Sources of Finance for Businesses

This assignment delves into the different sources of finance available to businesses. It examines both internal sources, such as retained earnings and owner contributions, and external sources like bank loans, equity financing, and venture capital. The document also discusses financial ratios and their role in analyzing a company's financial health and its ability to secure funding.

MFRD

Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
1.1 Sources of finances available.....................................................................................................3
1.2 Implication of the sources..........................................................................................................4
1.3 Evaluation of most appropriate sources. ...................................................................................6
TASK 2.................................................................................................................................................6
2.1 Analysing cost of different sources............................................................................................6
2.2 Importance of financial planning...............................................................................................7
2.3 Assessment of information needs of decision makers. .............................................................7
2.4 Impact of identified source of finance.......................................................................................8
TASK 3.................................................................................................................................................8
3.1 Analysis of the budget and proposed recommendations............................................................8
3.2 Calculations of Unit cost and pricing decisions.........................................................................9
3.3 Assessment of the projects through investment appraisal techniques.......................................9
TASK 4...............................................................................................................................................11
4.1 Discussion on the financial statements....................................................................................11
4.2 Comparison of different financial formats...............................................................................12
4.3 Ratio analysis...........................................................................................................................12
CONCLUSION..................................................................................................................................13
REFERENCES...................................................................................................................................14

INTRODUCTION
Financial resource plays a vital role for the development and smooth operations of a
business. They are the core pillars for establishing any business and making it a success. It is very
important for the business to manage financial resources available to the enterprise in effective
manner. A business requires financial assistance at various steps (Keller, 2013). Decision making is
one among the different steps. The financial manager requires finances while planning or
implementing the decision into the firms. Financial funds available to the business must be used
very appropriately and the manager must examine the return on investment being generated.
The current report is on identifying available sources of finance available to Sweet Menu
Restaurant. As the restaurant is doing well in terms of profitability, the owners are planning for
expansion to two new locations; one being in Central London and the other in Croydon. The finance
manager has acquired few choices to raise funds for the business. For this, an in-depth assessment
has been done by the manager to ascertain the feasibility of choices of finances (Kil, 2013). The
other part of the report discusses about raising budget for Blue Island Restaurant. Directors
understand the relevance of budget and cost as they have less knowledge about financial planning.
Thus, to evaluate the sources and choices available to both the businesses, various techniques have
been used which are discussed in the report.
TASK 1
1.1 Sources of finances available
Sweet Menu restaurant is planning to expand its business to two new locations, the business
requires identifying available sources of finances. They are as follows-
Long term sources of finance Share Capital- Share capital signifies sharing of ownership rights to a business or company.
They are considered as a cheaper mode as compared to shares. The share holders ave a equal
right in the decision making of the company. Debentures- The company can also raise capital with the help of debentures (External
Source of Finance / Capital, 2016). The company does not have to share its control with the
debenture holders and in return only have to provide them with timely dividends. Retained Earnings- A portion of income is reserved by the organisation which is known as
retained earnings. Instead of distributing dividends among the investors, the organisation

may decide to hold the income in order to retain the earning for future use. It is easier for the
business to reinvest retained earnings to his/her company. Loan- A loan may be lended by a bank or a financial institution or by a friend and relative
(Sources of finance, 2012). Loan seekers require paying for a security in terms of getting the
loan approved. The security is kept in hold with the loan giver. Seeker of the loan will have
to pay the principal amount along with the interest amount. Loan can be used for purchasing
assets or inventory for the company.
 Venture funding- The venture capitalist are investors who invest in a business by examining
its feasibility. They tend to acquire stocks or ownership in the business. They are generally
those people who have a set of money but they do not know as to where to invest it
(Financial ratio and Analysis, 2013). Thus, they tend to find potential start-ups or business
that has high potential for generating profitability.
Short term sources of finance
 Hire Purchase/ Leasing- Hire purchase is a short term loan, as the business would have to
return principal amount in the form of instalments. Purchaser purchases certain goods or
machinery in the form of hires purchase but can repay the amount on instalment basis
(Managing financial resources, 2014). In leasing, business rents a property or equipment
from the lessor under contractual agreements. For example, the restaurant can lease
computer or microwave oven for a set period of time by paying amount in instalment.
1.2 Implication of the sources
Sources Share Capital/
Debentures
Retained
Earnings
Loan Venture
Capital
Hire
Purchase/Leas
ing
Legal
Implications
The company
have to clearly
state the fact
related to
shares and
dentures under
a legal
statement
(Ryan, 2009).
This is to avoid
any legal
The
shareholders
may not agree
to retain
earning of the
company as it
may restrict
their right to
receive
dividends.
The company
have to make
sure to
understand all
the terms and
condition
provided by
the bank or
financial
institution.
They also have
The
organization
will have to
make sure to
duly
understand the
demands of the
venture
capitalist
before making
any contracts
The lessor or
the owner may
take legal
actions against
the company
(Brealey,
2012). If the
business is not
able to pay for
the instalment
amount on the

