Financial Analysis of Blue Island Restaurant

The assignment focuses on a financial analysis of a restaurant called Blue Island. It involves analyzing the restaurant's cash flow, evaluating its viability through investment appraisal techniques, and comparing the financial positions of two restaurants by calculating various financial ratios.

MANAGING FINANCIAL
RESOURCES AND DECISION

Table of Contents
MANAGING FINANCIAL RESOURCES AND DECISION ......................................................1
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Sources of finance ................................................................................................................1
1.2 Implication of sources of finance..........................................................................................2
1.3 Suitable sources of finance for Sweet Menu restaurant........................................................3
TASK 2............................................................................................................................................3
2.1 Cost of sources of finance.....................................................................................................3
2.2 Importance of financial planning to Sweet Menu restaurant................................................4
2.3 Information need by different decision maker......................................................................4
2.4 Impact of sources of finance on financial statements...........................................................5
TASK 3............................................................................................................................................6
3.1 Analyses of cash budget and necessary decisions.................................................................6
3.2 Calculation of Unit cost........................................................................................................6
3.3 Viability of two proposal .....................................................................................................8
TASK 4............................................................................................................................................9
4.1 Financial statements..............................................................................................................9
4.2 Financial statements prepared by different organisation....................................................10
4.3 Analyse of financial statements by calculating various ratios............................................10
CONCLUSION..............................................................................................................................11
REFERENCES .............................................................................................................................13

INTRODUCTION
Finance is the branch of economic that is mainly concerned the management, allocation
of resources and capital (Barnes and Pancost, 2010). Management of finance help the company
in maintaining a balance between inflow and outflow of cash that takes place within and outside
the business organisation. Moreover, in the following report two restaurant have been considered
(i.e Sweet Menu which is suited in Gants Hill of East London and the other is Blue Island
restaurant whose financial position has been compared).
In this report, various sources of finance has been identified for Sweet Menu restaurant
along with its implication. In addition to this, the cost that will be incurred by the company at the
time of using various sources. Along with this importance of financial planning of Sweet Menu
has also been discussed. In the following report, cash budget of Blue Island restaurant has been
analysed in order to find out its flow of cash. In addition, viability of the proposal given is
identified by using investment appraisal techniques. At last financial statements of both the
companies are analysed in order to conclude its financial position.
TASK 1
1.1 Sources of finance
INTERNAL SOURCES OF FINANCE
Sale of assets This is one of the beneficial method that can be used by Sweet Menu in order
to raise its capital. By using this method, restaurant will be raising funds by
selling out the old and obsolescent assets that is of no use.
Retained profit It is a part of profit that is kept by the company out of the revenue earned at
the end of the financial year. Retained profit is kept by the restaurant in order
overcome certain contingencies (Bhowmik and Saha, 2013).
EXTERNAL SOURCES OF FINANCE
Bank loan This can be said as one of the simplest method that can be used by Sweet
Menu in order to raise its capital. By using this method, company can
borrow funds from the bank for a predetermined time period by submitting
the collateral security.
Issue of shares This is another way through which Sweet Menu restaurant can raise large
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amount of capital within a short period of time. In this method, firm issue
shares to the general public and collect funds from them which they may not
require to pay back.
1.2 Implication of sources of finance
Sources Legal aspects Cost Suitability
Sale of assets Sweet menu restaurant
is required to take
legal procedure into
consideration at the
time of selling assets.
By using this method,
Sweet Menu can be
able to meet its
financial needs but at
the same time assets of
the company will also
decrease.
This method is suitable
for meeting short term
requirements. Because
business is required to
follow a set limit by
the board of directors
in regard to the sale of
assets.
Retained profit As the law, every
organisation is
required to keep
certain amount of
profit as a reserves
with them. In lieu of
which Sweet menu
restaurant will be able
to overcome
uncertainty.
