Financial Planning & Management Accounting

This assignment delves into the realm of financial planning and management accounting. It examines various aspects of financial planning, including capital budgeting, internal finance, and strategic water utility management. The assignment also emphasizes the importance of ratio analysis for evaluating firm performance, with a focus on applications in commercial banking and small enterprises. Key concepts covered include unit cost calculations, multi-objective optimization, and the perception of financial planning within specific business contexts.

Managing Financial Resources and
decisions
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Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
1.1....................................................................................................................................................3
1.2....................................................................................................................................................4
1.3....................................................................................................................................................5
TASK 2.................................................................................................................................................6
2.1....................................................................................................................................................6
2.2....................................................................................................................................................6
2.3....................................................................................................................................................7
2.4....................................................................................................................................................8
TASK 3.................................................................................................................................................8
3.1....................................................................................................................................................8
3.2..................................................................................................................................................10
3.3..................................................................................................................................................10
TASK 4...............................................................................................................................................12
4.1..................................................................................................................................................12
4.2..................................................................................................................................................12
4.3..................................................................................................................................................13
CONCLUSION..................................................................................................................................15
REFERENCES...................................................................................................................................16
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INTRODUCTION
Money is the primarily need of every new as well as established business organization to run
their operations successfully. Commercial as well as service rendering entrepreneurs need adequate
funds for different purpose i.e. payment of revenue and capital nature expenses, expansion,
investment in profitable purpose and managing financial risk to achieve set targets. There are wide
ranges of resources available to every entrepreneur through which they can gather sufficient amount
of capital resources to meet their financial need. Thus, the present report here emphasizes on
identifying variety of capital sources along with its positive as well as negative impact to Sweet
Menu Restaurant for its expansion programme. It will enable restaurant to select the best source
among all. Moreover, the assignment also aims to evaluating the role and importance of budgetary
analysis in effective financial management. Furthermore, the report also shed light on the
significance of project evaluation techniques, comprising both discounting and non-discounting
methods to test project viability. In the end, operational performance of Sweet Menu Restaurant
(SMR) and Blue Island Restaurant (BLR) will be examined through applying ratio analysis
technique. It will enable restaurant to take necessary decisions for performing well in future period.
TASK 1
1.1
According to the scenario, SMR is a reputable restaurant which is operating in Gants Hill,
East London from past 10 year. It built-up a strong reputation in the market by offering various
inter-continental food items at an acceptable prices. Now, in order to expand operations, it is
planning to begin two branches in Central London and Croydon requiring investment worth
£300,000 and £500,000 respectively. In order to finance its proposed expansion plan, it can gather
funds through following sources:
Debt fund: In UK and all the other countries, commercial banks and financial institutions
provide funding facilities to the corporations to meet their capital need at an interest rate. Thus, one
of the options available to SMR to gather funds is to raise capital through external borrowings.
Hire purchase (HP): At the time of beginning branches in Central London and Croydon,
SMR can decide to use rented office rather than purchasing it (Berger and Black, 2011). In this,
SMR can purchase property on HP system through making some initial down payment and rest in
equal periodical instalments.
Retained earnings: Companies distribute some proportion of their net earnings to
shareholders and rest of the part is called retained earnings. It is another option available to SMR to
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meet their capital requirement through ploughing back their available retains profits in the business
to support proposed expansion plan.
Trade credit: It is an arrangement between manufacturer and creditors, in which, supplier
agrees to deliver material on credit (Brandimarte, 2013). Through this, restaurant can take some
time to make payment to the suppliers after gathering sales revenues.
Overdraft: Commercial banks allow their customers to withdraw some extent amount than
their available balance in account, called overdraft. It can provide huge help to SMR to meet their
urgent short-term capital requirement.
1.2
Sources Financial Legal Control dilution Bankruptcy
Debt Every commercial bank
charges an interest rate on
provided debt services on
the entities that is its
financial implications. It is
necessary for the SMR to
pay their loan instalments
inclusive interest
periodically.
Mortgage and
securities has to be
provided to the bank
to make lenders
relaxed about fund
security (Guariglia,
Liu and Song, 2011).