penalty
charged by the
government or
legal
framework
against any
fraud towards
the
shareholders or
debenture
holders.
to deposit a
security to the
bank.
with him/her. time declared
in the legal
document it
may face legal
complications..
Financial
implications
In case, when
the company is
declared to be
insolvent, the
investors may
cease
companies’
assets to
recover their
invested
amount in the
business. The
shareholders
have equal
voting right in
the company
i.e. they can
share their
ideas and
views in the
management of
the company.
There are no
financial
implications to
the business as
retained
earnings are
part of the
business
earnings and
income
(Pompian,
2012).
Bank or the
financial
institution will
cease the
assets to
recover the
principal and
interest
amount of the
loan.
Company is in
risk to go
bankrupt if it
faces huge
losses and risk
in the business.
The company
is entitled to
pay the interest
amount levied
by the lessor or
the hire
purchase
company
which
increases the
cost for the
company
(Dyck, 2013).
Dilution of The ownership There is no The restaurant Ownership is The ownership

ownership of the share or
the debenture
stays with the
purchaser until
and unless they
are sold to a
new person or
investor.
such dilution to
the ownership
of the business
through
retaining of
earnings.
can use the
money loaned
to them by the
finance into
their business
activity as
soon as they
receive the
loan amount
(Wuttke,
Blome, Foerstl
and Henke,
2013).
dependent on
the share
declared in the
legal contract
done with the
venture
capitalist. In
case of loss the
capitalist may
increase his
ownership in
the business to
compensate for
the deficient.
is transferred
to the owner of
the respective
inventory. This
happens only
after duly
paying the last
instalment to
the owner.
1.3 Evaluation of most appropriate sources.
Available sources of finance for Sweet Menu restaurant has been identified and evaluated
above. From above all it is feasible to choose retained earning, bank loan and ire purcase system for
raising capital. As per the current financial condition and analysis of the financial position it is
advisable to choose these methods. As the owners of the restaurant are planning to expand business
they require £300,000 and £500,000 of finance for their business activity. For this the owners may
use their retained earning's and bank loan to raise funds. Bank loan is feasible as the owner will be
able to raise a big amount of £500,000. Banking institution will not charge a high interest as
compared to the other lenders. This will save the business from unnecessary cost (Schock, Von
Flotow and Täube, 2013). Also repayment of the loan amount can be done on monthly basis thus it
will not create a burden on the operations of the business. As the restaurant is running from the past
ten year. It is expected that the business will have good amount of retained earning. As compared to
the other available resources it is applicable to use retained which would have been saved by the
business from the past 10 years. It is practical for the restaurant to use those earning as this will the
appropriate time for the same. Apart from this to purchase new machinery the business can use hire
purchase option. It is available method to hire-purchase inventory for the new locations. This will
allow the business to use the inventory and will also save the financial resources as the amount can
be paid on instalment basis.

