Financial Ratio Analysis (2012): Comparison between Sweet Menu and Blue Island

The financial analysis suggests that Sweet menu is better than Blue Island. The quick ratio, debt equity ratio, and debt to assets ratio all indicate a stronger financial position for Sweet menu compared to Blue Island. In contrast, Blue Island has a higher return on equity (ROE) but this does not compensate for its weaker overall financial performance.

MANAGING FINANCIAL
RESOURCES AND DECISON
MAKING

TABLE OF CONTENTS
Introduction ...............................................................................................................................3
Task 1.........................................................................................................................................3
1.1 Sources of finance available to Sweet Menu Restaurant Ltd. ........................................3
1.2 Implications of sources of finance ..................................................................................4
1.3 Appropriate sources of finance........................................................................................5
TASK 2 ....................................................................................................................................5
2.1 Cost of different sources of finance.................................................................................5
2.2 Importance of financial planning.....................................................................................5
2.3 Information needs of different decisions makers............................................................6
2.4 Impact of sources of finance on the firm financial statements........................................6
TASK 3......................................................................................................................................7
3.1 Analysis of budget...........................................................................................................7
3.2 Calculation of meal cost..................................................................................................8
3.3 Project evaluation techniques..........................................................................................8
TASK 4......................................................................................................................................9
4.1 Main financial statements................................................................................................9
4.2 Financial statements of different business.....................................................................10
4.3 Ratio analysis.................................................................................................................16
CONCLUSION........................................................................................................................18
REFERENCES.........................................................................................................................19
INDEX OF TABLES
Table 1: Implications of sources of finance...............................................................................4
Table 2: Income statement.........................................................................................................6
Table 3: Balance sheet as at 31 December, 2014.......................................................................7
Table 4: Analysis of budget........................................................................................................7
Table 5: Calculation of unit cost................................................................................................8
Table 6: Calculation of payback period.....................................................................................8
Table 7: Calculation of NPV......................................................................................................9
Table 8: Ratio analysis of Sweet menu and Blue Island restaurant.........................................16

INTRODUCTION
An efficient management of financial resources is considered to be highly important
for determining the success of an organization. It is essential for the business unit to
efficiently manage and administer the financial resources. The organization should conduct
an in-depth evaluation of various sources of finance so as to select the most suitable one.
Moreover, it is essential for the organization to judge the viability of various projects before
making investments into the same. The report proposed herewith emphasizes on identifying
ways through which financial resources are managed in an efficient manner within the
organization. It is through analysis of various cases that the monetary decisions within the
business unit are evaluated.
TASK 1
1.1 Sources of finance available to Sweet Menu Restaurant Ltd.
Sweet Menu restaurant ltd. is a reputed restaurant unit that is conducting its operations
at Gants Hills in East London. Management of the restaurant unit is planning to expand its
operations in Central London and Croydon. Henceforth, the organization requires additional
investment of £300,000 and £500,000. Different sources of finance are available with
business unit for the acquisition of required funds which are discussed underneath in detail. Bank Loan: The restaurant can acquire required funds by availing bank loan facility.
The financing option helps in easy acquisition of funds on regular payments of
nominal interest amount (Adams, 2003). It is suitable for financing all kinds of
business requirements such as long-term, short-term and medium-term. Issue of debentures: Every business unit has an option to raise debentures for
acquisition of funds. The debt fund helps in acquisition of large amount of funds for
required duration. Issue of equity capital: The restaurant unit can issue equity shares so as to meet its
capital requirements for long-term. It is through issue of equity capital that the
business unit is able to acquire any amount of funds required to support operations
and expansion plans.
 Retained earnings: It refers to the part of profit that remains after deducting all
expenses form the cash inflows of the business. This is an internal source of finance
and cost free in nature (Beddow and Cohen, 2003). Due to these roans every sort of
firm irrespective of its size uses this source of finance to fund its operations.