Lenders have no
authority to take
participation in
business decisions
and cannot control
operations.
It exists,
because if
restaurant goes
for insolvency
than it will have
to sale their
property for
repayment of
loan amount.
HP Instalments which are
decided by assets vendors
always include some
interest charges so as to
get some extra return in
financial terms (Arrondel,
Debbichand Savignac,
2014).
Parties have to follow
decided terms and
conditions and
ownership will not be
transferred to SMR
till the payment of
final instalment.
Vendors have no
power to interfere
in business
decisions.
No bankruptcy
implication
exists.
Retained
earnings
No financial cost. Entrepreneur need to
transfer some amount
in legal reserves.
No dilution as it is
already the part of
owner’s capital
(Vernimmen and
et.al., 2014).
Same as HP.
Trade Creditors charge some Timely payment is It does not transfer Same as above.
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credit interest to deliver goods to
SMR on credit.
necessary for
restaurant.
or diversify
control power to
suppliers (Berger
and Black, 2011).
Overdraf
t
Interest rate on overdraft
is comparatively high as
compare to bank loan
(Brandimarte, 2013).
SMR has to repay
taken amount on time.
Banks have no
right to change
business
decisions.
Bankruptcy
exists.
1.3
Source Advantage Disadvantage
Debt  Tax benefits because of considering
interest as deductible payments to
determine tax obligations.
 No dilution of control.
 Helps to meet short-term, medium-
term and long-term capital
requirements (Poynton, Lapan and
Marcotte, 2015).
 Fixed financial burden to pay
instalments.
 Providing mortgage to ensure fund
security.
HP  Tax advantage and also freedom of
decision-making.
 Ownership only can be gained after the
payment of last instalment.
Retained
earnings
 Elimination of financial cost.
 Does not change the control dilution.
 Opportunity cost exists that reflects that
by investing fund in profitable
opportunity, SMR can gain return on it.
Trade credit  Deferral payments can be made to the
suppliers from gathered revenues
(Horngren, Sundem and Burgstahler,
2013).
 If restaurant became unable to make
their deferral payments timely to
suppliers than it will create negative
image, which in turn, it will be very
difficult for the SMR to buy material
on credit (Mutanda, De Beer and
Myers, 2014).
Overdraft  Its most important benefit is it helps
to meet urgent capital requirement.
 High rate of interest is the negative
aspect of it.
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 Tax advantages
After evaluating both the benefits and disadvantages, it can be said that bank loan and
retained earnings are considered as best options for meeting of SMR’s financial requirement for
proposed expansion plans.
TASK 2
2.1
Each and every source of finance has some kind of financial cost like interest, dividend etc.
With regards to the selected sources for SMR’s expansion programme, its cost has been described
below:
Cost of debt: As stated earlier, that financial institutions provide loans at a lending (interest)
rate. Thus, interest payment will be the cost of debt capital for Sweet Menu Restaurant which it has
to pay during a fixed interval of time (Horngren, Sundem and Burgstahler, 2013). But still, tax
benefits are the benefits of such interest amount.
Cost of HP: Vendor of the assets also charges a interest rate while determining amount of
equal instalments. Henceforth, interest obligations will be the cost of hire purchase system.
Cost of retained earnings: It is the business profit that restaurant’s entrepreneur will invest it
for the establishment of two new branches to expand the business. It does not includes any cost like
interest, but still, opportunity cost exist which means that entity can gain return on these amount by
investing it in other profitable purpose.
Cost of trade credit: Suppliers will deliver services at some interest charges which are
regarded as the cost of trade credit facilities (Jackson, Keune and Salzsieder, 2013).
Cost of overdraft: Bank charges high rate of interest on overdraft facilities which is its cost.
Moreover, SMR also needs to pay the amount of overdraft on right time; otherwise, it will
negatively affect business reputation.