By using this source
Sweet Menu will be
able to meet its
financial needs at that
particular time
(Brigham and Daves,
2012). But afterwards
they may not be able
to overcome
uncertainty that can
occur in future.
This source is suitable
for the Sweet Menu
restaurant in order to
overcome uncertainty.
In addition, this
method can also be
used by the company
to expand its business
unit.
Bank loan If Sweet Menu is not
able to repay the
amount of loan taken
by them from bank
than in that case bank
Debt of the company
may increase if they
move on with this
method because
company is required to
This method is suitable
for expanding the
business units.
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has the right to cease
the assets of the
company.
pay high interest rate
to bank.
Issue of shares If company issues the
shares then they are
required to give voting
rights to the
shareholders. In
addition to this
company is also
required to pay
dividend.
Sweet Menu restaurant
is required to pay
dividend to the
individual to whom
they have issued the
shares.
This is also one of the
best method that can
be used by the
company in order to
start up a new business
or to expand it.
1.3 Suitable sources of finance for Sweet Menu restaurant
In accordance to the above implication it can be suggested that Sweet Menu
restaurant should move onto Bank loan, As it is one of the best methods that can be used by the
Sweet Menu to expand the business bank are always ready to provide loan to the companies in
order to meet their financial requirement (Cetorelli and Strahan, 2006). Bank charges, rate of
interest on the loan given by them but the amount of interest is less as compared to any other
financial institutions.
By using this source Sweet Menu is able to avail tax benefits. In addition to this,
restaurant is not required to repay the whole amount of loan at a time, they can repay it as per
there requirement. Payment in instalment reduces the financial burden of the business.
TASK 2
2.1 Cost of sources of finance
Sweet Menu restaurant has taken into consideration the two source to expand its business.
They have preferred to use bank loan and retained profit as sources to raise their finance level.
But in order avail these sources, corporation is required to bear financial and opportunities cost.
Both these cost creates an impact on profitability and growth of the company.
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Opportunities cost: - Opportunity cost is the cost that needs to be incurred by the
company at the time of selection of one best alternative against another (Chandra, 2011). For
instance, if they move on retained profit than in this case company may not be able to pay
dividend to its shareholder at the time of loss. In addition to this, Sweet Menu restaurant may not
be able to overcome any of its uncertainties that can occur in future.
Financial cost: - Bank and other financial institution changes high rate of interest on the
funds given by them in order to increase its financial assistance. This in turn reduces the
financial cost of the company. Along with interest, Sweet Menu is also required to repay the
amount of money borrowed by them. Moreover, this affects the liquidity and profitability ratio of
the firm.
2.2 Importance of financial planning to Sweet Menu restaurant
Financial planning is the activity which assist Sweet Menu restaurant to make various
necessary decisions in order to generate more profit and move the business towards growth.
Some of the importance of financial plannings are listed below:-
 Financial planning of all the activities in advance help the Sweet Menu restaurant to
utilize the available resources upto full extend. Wastage of resources can also reduce.
This in turn will help to avoid the condition of surplus and deficits (Dontoh, Ronen and
Sarath, 2008).Economic planning in advance will assist the Sweet menu to anticipate its
future sales and growth. In addition to this, business entity will be able to forecast its
financial requirement that can occurs in future.
 Planning of all the activities in advance will aid the Sweet menu to properly coordinate
all the activities that are taking place within an organisation. In lieu of this company will
be have the deeper knowledge of the funds that are required by each and every
department.
2.3 Information need by different decision maker
Shareholders: - Shareholder are the one who invest in the company with an aim of
generating high rate of return on investment. These shareholder prefer financial statements of the
company in order to determine whether they should spend their saving in the business or not
(Eccles and Holt, 2005).
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Employees: - Employees are the one who work for the betterment of the company. They
only want that the firm should pay them fair wages. In lieu of this, prefer to see the income
statements of the company.
Manager: - Managers works for the development of the company (Vitez, 2014). They
take into consideration all the financial statements in order to develop various strategies for the
growth of the enterprise.
