Financial Analysis of Restaurants

This assignment delves into a comparative financial analysis of Sweet Menu Restaurant Ltd. and its competitor, Blue Island Restaurant. It examines various financial ratios such as profitability, liquidity, solvency, and efficiency ratios to assess the financial health and performance of both restaurants. The analysis utilizes data from 2015 financial statements to draw conclusions about their strengths and weaknesses in key areas like profit generation, asset management, and debt utilization.

MANAGING
FINANCIAL
RESOURCES &
DECISIONS

INTRODUCTION
The financial resources play an important role in a business corporation. The various
resources are used by the company to raise its capital. The purpose behind preparation of this
report is to reflecting the different sources of finance used by Sweet Menu Restaurant Ltd and
the decisions made by it. The another importance for preparing this is to analyse the costs of the
sources of the finance (Anandarajan, Anandarajan and Srinivasan, 2012). The financial ratios
have to be explained in this report for the better understanding of it. Sweet Menu Ltd is a
restaurant which is established at Gants Hill in East London. It is the listed company and has the
two branches at the different places in London.
TASK 1
1.1 Sources of Finance available in Business
Finance is such invariant requirement to any business which is helpful in the growth of it.
There are several sources for the financing of a business enterprise. There are mainly two types
of sources available to for financing in Sweet Menu Restaurant Limited namely internal and
external sources. These are as follows:
Internal Sources
These are such source of finance which are generated with in the business only. These
can be of two types short term (working) capital and long term (fixed) capital. Short-term Capital: The major source of finance are Banks. Here, the Banks finances on
the short term basis to Sweet Menu Restaurant Ltd where the working capital is used for
the financing the business. It also provides the bridge finance to the company to
overcome from the temporary shortage. It involves the short term money which is
required for the day to day expenditure of the business.
 Long-term Capital: This capital is generally provided by the stockholders and the
bondholders of the company (Boiral, 2011). It is helpful for the large scale investment.
There are various sources of business capital such as owner's equity capital, sales of
securities, retained earnings and lease financing.
External Sources
These sources are used when large amount of capital is required for the business. This is
collected from the outsiders of the organization. The capital which is generated from outside of

the business comes under this. There are the following sources of finance in Sweet Menu
Restaurant Ltd: Shares: Here are two types of shares through which the capital can be collected for the
growth of the company. Ordinary shares includes the equity which are allotted top the
public and the others whereas the preference shares are those which are generally issued
to the investors, partners and other members of the company.
 Borrowings: The long term loans are generally acquired by issuance of debentures. It has
a fixed rate of interest and helpful in making profit to the company (Broadbent, and
Cullen, 2012). There are other various types of loans which are available at fixed and
variable rate of return.
1.2 Implications of sources of finance
There are various implications over the different sources of finance. These implications
are legal, financial, dilution of control implications and bankruptcy. Sweet Menu Restaurant Ltd
also has the above mentioned implications for both internal and external sources of finance.
These are discussed as below: Legal Implications: In case of Sweet Menu Restaurant Ltd, the legal implications can be
arise while offering the shares to the public. The legal terms do not allow the business to
offer initial public offering to raise its capital. Also, cannot mortgage on the property due
to the changing rate of interest (Brief and Peasnell, 2013). The different taxes also
charged by the government for availing the long term as well as short term loans. Financial Implications: These implications are related to the finance of the business
which is invested to make profits. Under this, both the debtors and the shareholders are
entitled to be paid by the company as per their rate of interest. Dilution of Control Implications: Dilution means the reduction of the ownership
percentage of the share of the person in the business. It is generally caused by the
issuance of the new shares. For example, a company issue 100 shares to 10 shareholders.
Every holder owns 10% of the company. And after this it offers secondary issue of 100
share to 10 persons again then at this time each person will own 5% of the company. It
shows the reduction of the ownership percentage.
 Bankruptcy Implications: The bankruptcy occur when the total borrowings exceed the
assets of the business. Many times it happens that the business is bankrupt because of