1.2 Implications of sources of finance
Following are implications of sources of finance for business
Table 1: Implications of sources of finance
Source of finance Advantages Disadvantages Legal Cost
Bank loan No dilution of
control of owners
in the company
Needs to
mortgages assets
and in case of
default bank may
file a case
against the firm.
This will tarnish
company image
among the
stakeholders
(JKirigia and
et.al, 2008).
Needs to
complete some
paper formalities
in order to take
loan from bank
Interest charged
on loan is a cost
of source of
finance
Debentures Control is not
reduced in the
firm
Necessary to pay
interest on time.
Hence, in case of
weak financial
position debt
burden on the
firm get
increased.
Require to take
permission from
any regulatory
authority.
Interest paid on
debentures is a
cost of this
source of
finance.
Equity No fixed finance
cost for the firm
Loss of control
on the firm
Needs to fulfil
certain criteria’s
determined by
the regulatory
authorities.
Dividend paid on
shares acts as
cost this source
of finance.
Retained
earnings
As a source of
finance is
instantly
Due to lack of
proper planning
retained earnings
No rules and
regulations are
applicable on use
Opportunity cost
is assumed as
cost of this

available is not use in most
productive
manner (Kung,
Huang and
Cheng, 2013).
of this source of
finance
source of
finance.
1.3 Appropriate sources of finance
Issue of shares will be appropriate for the firm because currently business conditions s
are uncertain and due to this reason finance cost of the firm get increased. This happen when
debt is taken at the fleeing interest rate. If firm will further takes a loan then interest burden
on the firm will increase (Lindholm and Suomala, 2007). On other hand, if shares are issued
then firm will be in position to control its finance cost. However, control of owners of the
company owners will get diluted in the firm. But substantial part of shareholding will remain
in their hands. Do there is no problem in issuing shares.
TASK 2
2.1 Cost of different sources of finance
Cost of aforementioned source of finance is as follows. Bank loan- Under this interest is charged on the loan taken by the firm. Interest rate
may be taken at fixed of floating interest rate. If loan is taken at floating rate then it
can book profit or loss. If interest rate changes in inverse direction then finance cost
of the firm will elevate (Lindholm and Suomala, 2007). Thus, it is advisable to the
companies that they must take loan at fixed interest rate. Debentures- In this case also interest is charged on the Principe amount. Interest rate
remains same in all durations. Hence, unexpected elevation in finance cost does not
occur like we see in case of bank loan. Equity- Dividend paid on shares and share issue expenses are treated as cost of raising
finance from this source of finance (Northcott and Llewellyn, 2002). Rate of dividend
are always higher then rate of interest. But is also gives lots of benefits to the firm in
terms of finance cost.
 Retained earnings- There is no cost of raising finance from this source of finance.

2.2 Importance of financial planning
There is a great importance of financial planning because be perorating a plan
resources are used in efficient and effective manner. Sweet menu wants to commence their
operations in two geographical areas. Hence they needs to determine the activities that they
will need to perform in order to open these new branches. In this regard firm will need to buy
land and building construction material (Pacini, Qiu and Sinason, 2007). Due to limited
financial resources firm will give a weight age to land, building construction, furniture and
fixtures and employee cost in its entire budget. This weight age will be given by keeping in
mind priorities. In this way financial plan will help in making best possible use of scarce
resource.
2.3 Information needs of different decisions makers
Following are the entities that need financial information of the firm for taking
different decisions. Managers – These are those people which perform day to day management functions
and formulate a strategy. In order to prepare a perfect tactics managers needs financial
information. By using this information’s they identify areas where they needs to focus
(Payne, 2006.). Hence, in this way financial information’s supplement management
decisions. Creditors/ banks- These entities give a loan to the firm. Hence they need information
in order to identify that firm will be able to repay their loan amount or not. On the
basis of such kind of information they make further prepare their cash management
strategies.
 Government- It also needs financial information in order to identify whether company
is paying a tax on time (Prakash, 2015). Hence, due to this reason income tax
department gives a due importance to the firm financial data.
2.4 Impact of sources of finance on the firm financial statements
Table 2: Income statement
Revenue 350000
Less: Cost of Sales 127500
Gross profit 222500
Less:
Administration expenses 92000

Selling and distribution expenses 14500
Operating profit 116000
Interest 10000
Profit before tax 106000
Tax 21000
Profit after tax 85000
Proposed dividend 80000
Retained profit for the year 5000
Table 3: Balance sheet as at 31 December, 2014
NON-CURRENT ASSETS
Equipment 75000
Delivery vans 52000
Furniture and fittings 38000
165000
CURRENT ASSETS
Inventories 44000
Receivables 13000
Cash and banks 31000
88000
CURRENT LIABILITIES
Payables 38000
Net Current Assets 50000
Net Assets 195,000 215000
EQUITIES
60,000 ordinary share capital @ £1
per share 60,000 80000
Revenue reserves 104000
NON-CURRENT LIABILITY
Long -term loan 31000
Net Assets 195,000 215000