Government: - They are the one who work for the welfare and betterment of the society.
They prefer financial statements in order to analyse the economic position of the company and to
calculate the amount of tax needed to be paid bythem.
Suppliers: - They are the one who supply raw material to the firm. They simply want that
company should make payment to them on time of the goods supplied by them. In lieu of this,
they opt to see the income statements and balance sheet of the business.
2.4 Impact of sources of finance on financial statements
Sale of assets: - Entry of sale of assets will be made at the assets side of the balance sheet
and the same amount will be deducted from particular asset (Hursti and Maula, 2007). In
addition to this entry of profit earned or loss suffered by the company at the time of selling the
asset, will be recorded in profit and loss account.
Retained profit: - Entry of reserve kept by the company as retained profit which will be
made on equity side of the balance sheet under the head of share capital.
Bank loan: - Entry of bank loan will be made under the head of current liability in
balance sheet. Because bank loan is debt for the company. In addition to this interest paid by
them against the bank loan will be recorded at debit side of income statement.
Issue of shares: - Entry of issuing equity shares will be made under the head of share
capital in balance sheet (Sabău, 2013). Along with this entry of dividend paid to the shareholders
will be recorded at debit side of the income statement.
TASK 3
3.1 Analyses of cash budget and necessary decisions
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From the following analysis it can be concluded that financial position of Blue Island
restaurant is not good. Its flow of cash is constantly changing. It is seen that in the month of
September and December expenses made by the company were more than its income earned.
Firm income for both the months was 15000 and 20000 respectively while on the other hand
expenses made by the company were 40850 and 24280 which is almost double to that of the
income earned. Likewise, income earned by the business in the month October and November
was 15500 and 18000 respectively which is more than the expenses made by them. Its
expenditures for this month is 11630 and 13230 respectively.
This in turn point out that Blue Island is not able to negotiate its financial resources
properly. The main cause behind this could be that company is able to prepare various strategies
in order to maintain a balance between flows of cash. Therefore, at last it is suggested that in
order to overcome this problem, company should develop various strategies in an effective
manner.
3.2 Calculation of Unit cost
Unit cost is per unit cost of the product that is incurred by the company at the time of
manufacturing (Mayer, Schoors and Yafeh, 2005).
Calculation of unit cost is as follows:-
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Illustration 1: chart showing the inflow and outflow of cash

Unit cost = Direct cost per unit +Indirect cost per unitDirect costs or variable cost: streak(s) =
3Vegetables (v) = 1.5 Labour (l) = 3.5
(Total S+V+L = 8)
Indirect cost or fix cost=2 (overhead)
Mark-up =40%
Cost = 100%
Mark up = 40%
Selling price = 140%
Name of Units Costs (In £)
Steak(direct) 3
Vegetables and other ingredients(direct) 1.5
labour(direct) 3.5
Overheads (indirect) 2
Total Costs 10
Mark Up (40%) 4
VAT (20%) 2.8
Price to charge customer 16.8
Currently changing 16
VAT
Price exclusive VAT (Net) = 100%
VAT = 20%
Selling price inclusive (gross) =120%
Food cost percentage= Total costs of ingredients/sales price
Food cost percentage = Total costs of ingredients/Sale prices
Food cost percentage = 10£/16.8 £*100
Food cost percentage = 59.52%
Loss percentage on sales = Loss/sales prices*100
Loss percentage on sales = 6.8£/16.8£*100
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Loss percentage on sales =40.47%
As per the above calculation it can be concluded that total cost of the product including
mark-up value and VAT is £16.8. But, Blue Island restaurant charges only £16. This indicates
that company is facing loss of £0.8 on per customer. Thus, the percentage of cost of sales is
59.52% and Loss percentage is 40.47%.