TASK 2
2.1 Analysing cost of different sources
The Sweet Menu restaurant has decided to choose bank loan, retained earning and hire
purchase as the source to raise fund for the business. With the advantages there are various cost
associated with these choices. For understanding the cost associated with the option the financial
manger must perform a cost benefit analysis (Covas and Den Haan, 2012). This analysis helps the
manger to identify the strengths and weakness of different alternatives available to the restaurant.
Bank loan is a feasible easy to raise fund but there is high cost associated with interest rate. The
bank may charge high rate of interest over the principal amount. This interest rate will be add on the
total loan amount and thus the cost for the restaurant will increase. Also borrowing amount from
loan will raise debt for the restaurant. Apart from this using entire retained earnings in the
expansion will be considered as a risk for the business. There might be instances in future like loss
or a deficit which will require use of retained earnings. The company might loss its opportunity cost
for the future by using the earnings in the present. Use of retained earning will use also reduce the
reserve and surplus which will not be considered as an ideal situation for the financial statement of
the business. On the other hand using hire purchase system has also cost associated to it. In case of
a fault or breakdown of machinery the company will be entitled to bear the loss of the entire cost.
This will a burden for the financial condition of the company. Thus it can be said that each option
has a relative cost associated to it (Vuong, 2014). And proper analysis must be done to ensure the
practicality of choosing certain source of finance.
Sources of Finance Cost
Bank Loan Interest+ principal amount
Shares Dividends+ cost of issue of share
Retained Earning Lowered profit
Hire Purchase Interest amount+ security deposit
2.2 Importance of financial planning
Financial planning is ascertaining the future demand of a business activity in terms of
finances. The importance of financial planning is discussed as below.
 Financial planning is significant in identifying the financial goal and objectives for the
company. It helps in maintaining a balance between the current reserves and surplus with the
future requirements of the business (Brigham and Ehrhardt, 2013).
 Planning plays a vital role in identifying the sources of finances available to the business.
The financial manger is able to procure the sources from which the business can source its

funds.
 It is also viable to determine and formulate policies or strategies for a business activity of
the business. The manger is able to find out different methods to properly utilise the sources
of finance by making new strategies and policies (McKinney, 2015).
 Financial planning guides the manger in understanding whether the procured resources are
being utilised to their full potential or not. It is important to maintain the feasibility and
regular monitoring is facilitated by planning.
 Management of the cash flow is easily done with the help of financial planning. The manger
can closely monitor the areas where unnecessary money is flowing out of the business
(Moyer, McGuigan and Rao, 2014). The manager is able to identify the shortage as well as
the surplus of cash flow in the organisation.
2.3 Assessment of information needs of decision makers.
Stakeholders are the people who have an interest in the profitably of the business. There are
different types of stakeholders and the business must ensure to provide them with every information
they require form the business.
1. Supplier- They are very important to the business as they provide or supply raw materials to
the the business (Ogiela, 2015). In a restaurant, raw materials are the key ingredients that
help make the business stand out among its competitors. The business must make sure that
the suppliers are paid on time. They play a important role in customer satisfaction thus
cordial relationship must be maintained with them to enhance their loyalty with the
restaurant.
2. Customers- The customers must be provided with excellent service and quality of the food
must be very good. In case of change in menu or tariff the customers must be informed by
the waiter or the manger (Brigham and Daves, 2012). The service of the restaurant must be
outstanding to fulfil the demand and needs of the customer.
3. Lenders- They monitor the profitability of the business to ensure their return on investment.
The business must provide them with financial information like balance sheet and profit &
loss statement. Their dues must be paid ion time to avoid any charges or penalties.
4. Employees- They are the staff and the management of the restaurant business. Being part of
the hospitality industry employees are the key person who are responsible for the services
provided to the employees (Banerjee, 2015). Financial information like working capital,
debt or cash flow must be informed to the management. They must be motivated and must
be paid with appraisal to enhance their work quality.
2.4 Impact of identified source of finance
Sweet Menu restaurant have suggested to use retained earning, bank loan and hire purchase
system to raise fund for the business. Retained earning will reduce the opportunity of the business