2.2
SMR is not only required to gather sufficient quantum of funds for expansion, but also, has to
manage collected funds appropriately so as to accomplish financial targets. In such respect,
restaurant has to prepare best financial plan to commence operations in both the new branches. It is
regarded as the process of determining financial need and making policies in relation procurement,
allocation, utilization, investment and administration of fund. This planning is of great importance
as it enables entities to make business financial strong, best plan assist entrepreneur to manage
financial risk and reach success. The significance of financial planning for SMR is outlined below:
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 Plan of monetary arrangement will assist entrepreneur in ensuring better execution of fund
related activities and operations.
 Revenue management is also an important advantage of financial management. It is because,
with the help of different types of budget, restaurant’s manager can determine that whether
they will have surplus or shortfall of cash (Brigham and Ehrhardt, 2013). This in turn,
appropriate decisions can be taken to minimize expenditures and maximize revenues to meet
goals.
 Effective money-based arrangement will provide great assistance to the SMR to accept
market challenges due to proper availability of funds. Moreover, it will also support further
expansion and growth plans and ensure long-run sustainability (Toth, 2015).
 Constructing best financial plan enable restaurant to effectively utilize their funding sources
and gain maximum yield to compete effectively.
 Comparison of the planned activities with actual outcome also helps restaurant’s manager to
identify the reasons for not achieving target goals (Poynton, Lapan and Marcotte, 2015)..
This in turn, they can overcome the limitations that they have done in past years and prepare
a suitable plan to accomplish targets.
2.3
Every commercial establishment have wide range of stakeholders, categorized in two parts
that are internal and external. They require some valuable information about company’s operations
to take qualitative decisions for different purpose, presenting here as under:
Shareholders: They take risk by investing their own money in the business so as to generate
more dividends. They require information about current investors return, growth prospectus, and
return on capital employed and increase in market price. Investors will only put their money in
SMR, if there is a possibility of getting higher return.
Creditors: Companies often purchase some proportion of inventory on credit from the
creditors/suppliers (Dhaliwal and et.al., 2014). Thus, they are interested in knowing liquidity
position and creditworthiness of the SMR, because they provided credit facilities to corporations
that are able to make deferral payments on right time.
Government: Regulatory authorities have some kind of stake in the business success. For
instance, taxation department aims in collecting appropriate amount of taxes on net corporate yield.
Moreover, regulatory bodies also aim in ensuring legality and ethnicity of SMR’s regular activities
and functions.
Lenders: Commercial banks and financial institutions need important information about
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restaurant’s debt burden capability, solvency, long-term financial risk, cash generating ability and
profit position. The main aim to examine this information is to assure loan security.
Employees: They are willing to put their efforts in that organization, in which, there is a
greater chance of growth and progress (Horngren, Sundem and Burgstahler, 2013). It is because;
workers are mainly aims at getting better hike in salary, appraisal, rewards and other benefits like
holidays, more responsibility, club membership etc.
2.4
Collection of fund through debt will increase the amount of long-term and loan and cash in
balance sheet from £31000 and £11000 respectively. On the other hand, interest payment will be
reported in profit and loss account and increase total interest payment from £10000. Its dual impact
will be reflecting on closing cash balance which will be decrease by the amount of interest payment.
However, instalment payment on hire purchase will be recorded in P&L a/c and also decline total
cash and bank balance. Moreover, payment of instalments along with interest will be subtracted
from cash position and result in lower return. On the contrary to this, use of retained profit will be
recorded in the statement of change in retained earnings only. Buying material on credit will
increase accounts payable in balance sheet whereas in P&L a/c, total amount of goods purchase will
be recorded resulting less net profit. However, on the other side, overdraft will be the part of short-
term liabilities and increase total cash balance under the head current assets. Whereas, interest
payment will be recorded as expenditures and at the same time, it will also decline net cash
position.
TASK 3
3.1
Commercial entities prepare cash budget through projecting cash inflows and outflows from
daily business operations. This budget is considered as useful managerial tool that assist entities to
determine their net cash position either surplus or deficit through subtracting total cash spending
from generated revenues. With regards to BIR, it can use budgets to evaluate their standard income
and expenses with actual results and thereby better decisions can be made to enhance overall
performance.