non payment of the debts of the company. So, while borrowings the capital form the
outsiders for long term investment, the enterprise has to think about this outcome.
Therefore, form the above explanation it is clear that there are various implications
available while financing from bot internal and external sources (Carballo-Penela and
Doménech, 2010). And management has to keep these in mind at the time of issuance and
borrowings.
1.3 Most appropriate sources of finance for Sweet Menu Restaurant Ltd
All the above sources of finance are not suitable for every organization. Each
organization chooses such sources which are appropriate for its business. Sweet Menu
Restaurant Ltd should adopt the following sources of finance: Bank Loans: It is the easiest and very secured term of borrowing. It is helpful for both
long term and short term financing. Here, this is beneficial for Sweet Menu Restaurant
Ltd for providing long term loans to it for accomplishment of the desired goals of it. The
main advantages of it is that it is a safe and secured process and the money can be
borrowed for many times. Along with the advantages there are some drawbacks as well.
Some times the loans carry a high rate of penalty and interest and also too many
borrowings may lead to the decrease in the cash flow of the business.
 Equity Shares: The holding of an equity share with a person shows the ownership of that
person to a company. Equity shareholders are knows as the owners of the business
according to their percentage of shares. Sweet Menu Restaurant Ltd has to issue its shares
to raise the capital in the enterprise. The main advantage of this is that it provides the
high profits to the company with a limited legal liability. It facilitates the owners two way
profits in terms of capital gains and dividends. But it has a huge disadvantage that the
holders are always the last to get paid and do not enjoy all the rights of the business
which is held by the owners of the company.
TASK 2
2.1 Analysing the cost of different sources of the finance used in Sweet Menu Restaurant Ltd
Every sources of finance have incurred cost of it over the business. The sources which are
used by Sweet Menu Restaurant Ltd charged the different costs over the business.

 Bank Loans: In financial term loan is the lending of money from one person to other.
Bank loan is the amount of money which is lent by the Banks to the borrowers. All
Banks charged the interest over the money which they lend to others (Drake and Fabozzi,
2012). It is the major element of the cost of the finance. Each bank has its different rate of
interest while providing the loan to the individual and the enterprise. The banks incurred
generally two charges over the loan they provided such as interest rate and the security
amount. Sweet Menu Restaurant Ltd has to pay theses two amounts to the Banks. At the
time of lending money to the business enterprises the interest rate is charged by Bank.
The other cost of this loan is incurred in the form of security amount which may create a
burden on the for the business.
 Equity Shares: Equity shares are such which are issued by the company to raise its
capital. It is one of the best method of financing for the companies whose shares are
listed on the stock exchanges. These shares also incurred the charges in the form of
dividend. In the form of dividend company has to pay the fixed amount to their
shareholders. The rate of the dividend is fixed for every shareholder according to their
percentage of the shares owned by them. So here, only one cost is charged that is
dividend.
2.2 Importance of financial planning
It is really very important for a business to plan the finances to achieve the long term
profits. Sweet Menu Restaurant Ltd also plans the finance to achieve its targets and goals.
Financial planning is the process which involves the developing the strategies to manage the
financial affairs and meet the targeted goals. The need of financial planning is felt because of the
following reasons: Forecasting the Funds: The first and main importance of financial planning is to finding
the suitable sources of funds for the business. Through this the funds are allocated and the
optimum utilization of such resources can be done. It includes both short term as well as
the long term forecasting (Flamholtz, 2012). It is necessary for identifying the appropriate
sources of the finance for Sweet Menu Restaurant Ltd. Helpful in Operational activities: It is also helpful in the business activities. The success
and the failure of the business production and distribution is all depends on its financial

decisions. The right decisions help in smooth financing and operations of the business
such as production and distribution. Reducing the Uncertainties: It helps in reducing the uncertainty related to the market
changes. It also helps in ensuring the better profitability and productivity of the company
and reduces the hurdles occur in the growth of the business. Increase the Sales: As Sweet Menu is a restaurant, the financial planning is very helpful
in the growth of the sales of it (Conway, 2013). Through financial planning the
management will come to know about the demands and the supply of the products of it.
 Cash Flow: The financial planning helps in increasing the cash flow of Sweet Menu
Restaurant Ltd. Managing the incomes will help in tax planning and the other saving and
expenditures of the firm. It maintains the balance between the inflow and the outflow of
the funds.
2.3 Assess the information needs of different decision makers in Sweet Menu Restaurant
There are mainly three levels of management in every organization which are as follows: Top level management: This management includes the owners of the company such as
directors, executives and supervisors. They owned the business and are held liable to
make the strategic decision about the enterprise. Middle level Management: The managers under this comes under the top management.
They are subordinates to them. Sweet Menu Restaurant Ltd is also involves this level
where the decisions are taken by the managers for their different functional departments.
 Lower level Management: This is consists of the supervisors who are involved in making
decisions of their area of work. It is generally related to the day to day operations of the
business.
Every business organization have several decision makers which are described as below: Employees: Employees are the individuals who work for the company and are the main
part of the business. There is a great role of these people in decision making process.
They make decisions for their own growth and career opportunities (Horngren, 2013).
They work with the full efficiency to increase the productivity of the firm. The
employees of Sweet Menu Restaurant Ltd takes the decisions for completion of their
work and also helpful in providing the new and innovative ideas for the better
development of it.