due use the amount for future purposes. As the retained earning are shown in the liability side of the
profit and loss statement the profit will reduce in absence of retained earning. A lowered profit will
not be ideal situation for the business. Bank loan will raise the liability of the business (Cheng and
Dong, 2015). Whereas hire purchasing inventory will increase the cash outflow of the business. In
the profit and loss statement the tax calculation will rise due to te higher interest paid in the above
chosen financial resources. In this case the business is entitled to pay back the amount for the
inventory on instalment basis. The net profit will decrease due to high rate of cash outflow. As the
restaurant is entitled to pay back the principal as well as the loan amount in the given period of
time. Altogether raising sources of finance will impact the profit and loss statement of the business.
The profit is directly affected by bank loan, retained earning and hire purchase of inventory. It is
important for the financial manager to carefully monitor the impact to avoid any loss of profit.
TASK 3
3.1 Analysis of the budget and proposed recommendations.
Budget analysis is the tool used to manage budgeting process of the business. It includes
formulation, estimation and report making of the budget required by a business activity of the
restaurant. As presented in the case study, the budget of Blue island restaurant is been presented to
analyse the budget. It is very crucial for the Blue Island restaurant to analyse its budget in order to
ascertain it practicality towards the business activity (Wu and Olson, 2015). By looking at the
budget it is clearly understood that the cash sales are reasonably good which is consider as a better
condition for the restaurant. Although the restaurant is earning good, the expense for running the
restaurant is relatively higher then the sales. The restaurant is not able to manage the balance so as
to increase the net profit. It is also clear that as sales rises the expenses are also rising
simultaneously. In the month of December specifically the money outflow is more then the inflow
of the money. Thus it can analysed that the sale of services is linked with the expenses of the
business. As there is consecutive negative net balance, the restaurant must emphasize on reducing
its expense and to increase the sale.
3.2 Calculations of Unit cost and pricing decisions.
The calculation of cost is done as followed-
Menu Items Costs in £
Meat Item 3
Vegetables and other elements 1.5
Making cost 3.5
Overhead expenses 2

Total Cost 10
Mark Up @ 40% 4
Value Added Tax 2
Total Selling Price 16
Formula for Food Cost Percentage=
Total Costs of Ingredients/ Selling Price * 100
Percentage of Food Cost = 10/16*100
Total Percentage = 62.50%
Blue Island Restaurant is expecting 40% profit in the cost and will levy 20% VAT charges as
defined by the legal framework. As per the calculation, the total selling price of the meal is £16 and
the total food cost in percentage is 62.50%. Food costing enables the restaurant to identify the
pricing decisions (Stulz, 2015). It is helpful in identify the total sale price which allows the business
to estimate the cost that it can apply to ensure that it receives marginal profit from its sales. If the
business knows what it requires to spend, it can accordingly plan for the cost of service provided by
it. Overhead and labour cost are included as they are part of expense of the business. The restaurant
can plan for the pricing decision based on the cost that its service will incur.
3.3 Assessment of the projects through investment appraisal techniques
Investment appraisal technique allow the manger to identify the investment which will be
most profitable for the business. This techniques help in estimating the financial relevance of the
projects acquired by the manger (Keller, 2013). Net present value and Pay back period are
techniques which help to identify the feasibility of the investment for the business. The assessment
of projects is done in the following way.
The initial investment of proposal 1 is £1200 and for proposal 2 is £1200.
Net Present Value:
Proposal 1:
Year Inflow PV Factor @10%
Inflow by considering pv
factor
1 £800 0.909 £727
2 £600 0.826 £496

3 £400 0.751 £300
4 £200 0.683 £137
5 £50 0.62 £31
Residual value £0.00 0.62 £0.00
Total inflow £1,691.00
Less: Initial
investment £1,200
Net present value £491.00
Proposal 2:
Year Inflow PV Factor @10% Inflow by considering pv factor
1 £300 0.909 £273
2 £400 0.826 £330
3 £500 0.751 £376
4 £600 0.683 £410
5 £500 0.62 £310
Residual value £50 0.62 £31
Total inflow £1,729.00
Less: Initial
investment £1,200
Net present value £529.00
On the basis of the calculation, it is evident that proposal 2 is more feasible as it has higher
NPV. Net present value is a tool used to ascertain the profitability of a project. On comparison it
was found that proposal 1 will create more value to the business (Kil, 2013). Thus proposal 2 will
generate more profitability then proposal 1.
Payback Period:
Proposal 1:
Year Inflow Cumulative inflow
0 -£1,200 -£1,200