Changes in sales performance
Month Sales Percentage change Results
September 15000
October 13000 (13000-15000)/15000*100 -13.333333
November 15000 (15000-13000)/13000*100 15.384615
December 18000 (18000-15000)/15000*100 20
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Above table reveals volatile trend of sales as it is fluctuating at -13%, 15.38% and 20% in
October, November and December resulted total turnover amounted to £58000. Changing customer
attitude, preferences, competition level, pricing pressure and volatility in market demand may be the
reasons for this volatility. While, on the other hand, in the first month, total cash spending is very
high to £40850 is decreasing to £11630, £13230 and £24280. High capital expenditures to buy
furniture and fittings and van total amounted to £30000 is the main reason for excessive spending in
the initial month caused shortfall of (£25850). However, salaries and wages, petrol and insurance
expenditures remain constant to £7500, £280 and £350 whilst lighting and energy expenditures
shows increasing trend from £500 to £600 and £650. Cost of inventory purchase may be increase
due to high supplier charges or inflation. Along with this, trade payable budget depicts that 60% of
total purchase made on cash while rest is on credit for 1 month.
Decisions:
 Restaurant needs to control utility expenditures by switching off lights when not in use to
save power consumption (Rehan and et.al., 2015)..
 Recruiting required human force at affordable wages rate will also assist BIR to minimize
their spending, which in turn, result in high surplus.
 Inventory cost can be controlled by finding suppliers who are willing to supply quality
goods at cheaper rates.
3.2
The sum of money, comprising both direct and indirect expenditures that BIR incurred on
preparation of each unit of meal is known as unit cost. Being a restaurant, it incurs expenses on
steak, vegetables, ingredients, labour and other overheads (fixed and variable).
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Total cost (TC) = Direct cost (DC) + Indirect cost (IC)
Unit cost computation is also necessary to determine the selling price. In the cost-oriented,
also called cost-centric approach, BIR can add an appropriate profit mark-up in their total cost and
determine net selling price, computed below:
Items Cost (£)
Steak 3
Vegetables and other ingredients 1.5
Labor 3.5
Overheads 2
Meal cost 10
Value Added Tax 2
Mark-up 4
Selling price 16
Food cost % = (Total cost / Selling price)*100
= (10/16)*100
= 62.5%
According to the table, it can be seen that cost per unit of meal is £10 and at 40% mark-up
and 20% VAT, selling price will be £16. While, on the other hand, its cost percentage on sales price
is 62.5%.
3.3
Many-times, businesses have to make capital investment in fixed assets such as acquisition of
machinery, plant and building and advanced technology etc. Every capital projects is associated
with both the risk and return, therefore, it is important for the companies to examine potential return
of all the projects and thereby determine the most suitable ones (Dellavigna and Pollet, 2013).
According to the scenario, BIR available an empty space in its one branch which it can use to
expand the production of ready meals supplied to local supermarkets. In this respect, two projects
are available to the restaurant, both are mutually-exclusive but BIR can adopt only one of these.
Thus, it becomes essential for the restaurant to determine the best project through applying various
investment appraisal techniques, done below:
Payback period: It refers to the length of time which BIR requires to get back initial cash
outlay worth £1200 through generating cash flows over the project life. The best benefit of this
method is to it helps to identify the time lag in which project cost can be recovered ( Bierman and
Smidt, 2012). However, on the other side, it does not pay attention to the time value of money and
also do not consider cash flows beyond payback period (PP). As per this method, shorter PP is
considered suitable and highly preferred by others.
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Year Proposal 1 Cumulative cash
flows
Proposal
2
Cumulative cash
flows
1 800 800 300 300
2 600 1400 500 800
3 400 1800 600 1400
4 200 2000 600 2000
5 50 2050 500 2500
Residual value Nil 2050 50 2550
PP (A) = 1 year + (£1200 - £800)/ £600
= 1.67 year
PP (B) = 2 year + (£1200-£800)/ £600
= 2.67 year
Net present value: This method use discounting to determine the present value of forecasted
cash flows over the future period. It is because; NPV believes that having today a sum of money is
worth more than receiving the amount in future due to inflation (Grob, 2013). Thus, this capital
budgeting technique makes use of an appropriate discounting factor to identify the present value of
projected cash flows and subtract the total of it to find out the NPV. As per the method, project that
has highest NPV is considered the most viable (Andor, Mohanty and Toth, 2015).