3.3 Viability of two proposal
Payback Period:
Proposal 1 Proposal 2
Year Cash Inflow
Cumulative
inflow Cash Inflow
Cumulative
inflow
0 -£1,200 -£1,200 -£1,200 -£1,200
1 £800 -£400 £300 -£900
2 £600 £200 £400 -£500
3 £400 £600 £500 £0
4 £200 £800 £600 £600
5 £50 £850 £500 £1,100
Residual
Value £0 £850 £50 £1,150
Payback
Period 1.5 Years 3 Years
Payback period method is the method used by the company in order to find out the time
period after which they will be able to recover there money invested. on the capital invested by
them (Penman, 2007). On the basis of the above calculation it can be concluded that Blue Island
restaurant should move on with proposal 1 against proposal 2. Because payback period of
Proposal 1 is less as compared to proposal 2.
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Net Present Value:
Proposal 1 Proposal 2
Year
Cash
Inflow
PV Factor
@10%
Discounte
d cash
flow
Cash
Inflow
PV Factor
@10%
Discounted
cash flow
1 £800 0.909 £727 £300 0.909 £273
2 £600 0.826 £496 £400 0.826 £330
3 £400 0.751 £300 £500 0.751 £376
4 £200 0.683 £137 £600 0.683 £410
5 £50 0.62 £31 £500 0.62 £310
Residual value £0.00 0.62 £0.00 £50 0.62 £31
Total
Discounted
cash flow £1,691.00 £1,729.00
Less: Initial
investment £1,200 £1,200
Net present
value £491.00 £529.00
Net present value is calculated by the company in order to find out the flow of cash by
considering the discounted rate (White, 2006). According to the above calculation it can be
concluded that company should move on to proposal 2. Because rate of return on the capital
invested by the company is more as compared to proposal 1.
Therefore, at last it is suggested that Blue Island restaurant should go on with proposal 2.
Because the decision taken by using NPV is more realistic than that of PBP.
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TASK 4
4.1 Financial statements
Income statements: - This statement is prepared by the company in order to analyse the
income earned and expenses made by them during thet financial year. It is further divided into
two parts (Peterson and Fabozzi, 2012). One is income side which is also known as credit side
which includes interest earned, dividend received etc. whereas another side is expense side that
contains Salary, rent, interest paid etc.
Balance Sheet: - This is prepared by the company in order to find out its financial
position at the accounting year. In this statements assets and liabilities of the company are
recorded. Assets side includes machinery, furniture, cash etc. and liabilities side comprises of
issue of shares, bank loan etc.
Cash flow statements: - This statement is prepared by the company in order to analyses
its inflow and outflow of cash. It is further divided into three activities (i.e. operating, investing
and financial activity).
4.2 Financial statements prepared by different organisation
Limited company: - Limited company are those which are listed on the stock exchange.
These organisation are required to prepare all financial statements. In addition to this they are
also required to issue there monetary statements to the general public.
Partnership firm: - Partnership firm are the organisations that are formed by making an
agreement between two or more parties at the time of starting new business (Tulsian, 2002).
These organisation are also required to maintain all financial statements. Along with this they are
also required to prepare partner's capital account.
Sole traders: - Sole trader’s organisation is the one which is owned and controlled by
asingle individual. These organisation are simply required to prepare receipt and payment
account in order to analyse the income earned and expenses made by the company during that
financial year.
4.3 Analyse of financial statements by calculating various ratios
Ratios Formula
Sweet Menu
Restaurant
Blue Island
Restaurant
PROFITABILITY RATIO
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Net Profit margin Net profit/sales 0.01 0.13
Gross Profit margin Gross profit/sales 0.63 0.66
LIQUIDITY RATIO
Current Ratio
Current assets/
current liabilities 1.78 0.63
Quick Ratio
Current assets –
Inventory/ current
liabilities 0.63 0.15
EFFICIENCY RATIO
Asset Turnover Net sales / net assets 1.79 2.4
SOLVENCY RATIO
Debt/equity ratio Debt/Equity 0.41 0.58
Profitability ratio: - On the basis of above calculation it can be concluded that
profitability ratio of Blue Island is superior as compared to Sweet Menu restaurant. Gross profit
and Net profit ratio of Blue Island restaurant 0.66% and 0.13% respectively which is more than
that of Sweet Menu. This in turn indicates that Blue Island restaurant is able to prepare effective
strategies in order to reduce cost of its production.