 Customers: The customers are the end users of the products offered by a company. It is
also the another factor which influence the growth of the business of Sweet Menu
Restaurant Ltd. They play a very important role in making the decisions because the
management make the decisions as per the feedback of the customers. They help the
enterprise in developing the brand image of it.
 Suppliers: These are those who facilitate the raw materials for the business. The suppliers
have both positive and negative impact on the business(Kaplan and Atkinson, 2015). It is
the duty of the management of Sweet Menu Restaurant Ltd to make payment to them on
time. They maintain a healthy relationship with the business.
2.4 Explaining the impact of the sources of finance on financial statements of Sweet Menu
In order to expand business operations in Central London and Croydon Sweet Menu
needs to raise finance through bank loan and by issuing the equity shares. In this, both the
sources directly influence financial position and performance of firm in the following manner.
For instance: If business unit takes loan of 150000 @ 2% and also issue shares of 6%150000
shares then financial health and profitability aspect of the restaurant will be affected in the below
mentioned manner:
Income statement
Particulars Amount (£) Particulars Amount (£)
To interest on bank
loan
3000
To dividend on equity
shares
9000
Statement of financial position
Liabilities Amount (£) Assets Amount (£)
Equity shares (60000
+150000)
210000 Cash at bank (11000 +
150000 + 150000)
311000
Long term loan
(150000 +31000)
181000

From the above mentioned analysis it has been determined that profit margin of the firm
will significantly reduce due to the rise in expenditure level. Moreover, both are the expense for
the business unit so they are recorded in the debit side of income statement. Along with this, if
restaurant issues equity shares and take loan then both the aspects impose financial obligation in
front of it (Costa and Lorente, 2010). Thus, they are mentioned in the liabilities side of balance
sheet. Further, cash aspect of balance sheet also increases with the similar amount when loan is
taken and shares are issued by the organization.
TASK 3
3.1 Analyzing budget and make appropriate decisions based on it
Budget may be defined as a financial framework or expression regarding the income and
expenditure which will be earned or incurred by the firm during the accounting year. According
to the cited case situation Blue Island restaurant has been prepared budget for the period of 4
years with the aim to make optimum use of money or financial resources. Moreover, business
unit can attain its aims and objectives only when effective allocation of money is made in the
various business activities.
Receipts
September
(£)
October
(£)
November
(£)
December
(£)
Total
(£)
Cash sales 15000 13000 15000 18000 58000
Total cash inflow 15000 15500 18000 20000 58000
Cash outflows
Van 12000 12000
Furnitures & Fittings 18000 10000 28000
Salaries & wages 7500 7500 8500 9000 32500
Petrol 280 280 280 840
Lighting &Energy 500 600 650 1750

Insurance 350 350 350 350 1400
Purchases - inventory 3000 3000 3500 4000 13500
Total cash outflow 40850 11630 13230 24280 89990
Cash deficit / surplus
(inflow – outflow)
(25850) 3870 4770 (4280) (21490)
Opening cash balance 18500 (7350) (3480) 1290 8690
Closing cash balance (7350) (3480) 1290 (2990) (12530)
From the above budgeting framework of Blue Island restaurant it has been analyzed that
sales revenue of the firm was showing fluctuating trend. In the month of October sales of the
restaurant diminished such as £1300 which is not good indicator for it. On the other hand, sales
of the firm inclined in the month of December from £15000 to £18000. This aspect shows that
gradually customers prefer to make use of services of restaurant to the significant level.
However, due to the increase in expenditure aspects business unit has generated negative cash
flow (Kieso, 2012). Moreover, in December Blue Island has made additional investment on
furniture and fittings. In the hospitality sector decision making aspect of the customers are highly
influenced by the interior and exterior level.
Along with this, rise in the salaries, inventory and lighting expenses outflow of the firm
inclined in 2015 in comparison to the outflow. Thus, by considering all the above aspects it can
be stated that Blue Island needs to place emphasis on promotional aspects or campaign for
enhancing the sales revenue. For this purpose, owner of restaurant needs to undertake both
traditional and modern means of advertisement such as social media, television etc. Further,
company also needs to encourage employees to switch off the lights when there is no need of it.
Beside this, it is highly required for the restaurant to make changes in the existing strategic
framework. This in turn helps business unit in exert control over expenditure. Hence, by
following all such aspects Blue Island restaurant can improve its cash position to the large extent.
3.2 Explaining the unity cost for meal for making suitable pricing decision
Unit cost refers to the amount or expenses made by the business unit for producing the
individual product or services. Through this, business unit can set suitable price of the services