Year Proposal
1
Proposal
2
Discounting
factor
Present value
(A)
Present value
(B)
1 800 300 0.9091 727.2727 272.7273
2 600 500 0.8264 495.8678 413.2231
3 400 600 0.7513 300.5259 450.7889
4 200 600 0.6830 136.6027 409.8081
5 50 500 0.6209 31.0461 310.4607
Residual
value
0 50 0.6209 0.0000 31.0461
Total present value 1691.3152 1888.0541
Initial investment 1200 1200
Net present value 491.3152 688.0541
Recommendation:
By taking into account derived output, it can be seen that payback period of proposal 1 is
comparatively less to 1.67 year whereas NPV is higher in another proposal to £688.0541 which
indicates that project B has greater chance of more return in future period. BIR can be advised to
accept 2nd proposal because NPV is considered as best technique which provides more realistic
results about net project yield. Thus, by investing amount worth £1200 in this proposal, restaurant
can gain maximum return of £688.0541.
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TASK 4
4.1
Every business entity needs to measure their operational success timely so that they can
examine their strength and weakness as well. Moreover, financial statements also deliver credible
and valuable information to various stakeholders like investors, creditors and lenders.
Statement of comprehensive income (SOCI): It is also called profitability statement, in which,
information has been recorded about routine business expenditures and revenues, prepared on
accrual accounting concept. The main objective of SOCI is to determine gross profit and net profit
of the business, calculated through using following formula:
Gross profit = Turnover – Cost of goods sold
Net profit = Total revenues – Total expenditures
Statement of financial position (SOFP): BIR and SMR needs to prepare balance sheet at the
end of every accounting year, in this, entity record their assets as well as liabilities (Deegan, 2013).
This statement is of huge importance to determine the financial position or strength by examining
solvency and, liquidity position.
Assets = Liabilities + Owner’s capital
Owner’s capital = Assets – Liabilities
Statement of cash flows (SOCF): SOCI records income and spending on accrual concept
whereas SOCF take into account only cash inflows and outflows from operating (routine
functioning), investing (purchase and disposal of fixed assets) and financial activities (collection
and repayment of debt and equity capital) (Edwards, 2013). Restaurant can prepare this statement to
determine the reasons for having distinguished cash funds at the end of two different financial
years.
4.2
With regards to preparation of financial statements, there is not high level of legal
compulsion on sole trader and partnership organizations. Sole trader contributed their own capital,
do business himself/herself and gained profit or loss through operations. They prepare SOCI, SOFP
and SOCF by taking into account UK Generally Accepted Accounted Principles (GAAP) and
conventions. While, on the other hand, in partnership, all partner’s contributed their money and run
operations by putting their combined efforts. Moreover, they receive interest on capital (IOC) as a
return for their money invested. These organizations prepare profit and loss appropriation account
to share total business profit among all in decided ratio whilst capital account is prepared to
determine the capital contribution of each partner (Deegan, 2013). They follow UK GAAP,
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accounting concepts and principles along with partnership act legislations. Besides this, large sized
companies do operations at wider scale and also have number of internal as well as external
stakeholders. They are legally liable to comply with Company Act, 2006, UK GAAP, International
Accounting Standard (IAS) and International Financial Reporting Standard (IFRS) (Pratt, 2013).
Through complying with all the laws and regulations, it can deliver credible and authentic
information to the users. Along with this, CA, 2006 also impose legal obligations to the companies
to verify their accuracy of financial statements through an independent auditor to communicate
information about their financial position to bank, investors and taxation authority.