1 £800 -£400
2 £600 £200
3 £400 £600
4 £200 £800
5 £50 £850
Residual Value £0 £850
Payback Period 1.5 Years
Proposal 2:
Year Inflow Cumulative inflow
0 -£1,200 -£1,200
1 £300 -£900
2 £400 -£500
3 £500 £0
4 £600 £600
5 £500 £1,100
Residual Value £50 £1,150
Payback Period 3 Years
As per the calculation, payback period of proposal 1 is lower then the second proposal. Th
proposal 1 will yield return on investment in a shorter period of time (Ryan, 2009). Thus the
proposal 1 is more viable to the restaurant over the other proposal. From the final assessment of the
performance appraisal technique it is clear that proposal 2 will generate more feasibility in terms of
time and money resources employed by the company in the above projects. Thus proposal 2 must
be selected by the owners of Blue Island Restaurant.
TASK 4
4.1 Discussion on the financial statements.
A financial statement is the record of financial activity of a business. All the financial
information related to the Blue Island Restaurant is presented in the financial statements. They are
as followed.
 Balance Sheet- It is known as the statement if financial position. Balance sheet shows three

elements i.e. Assets, Liabilities and equity. In depicts what the business owns and what it
owes to the other person (Brealey, 2012).
 Income statement- It highlights the profit and loss status of the business. It highlights the
current financial position of the organization in terms of income made and expenses
incurred on various business activity.
 Cash Flow statement- It represents the cash inflow and outflow in and out of the
organisation (Wuttke and et.al., 2013). It shows the cash flow from the operating and
investing activity of the restaurant .
 Statement of Retained Earning- This statement shows the amount of earnings retained by an
organisation. Any change in the equity of the owner is recorded ion this statement. It is
associated with the income statement as any amount of profit earned by the company is
added to the retained earning in order to find the closing balance of the earnings.
4.2 Comparison of different financial formats.
There are different type of business that perform in different ways (Pompian, 2012). Sole
proprietor, partnership and limited company is been differentiated on the basis of their financial
statement. They are as followed.
 Limited Company- The company is a separate legal entity from its owners. The company
have to maintain all the financial records and statements to identify the earnings of the
company (Ogiela, 2015). The statement consist of profit & loss account, balance sheet,
stakeholders statement and etc.
 Sole Proprietor- As this business is managed by a one single person i.e. the sole proprietor.
There is strict requirement for the proprietor to make all the statements (Brigham and
Ehrhardt, 2013). In case of assessment of tax it is required to maintain profit and loss record
of the business.
 Partnership- A partnership consist of two or more people who share the loss and profit of the
business basis on their profit sharing ratio. It is compulsory for the firm to maintain all the
financial statements (Wu and Olson, 2015). Along with this an individual statement of the
partners earning has to be maintained to identify performance of each partner of the
business.
4.3 Ratio analysis
Ratio analysis is done to identify the companies profitability, liquidity, efficiency and
solvency (Stulz, 2015). From the above table, ratio analysis can be studied for both the restaurants.
Ratios Formula
Sweet Menu
Restaurant
Blue Island
Restaurant
Profitability

Net Profit margin Net profit/sales 0.01 0.13
Gross Profit
margin Gross profit/sales 0.63 0.66
Liquidity
Current Ratio
Current assets/ current
liabilities 1.78 0.63
Quick Ratio
Current assets –
Inventory/ current
liabilities 0.63 0.15
Efficiency
Asset Turnover Net sales / net assets 1.79 2.4
Solvency ratio
Debt/equity ratio Debt/Equity 0.41 0.58
From the above, it is evident that the liquidity of Sweet menu restaurant is better then the
other restaurant. Quick Ratio of the restaurant is higher then the Blue island restaurant which shoes
that the former is more capable in terms of liquidity (Moyer, McGuigan and Rao, 2014). Sweet
Menu have few liabilities to be paid thus its solvency position is better then the Blue Island
restaurant. Although Sweet Menu's profitability ratio are very low then Blue Island. This shoes that
the restaurant is making low profit then Blue island. After ascertaining all the ratios it is clear that
Sweet Menus financial position is better then Blue Island.
CONCLUSION
From the above it is clear that management of finances is very important for a business. It is
mandatory for very manager to identify the financial option available to the business. The manger at
Sweet Menu restaurant evaluated different types of finances in order to identify the best suitable
alternative for their business. The directors at Blue Island used financial information to evaluate the
financial position of their business. Ratio analysis helped to compare the financial position of both e
restaurant. Thus it can be said that procurement and management of financial resources is a very
vital aspect of any business or organisation.