which are offered by the restaurant. In this, Blue Island restaurant has prepared following recipe
cost sheet for popular meal.
Items Costs (£)
Steak 3
Vegetables and other ingredients 1.5
labour 3.5
Overheads 2
Total Costs 10
Mark Up (40%) 10 *40% = 4
VAT (10* 20%) 2
Selling Price 16
Food cost percentage = Total cost of ingredients / sale price *100
= 10 / 16 *100
= 62.5%
On the basis of the above mentioned analysis it can be stated that out of 100% cost which
is incurred by the restaurant for preparing popular meal is 62.50%. On the basis of mark-up
pricing method Blue Island restaurant will get £4 as profit margin by serving food to the
individual customers. Moreover, due to the VAT amount of £2 profit margin of the firm reduced
from £6 to £4. Hence, by charging £16 from each customer business unit is become able to get
£4 as profit after recovering all the expenditure.
3.3 Assessing the viability of project by using investment appraisal techniques
Investment appraisal techniques may be served as a financial analysis tool which can be
undertaken by the business unit for evaluating the profitability of proposed investment.
According to the cited case situation Blue Island restaurant has two proposals for the expansion
projects in relation to the production of ready meals ((Ho, Liu And Tsay, 2010)). In this,
restaurant can select suitable proposal by taking into account the following techniques are:
Payback period
Year Proposal 1(£) Cumulative cash Proposal 2 (£) Cumulative cash

inflow (£) inflow (£)
1 800 800 300 300
2 600 1400 400 700
3 400 1800 500 1200
4 200 2000 600 1800
5 50 2050 550 2350
Proposals Figures
Proposal 1 1 + 400 / 600 = 1.7 years
Proposal 2 3 years
Calculation of net present value (NPV)
Years
Project A
(£)
PV factor
@10%
Discounted
cash inflow
Project B
(£)
PV factor
@10%
Discounted
cash inflow
1 800 0.909 727.2 300 0.909 273
2 600 0.826 495.6 400 0.826 330
3 400 0.751 300.4 500 0.751 376
4 200 0.683 136.6 600 0.683 410
5 50 0.621 31.05 550 0.621 342
6 0 0 0.000 0
Total
discounted cash
inflow 1691 1730
Initial
investment 1200 1200

NPV (Total
discounted cash
inflow – initial
investment) 491 530
The above mentioned table presents that Blue Island restaurant has to wait for 1 year 7
months for getting back the money of initial investment such as £1200. On the other hand,
payback period of proposal 2 is 3 years. Thus, business entity will take more time for recouping
the initial investment and making profit if they invest money in project 2. In addition to this,
company will get £530 after the period of five years by investing money in proposal 2. On the
contrary to it, net present value of proposal 1 will be £491 after the pre-specified time frame.
This aspect clearly shows that NPV of proposal 2 is higher than proposal 1. Hence, by taking
into consideration all the above mentioned aspect it is advised to Blue Island restaurant that it
should select proposal 2 rather than 1. Moreover, NPV method of investment appraisal offers
highly realistic solution because it undertakes time value of money concept. Thus, company
should invest money in proposal 2 which will aid in the growth and profitability aspect of the
firm to the significant level.
TASK 4
4.1 Financial Statements
Financial statement is the record of the financial activities of a business or entity. The
basic financials statements of a firm are discussed below: Profit & loss account: It is a financial statement which is a summarized record of the
revenues, costs and expenditures. These are incurred during the financial period of the
company (Sources of finance., 2013). It is also called the income statements which is
made by every company and also by Sweet Menu Restaurant. It is helpful in creating the
other financial statement like balance sheet and cash flow statement. This shows the
financial performance, earnings, expenses and the other operations of the firm. Revenue
means the money received by the company for the particular period. The main aim
behind preparation of this statement is to provide information to the management and the
investors of the company whether it is running in profit or loss.