4.3
In the actual market place, companies not only need to prepare their annual accounts but also
require evaluating and comparing their own performance with that of competitors so that more
qualitative decisions can be taken. Ratio analysis is an effectual way to compare financial strength
and operational results both internally and externally, done here as under:
Ratio Formula SMR BIR
Profitability ratios
Gross profit 222500 198000
Net profit 85000 94800
Sales 350000 299000
Gross margin Gross profit/sales*100 63.57% 66.22%
Net margin Net profit/sales*100 24.29% 31.71%
Liquidity ratio
Current assets 68000 41000
Current liabilities 38000 65000
Inventory 44000 31000
Current ratio Current assets/current liabilities 1.79:1 0.63:1
Quick ratio (Current assets-Stock)/Current
liabilities
0.63:1 0.15:1
Efficiency ratio
Total assets 233000 188000
Debtors 13000 5000
Assets turnover ratio Turnover/total assets 1.50 1.59
Receivable turnover
ratio
26.92 59.80
Solvency ratios
Debt 31000 5000
Equity 164000 118000
Debt-equity ratio Long-term debt /total share capital 0.19 0.04
EBIT 116000 126800
Interest 10000 3000
Interest coverage ratio EBIT/Interest expenditures 11.6 42.27
Profitability narratives:
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Gross margin: This ratio indicates restaurant’s ability to generate over total sales. SMR and
BIR has GM to 63.57% and 66.22% respectively, thus, it is higher in BIR demonstrating that this
restaurant is generating more return on their total turnover. Greater turnover to £225,000 and less
cost to £85000 is the main reason behind high profitability in BIR.
Net margin: It indicates overall profit generating capacity on total turnover (Kumbirai and
Webb, 2013). BIR has high NM to 31.71% than SMR’s ratio of 24.29%. Ratio reflects that BIR is
performing much well in the market because it is generating larger return on their total sales.
Effective control over indirect expenditures is the main reason behind this.
Liquidity narratives:
Current ratio: It indicates relationship between current assets and current liabilities helps to
measure business ability to pay short-term liabilities (Karande and Chakraborty, 2012). It is higher
in SMR to 1.79:1 and also more nearest to idle ratio of 2:1 depicts that it is highly able to make their
deferral payments on time.
Quick ratio: This ratio measure liquidity position without considering closing inventory
balance. Greater ratio in SMR to 0.63:1 reveal that it is able to meet their short-term liabilities
timely, but still, it is far away to standard ratio of 1:1, henceforth, it can be advised to enhance their
CA and pay off some creditors to reach idle level.
Efficiency narratives:
Assets turnover ratio: It measures management capability to use corporate assets to generate
more sales (Karande and Chakraborty, 2012). High ratio in BIR to 1.59 reflects that managers are
effectively and optimally utilize their assets to generate larger revenues.
Receivable turnover ratio: It measure business ability to generate cash from debtors. BIR’s
ratio is almost 2 times of SMR to 59.80 which is a sign of excellent management efficiency to
generate revenues quickly from accounts receivable.
Solvency narratives:
Debt-equity ratio: It indicates the ratio of long-term debt and shareholder’s capital in total
capital employed, high ratio depicts more risk or vice-versa. SMR and BIR have D/E ratio of 0.19:1
and 0.04:1 indicates that SMR has managed its capital structure through the composition of both
debt and equity. But still, it should be reached to the level of 0.5:1 that is considered as idle.
Interest coverage ratio: It indicates debt burden capacity of the firm so as to meet their
capital requirement through collection of long-term borrowings. It is comparatively greater in BIR
to 42.27 that demonstrate that it is highly able to take external borrowings through bank and thereby
meet their capital need.
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CONCLUSION
After evaluating the report, it can be concluded that debt fund and retained profit are identified
the most suitable and appropriate source for funding SMR’s expansion plan. Moreover, report
identified the fact that budgeting is of huge importance for the financial planners to administrate
and effectively manage their money-related activities. While, application of project evaluation
methods identified 2nd proposed more viable, hence, BIR must invest funds in this project. At the
end, comparative evaluation of financial performance of SMR and BIR examined that BIR is
performing much well in the market whereas liquidity and solvency position of SMR is much better
reflected that it is able to pay their creditors and lenders on right time.
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