Number of shares issued are 20,000 at £1. Hence share capital in balance sheet increases and
cash is received by issue of shares. Due to this reason cash and bank balance on balance sheet
also increased. Hence, issue of shares bring changes in the assets and liabilities of the balance
sheet.
TASK 3
3.1 Analysis of budget
Table 4: Analysis of budget
September October November December
Cash sales 15000 13000 15000 18000
Salaries 7500 7500 8500 9000
Lighting and energy 500 600 650
Insurance 350 350 350 350
Purchase 3000 3000 3500 4000
Cash sales percentage change -13.33% 15.38% 20.00%
Salaries percentage change 0.00% 13.33% 5.88%
Lighting and energy percentage
change 20.00% 8.33%
Insurance percentage change 0.00% 0.00% 0.00%
Purchase percentage change 0.00% 16.67% 14.29%
Interpretation
In order to analyse budget percentage method is used. In this major items of the
budget are taken. On analysis of data it has been seen that cash sales percentage is growing
sharply. In the month of October it is negative but after that in upcoming months cash sales
increases which is positive sign. Salaries get changed in November month by 13.33% and
after that it grows only by 5.88%. This shows that firm has sufficient HR in its organization.
Lighting percentage was high in the month of November but its growth rate biome slow in
the month of December. Same trend is observed in case of purchase. This reflects that firm is
estimating that in upcoming months sales my decline and due to this reasoned are following a
cautious approach in its business. This indicates that firm manager foresight power is
excellent. On analysis of trade repayable budget it can be seen that with increase in purchase
firm credit purchase also increase. However, in the month of December credit purchase grow

at a slow rate. This again proved a hunch that firm is following a cautious approach in a
business.
3.2 Calculation of meal cost
As information given in the question that sales price of meal is £ 16 and cost is £ 10.
In question file it is mentioned that there is a 40% mark up cost of the product and VAT of
20% is further deducted from the £ 16. By deducting these percentages from sales price of
meal final price is computed.
Table 5: Calculation of unit cost
Meal price 16
Less
40% Mark-up pricing 6.4
20% VAT 3.2
Final price (Mark up pricing +VAT) 9.6
In this way unit cost for the product is computed at Sweet menu restaurant.
3.3 Project evaluation techniques
Table 6: Calculation of payback period
Project A Project B
Initial
investment -1200 -1200
1 800 -400 300 -900
2 600 200 400 -500
3 400 600 500 0
4 200 800 600 600
5 50 850 550 1150
Interpretation
Payback period indicate the time period with in which project recover its investment
amount. From figures it can be seen that project A can recover investment amount in one
year. Whereas, project B can recover investment amount in two years. Hence, on the basis of
this parameter it can be said that project A is more viable then project B.
Table 7: Calculation of NPV
Project A Pv @10% Present value Project B PV @10% Present

value
Initial
investment 1200 1200
1 800 0.909 727.2 300 0.909 272.7
2 600 0.826 495.6 400 0.826 330.4
3 400 0.751 300.4 500 0.751 375.5
4 200 0.683 136.6 600 0.683 409.8
5 50 0.62 31 550 0.62 341
6 0.565 0 0
Total 1690.8 1729.4
NPV 490.8 529.4
Interpretation
NPV indicate present value of the project that remains after deducting initial
investment value from present value of the project cash inflows (What is NPV. 2015). NPV of
both projects are positive and here also project B is ahead of A. On this basis again project B
is considered more viable then project A.
NPV is higher in case of project B. Due to this reason this project is considered viable
then project A. However, in this project one year extra will be required to cover investment
amount. But return on investment is also high in case of this project. Hence, this project is
selected for Blue Island restaurant.
TASK 4
4.1 Main financial statements
Major financial statements are as follows. Income statement- This statement indicate the firm revenue and costs that are earned
and incurred during a year. These are also components of an income statement. On the
basis of this statement managers came to know about areas where they make
extravagance (Roden and Dale, 2000). Balance sheet- This statement indicate the firm financial position at the end of the
financial year. Current and fixed assets are major components of assets side of the
balance sheet. On other hand current and long term liability is another important
component of the liabilities side of the balance sheet. At the end of the balance sheet
values of assets and liabilities always remain same.

