project then taste plc can receive $1875000. Therefore, with the help of analysis
it is quite clear that company should take investment decision in favour of Europe and this can
surely support in enhancing the overall profitability level of the business (Hung and Subramanyam,
2007). Overall recommendation has been provided to board of director of taste plc by considering
the amount of investment and the level of return which business enterprise can receive after
allocating funds in the proposal.
4.5 Unit cost
4.5.1 Concept of unit cost and its calculation
Unit cost refers to the cost incurred by enterprise in order to produce, store and sell one unit
15

of particular commodity. It takes into consideration all fixed and variable cost which are associated
with the production process (Wahlen, Baginski and Bradshaw, 2014). Fixed cost can be defined as
the cost which does not changes with the alteration in level of output such as salary etc and variable
cost directly changes with the alteration in level of output such as labour, material etc. In order to
determine the unit cost taste plc has to calculate the total cost of product and it is divided by number
of units produced. Calculation of unit cost has been shown below:
Material 8000
Labour 4500
Overhead 4500
Fixed cost 13000
Total cost = 13000+ (8000+4500+4500) = 30000
Suppose if Taste PLC wishes to produce 30 units then unit cost of the product are as follows:
Total cost / number of unit produced
30000 / 1000 = $30 Per unit
By doing calculations it has been found that taste plc has to incur $30 in order to produce
per unit of products along with services.
4.6 Factors to be taken into account when setting prices for output
Their exist large number of factors which have to be considered at the time of setting prices
for the products and in turn is beneficial for taste plc. Business enterprise has to consider cost,
economic and market condition as major factors and on the basis of this prices of commodities are
decided by management. Further, business has to ensure well in advance at what price its
competitors are offering same commodity in the market so that pricing decision can be taken
accordingly (Xu and Birge, 2006). Apart from this cost has to be considered which has been
incurred in producing per unit of product. It directly provides base to taste plc in setting effective
prices for its range of commodities. On the other hand, bargaining power of suppliers along with
customers have direct impact on the prices set by enterprise. Generally selling price is the
summation of total cost and percentage of profit which has been fixed by management. Taste plc
has adopted cost plus pricing technique in order to sustain in the strategic business environment.
5.0 Cash flow vs profit
5.1 Main trends and messages contained within cash flow
Cash budget prepared by taste plc shows increasing pattern in the sales revenue of business
enterprise. After analysing the budget of organization it has been identified that overall expenses of
taste plc is increasing at faster pace as compared with revenue. Therefore, it is necessary for
business enterprise to develop effective strategies so that it is possible to control major expenses
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and this can enhance overall profitability level (Penman and Penman, 2007).
In the month of June sales revenue of company is showing decline which is not favourable
for company. So, management has to take corrective actions through which business operations can
be carried out smoothly. Further, to develop faith in the mind of target market firm has to enhance
its profitability level.
5.2 Importance of financial planning
Financial planning is very important for an organization as it helps to give certainty for
future business activities. It facilitates to allocate resources in profitable business activities and
achieve long as well as short term objectives of corporation. Moreover, financial planning helps to
reduce additional cost and enhance the profitability of corporation.
5.3 Explain why company may be profitable but run into liquidity problem
Large number of reasons are present due to which organization is able to earn higher profits
but is having liquidity issues. One of the major reason can be lack of appropriate financial planning.
Through proper planning it is possible for management to coordinate between different activities
carried out by management (White, 2005). Moreover, it directly provides base to management so
that company can focus on its key aims and objectives. Ineffective organizational polices can also
be another reason due to which business has to deal with liquidity problem as sometime adequate
cash is not present with management so as to carry out crucial operations. Therefore, it has to be
ensured by management that right policies are developed as per organizational objectives and aims.
5.4 Users of financial statements and their needs
5.4.1 Who they are
Different users of financial statements are present which satisfies their need and in turn it is
possible to know whether firm is financially healthy or not. It consists of employees, suppliers,
management and shareholders as well as customers.
5.4.2 What information they need Employees: Staff members working in organization are interested in knowing about
profitability of company. Further, through financial statements they are able to know their
growth prospects in near future (Puajri, 2014). Management: They are the main use of financial statements as through this they can know
effectiveness of policies being developed. Further, with the help of financial statements firm
can know overall sales and revenue level of entity. Banks: Financial institutions provides loan to company and by analysing financial
statements they can know repaying capacity of management. Investors: Through financial statements investors can know financial wealth of company
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and with the help of this level of return can be estimated easily (Nofsinger and Varma,
2005). Government: Regulatory authorities are interested in analysing financial statements of
company as through this it is possible to ensure whether firm complies with legal guidelines
or not. Competitors: By analysing financial statements competitors of taste plc can develop
effective strategies for its future growth.
 Suppliers: They are also main users of financial statements as goods are supplied to firm on
credit and through different statements repayment capacity of firm can be known easily.
6.0 Interpretation of the financial statements
6.1 Ratio Analysis
6.1.1 Profitability ratios
£'000 £'000
Ratios Formula 2015 2014
Profitability ratios
Gross profit 2210 2245
Operating profit 1991 2113
Net profit 1241 1393
Net Sales 1500 1560
Gross Profit Ratio (Gross Profit/ Net Sales) *100 147.33 143.91
Operating Profit Ratio
(Operating Profit/ Net Sales)
*100 132.73 135.45
Net Profit Ratio (Net Profit/ Net Sales) *100 82.73 89.29
Profitability rations explains the relationship between the profits achieved by the company
and sales generates from selling of products and services. It shows the percentage of profit after
deducting all the expenses and costs.
6.1.2 Liquidity ratio
£'000 £'000
Ratios Formula 2015 2014
Liquidity ratios
Current Assets 110 87
Current Liabilities 117 119
Closing Stock 60 50
Current Ratio
Current Assets / current
Liabilities 0.94 0.73
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.43 0.31
Liquidity ratio explains the obligation of the company over its current assets that whether business
can be effectively paid its short term obligations or not such as bank borrowings and short term
liabilities.
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6.2 Overall opinion on the company’s current performance
By analysing different financial ratios overall performance of company has been known.
Further, gross profit ratio of enterprise has increased as compared with past but on the other hand
net profit ratio of taste plc. has declined which is showing inefficiency of enterprise in utilizing its
financial resources. Further, liquidity position of company is effective where current and quick ratio
is showing positive results. Company is having sound liquidity position and it is showing that
management is having enough cash to meet its obligations.
7.0 Main difference in financial statements Partnership: It is an agreement between two or more parties where profit and losses are
shared equally or in predetermined ratio. Main financial statements prepared by partnership
companies involve balance sheet, cash flow statement and income statement. Apart from this
profit and loss appropriation account is also prepared (Murphy, 2001). Sole traders: This type of business is owned and operated by individual. Further, main
financial statement prepared involves cash flow and balance sheet. Profits earned by
company can be kept by deducting tax payment.
 Public limited companies: Taste plc is a public limited enterprise and management has to
prepare cash flow statement, income statement and balance sheet.
CONCLUSION
From the entire study being carried out it has been found that taste plc is operating
efficiently in the market and has done proper financial planning. Further, through investment
appraisal technique it has been found that hotel chain of Europe is more feasible for company as it
is having high return. Apart from this the factors considered by firm while taking pricing decisions
are effective and it is leading to rise in profitability level. Moreover, ratio analysis has supported
organization in knowing its profitability and liquidity position through which overall performance
of firm can be better enhanced.
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