 Balance Sheet: It is also the statement which shows the financial position of the
enterprise. It is the statement of the owners' equity, assets and liabilities of the
organization. It is based on the important accounting equation (Assets = liabilities +
owners' equity). The income statement is helpful in preparation of balance sheet.
 Cash Flow Statement: This statement shows the inflow and outflow of the money in the
business. It is prepared after the completion of balance sheet. It includes the three
accounting data such as operating, investing and financing activities. These sections show
the overall changes in the cash flow of the company for a specific time period.
4.2 Financial statements for different types of business
Different types of business uses or follows the different financial statements for their
business. These are as follows: Sole proprietorship: It is the organization which is owned by only one person who is the
owner of it (Lampe And Hofmann, 2013). The personal accounts of the person are
separated from the accounts of business. Only the owner has the authority to manage all
the activities of the firm. This firm has to maintain its financial records in the four parts
of the financial statement such as income statement, statement of changes in owners'
equity, balance sheet and cash flow statement. Partnership Firm: It is the business which is owned by two or more persons. They act as
a partner of the company. Here, the owners are personally liable for the debts of the firms
and the partnership can be dissolve on the retirement or death of the partners. It also
requires maintaining the records in the financial statement.
 Public Limited Company: It is such company which is owned by the number of
individuals. It is very essential for this company to disclose the financial position of the
company to the public because it is a public limited company. These companies include
the format prescribed by GAAP and IFRS. It involves the statements like income
statement, balance sheet and cash flow statement.
4.3 Analyzing the financial performance of Sweet Menu and Blue Island restaurant by using
ratio analysis
Ratio analysis of Sweet Menu and Blue Island restaurant are enumerated below:
Ratios Formula Sweet Menu Blue Island

restaurant
Profitability ratios
Gross profit ratio GP / net sales * 100 63.57% 66.22%
Net profit ratio NP / net sales * 100 24.28% 31.71%
Liquidity ratio
Current ratio Current assets (CA) /
current liabilities
1.79:1 0.63:1
Quick ratio CA – (prepaid expenses
+ inventory) / CL
0.63:1 .15:1
Solvency ratio
Debt-equity ratio Long term debt /
shareholders equity
0.51:1 0.14:1
Efficiency ratio
Inventory turnover
ratio
Net sales / inventory 7.95:1 9.65:1
Net assets turnover
ratio
Net sales / Total assets 1.79:1 2.43:1
 Profitability ratios: From the above table it has been assessed that gross and net -
profitability aspect of Blue Island restaurant is sound in comparison to Sweet Menu. In
2015 net profit margin of Blue Island was 31.71%, whereas this aspect of Sweet menu
was 24.28%. This aspect shows that Blue Island has generated enough amount of profit
over the expenses. Thus, Sweet Menu requires making effectual strategies which assist it
in enhancing the profit level. Liquidity ratios: On the basis of the outcome of ratio analysis it can be said that Sweet
Menu is highly capable in relation to meeting its current obligations over the rival firm.
Moreover, current and quick ratio of Sweet Menu was 1.79:1 and 0.63:1 at the end of
accounting year 2015. This ratio of the firm is highly near to the ideal ratio which states
that Sweet Menu is highly liquid (Mala and Chand, 2012). On the other hand, liquidity

aspect of Blue Island restaurant is not good. Thus, they require exerting control on
financial spending for improving the liquidity aspects. Solvency ratio: Debt-equity ratio of Sweet Menu was 0.51:1 which is line with the ideal
ratio. On the other hand, such ratio of Blue Island was 0.14:1. Hence, by considering such
aspect it can be said that solvency position of Sweet Menu restaurant is good in
comparison to the rival firms.
 Efficiency ratio: Inventory and asset turnover ratio presents that Blue Island has made
optimum use of assets for enhancing the sales revenue (Nissim and Penman, 2011).
Whereas, Sweet Menu requires encouraging human resources of the firm to make
effectual use of assets while performing the business activities and operations.
CONCLUSION
From the above study it is concluded that it is very important to managing the financial
resources for the business. The first two parts of the study is based on the various sources used
by Sweet Menu Restaurant Ltd. It discussed the various sources of finance such as bank loans,
retain earnings, working and fixed capital, equity shares and borrowings through debentures.
Costs in form of interest and dividend are also explained in this. The need of different decision
makers for Sweet Menu Restaurant Ltd are customers, suppliers, employees. The financial
statement of the business are described with its format which includes income statement, balance
sheet and cash flow statement.