Solvency ratio: - As per the above calculation it can be interpreted that solvency ratio of
Blue Island is more favourable as compared to Sweet Menu restaurant. Debt equity ratio of Blue
restaurant is 0.58 while of Sweet Menu is 0.41. Higher ratio indicates better position of the
company.
Liquidity ratio: - According to the following calculation liquidity position of Blue Island
is healthier as compared to Sweet Menu restaurant. Current and quick ratio of Blue Island is
0.63% and 0.15% respectively. On the other hand Current and quick ratio of Sweet restaurant is
1.78% and 0.63% respectively. Lower liquidity ratio indicates that company is having a large of
amount of liquid cash with them in order to meet any uncertainties.
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Thus, at last it can be concluded that overall financial position of Blue Island is much
better as compared to Sweet Menu restaurant.
CONCLUSION
The following report emphasis on various sources of finance that can be used by Sweet
Menu restaurant in order to start up two new business unit. In addition to this, importance of
financial planning for Sweet Menu restaurant are also concluded. In this report budget of Blue
Island restaurant is analysed in order to find out its flow of cash. Along with this viability of the
proposal are identified by using investment appraisal techniques. At last, various ratios of both
the restaurant are calculated in order to analyse which restaurant financial position is good.
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REFERENCES
Books and Journals
Barnes, M.L. and Pancost, N.A., 2010. Internal sources of finance and the Great Recession.
Available at SSRN 1708204.
Bhowmik, S.K. and Saha, D., 2013. Sources of Finance. In Financial Inclusion of the
Marginalised (pp. 61-71). Springer India.
Brigham, E. and Daves, P., 2012. Intermediate financial management. Cengage Learning.
Cetorelli, N. and Strahan, P.E., 2006. Finance as a barrier to entry: Bank competition and
industry structure in local US markets. The Journal of Finance. 61(1). pp.437-461.
Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
Dontoh, A., Ronen, J. and Sarath, B., 2008. Financial statements insurance.
Eccles, T. and Holt, A., 2005. Financial statements and corporate accounts: the conceptual
framework. Property Management. 23(5). pp. 374-387.
Hursti, J. and Maula, M.V., 2007. Acquiring financial resources from foreign equity capital
markets: An examination of factors influencing foreign initial public offerings. Journal
of Business Venturing. 22(6). pp.833-851.
Mayer, C., Schoors, K. and Yafeh, Y., 2005. Sources of funds and investment activities of
venture capital funds: evidence from Germany, Israel, Japan and the United Kingdom.
Journal of Corporate Finance. 11(3). pp.586-608.
Penman, S. H. and Penman, S. H., 2007. Financial statement analysis and security valuation (p.
476). New York: McGraw-Hill.
Peterson, P. P. And Fabozzi, J. F., 2012. Analysis of financial statements. 2nd edition. John Wiley
& Sons.
Tulsian, C. P., 2002. Financial Accounting. Pearson Education India.
White, 2006. The analysis and use of financial statements. John Wiley & Sons.
Online
Sabău,L.,2013. Information needs of financial statements users - between harmony and conflict.
[Pdf]. Available through:<
http://fse.tibiscus.ro/anale/Lucrari2013/Lucrari_vol_XIX_2013_104.pdf >.[Accessed on
8th February, 2016].
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Vitez, O., 2014. Sources of Finance Medium Term Borrowing[Online]. Available
through:<http://www.ehow.com/facts_5652982_sources-finance-medium-term-
borrowing.html>. [Accessed on 8th February, 2016] .
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