REFERENCES
Books and Journals
Banerjee, B., 2015. Fundamentals of financial management. PHI Learning Pvt. Ltd..
Brealey, R. A., 2012. Principles of corporate finance. Tata McGraw-Hill Education.
Brigham, E. and Daves, P., 2012. Intermediate financial management. Cengage Learning.
Brigham, E. and Ehrhardt, M., 2013. Financial management: theory & practice. Cengage Learning.
Cheng, J.Y. and Dong, P.W., 2015. Thinking of Corporation Financial Management Innovation in
the Era of Big Data.
Covas, F. and Den Haan, W.J., 2012. The Role of Debt and Equity Finance Over the Business
Cycle*. The Economic Journal. 122(565). pp.1262-1286.
Dyck, B., 2013. Managing Money: Economics, Finance, and Accounting. In Management and the
Gospel (pp. 169-179). Palgrave Macmillan US.
Keller, A., 2013. Finance and financial management. GRIN Verlag
Kil, C., 2013. Solutions from the Experts who Do it Every Day. Atlantic Publishing Company.
McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-
CLIO.
Moyer, R.C., McGuigan, J. and Rao, R., 2014. Contemporary financial management. Cengage
Learning.
Nicholson, B. and Aman, A., 2012. Managing attrition in offshore finance and accounting
outsourcing: Exploring the interplay of competing institutional logics. Strategic Outsourcing: An
International Journal. 5(3). pp. 232 - 247.
Ogiela, L., 2015. Intelligent techniques for secure financial management in cloud computing.
Electronic Commerce Research and Applications. 14(6). pp.456-464.
Pompian, M., 2012. Behavioral finance and investor types. Private Wealth Management Feature
Articles. 2012(1). pp.1-3.
Ryan, J. S., 2009. Managing Your Personal Finances,6th ed. Cengage Learning.
Schock, F., Von Flotow, P. and Täube, F.A., 2013. Sources of Finance in the Clean Technology
Sector: Capital Structure, Financial Intermediation and Industry Life Cycle. EBS Business School
Research Paper. pp. 14-07.
Stulz, R.M., 2015. Risk‐Taking and Risk Management by Banks. Journal of Applied Corporate
Finance. 27(1). pp.8-18.
Vuong, Q.H., 2014. Operational scales, sources of finance, and firms’ performance: evidence from
Vietnamese longitudinal data.
Wu, D.D. and Olson, D.L., 2015. Enterprise Risk Management. In Enterprise Risk Management in
Finance. pp.1-10.
Wuttke, D. A. and et.al., 2013. Managing the innovation adoption of supply chain finance—
Empirical evidence from six european case studies. Journal of Business Logistics. 34(2). pp.148-
166.
Online
External Source of Finance / Capital. 2016 [Online]. Available through:
<http://www.efinancemanagement.com/sources-of-finance/external-source-of-finance-capital>.
[Accessed on: 19th January, 2016].
Financial ratio and Analysis., 2013. Available through:
<http://accountingexplained.com/financial/ratios>. [Accessed on 19th January 2016].
Hofstrand. D., 2013. Types and Sources of Financing for Start-up Businesses. [Online]. Available
through: <http://www.statista.com/statistics/282870/lego-group-revenue/>. [Accessed on: 19th
January, 2016].

Management accounting. 2014. [Online]. Available at: <
http://www.e-conomic.co.uk/accountingsystem/glossary/management-accounting>.
[Accessed on 19th January 2016].
Managing financial resources. 2014. [online]. Available Through < https://www.aim-nsw-
act.com.au/course/managing-financial-resources>. [Accessed on 19th January 2016].
Sources of finance. 2012. [Online]. Available through: <http://
http://www.bized.co.uk/learn/business/accounting/sources/index.htm>. [Accessed on 19th
January 2016].