 Cash flow statement- In this statement all cash inflows and outflows are recorded
(Salvino, Tasto and Randolph, 2014). These cash flows are classified in to operating,
investing and finance activities of the firm. These are also major components of the
cash flow statement.
4.2 Financial statements of different business
Illustration 1: Company income statement

Illustration 2: Balance sheet of the company

Illustration 3: Cash flow statement of company

Illustration 4: Income statement of sole trader

Illustration 5: Balance sheet of sole trader
Illustration 6: Cash flow statement of sole trader

Illustration 7: Income statement for partner

On analysis of income statements of mode of business it can be said that format is
same in all cases but items showed in their income statement vary from each other. Company
(Sedevich-Fons, 2014). But in case of sole trader format is simple. Whereas, in case of
partnership these assets and liabilities are divided among the partners at the end of the
statement. Format of cash flow statement is same in case of all mode of business the only
difference is that in different items are shown in case of different mode of business.
4.3 Ratio analysis
Table 8: Ratio analysis of Sweet menu and Blue Island restaurant
Sweet menu
restaurant
Blue island
restaurant
Gross profit 222500 198000
Net sales 350000 299000
Gross profit ratio 63.57% 66.22%
Net profit 85000 94800
Net sales 350000 299000
Illustration 9: Cash flow statement of sole trader

Net profit ratio 24.29% 31.71%
Current assets 68000 41000
Current liabilities 38000 65000
Current ratio 1.78 0.63
Quick assets 24000 10000
Current liability 38000 65000
Quick ratio 0.63 0.15
Debt 31000 5000
Equity 60000 35000
Debt equity ratio 0.51 0.14
Debt 31000 5000
Assets 195000 123000
Debt to assets ratio 0.15 0.04
Net income 85000 94800
Equity 60000 35000
ROE 141.67% 270.86%
Sales 350000 299000
Inventory 44000 31000
Inventory turnover ratio 7.95 9.65
Interpretation Gross profit ratio- This ratio of the Blue Island is higher than Sweet menu restaurant
and this indicates that former restaurant has good control on direct expenses then
latter restaurant.

 Net profit ratio- This ratio of Blue Island is greater than Sweet menu restaurant and
this shows that former firm control indirect expenses in efficient and effective manner
then later firm. Current ratio- This ratio indicates the firm ability to pay current liability by using
current assets. This ratio is higher in case of Sweet menu then Blue Island (Financial
Ratio Analysis. 2012). Means that liquidity position of Sweet menu is better than Blue
Island. Quick ratio- In case of quick ratio sharp difference comes in case of both companies.
This is because stock in current assets is very high in case of Blue Island then Sweet
menu. Debt equity ratio- This ratio indicate the firm capital structure. This ratio is higher in
case of Sweet menu restaurant then Blue Island. Hence, it can be said that financial
condition is good in case of Sweet menu restaurant then Blue Island. Debt to assets ratio-This ratio reflect the firm ability to pay debt using assets
(Shahrokhi, M., 2008). This ratio is high in case of Sweet menu restaurant then Blue
Island. Hence, it can be said that Sweet menu restaurant has higher debt payment
capacity relative to Blue Island. ROE- This ratio indicate the return that a firm is earning on the equity. This is very
high in case of Blue Island. Hence, it can be said that Blue Island is giving good
return to its shareholders relative to Sweet menu restaurant.
 Inventory turnover ratio- This ratio indicates the number of times a stock turned over
to generate sales. Higher turnover ratio is assumed good for the firm. Hence, Blue
Island is in better condition than Sweet menu restaurant.
CONCLUSION
On the basis of above discussion it is concluded that firms must select an appropriate
source of finance in order to finance their projects. Moreover, projects must not be selected
randomly merely by looking at the project cash inflows. Project evaluation techniques must
be applied by the mangers for selecting appropriate project for the business. Managers must
use ratio analysis technique in proper manner and with negative change in ratios they must
formulate a strategy.

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