Sources of Finance for Businesses

This assignment delves into the crucial aspect of financial management for organizations, focusing on selecting appropriate sources of finance. It emphasizes the importance of evaluating a company's fundamental and liquidity positions before choosing funding options. The text also highlights the significance of project evaluation techniques in identifying the most suitable projects for investment.

Management of Financial Resources
and Decision Making
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Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Identification of the sources of finance available ................................................................3
1.2 Implications of sources of finance.........................................................................................4
1.3 Appropriate source of finance for Sweet menu restaurant.....................................................5
TASK 2............................................................................................................................................5
2.1 Cost of sources of finance......................................................................................................5
2.2 Importance of financial planning...........................................................................................6
2.3 Assessment of the information needs of the different decision maker of Sweet menu.........6
2.4 Impact of the sources of finance upon the financial statements of Sweet menu which are
undertaken by them to meet their financial needs.......................................................................7
TASK 3............................................................................................................................................7
3.1 Analysis of the budget and appropriate business decision based upon it..............................7
3.2 Unit cost to determine the pricing of the product and services offered by Blue Island
restaurant......................................................................................................................................8
3.3 Investment appraisal tools to assess viability of projects .....................................................9
TASK 4..........................................................................................................................................10
4.1 Financial statements.............................................................................................................10
4.2 Comparing the formats of financial statements for the different types of business
organization................................................................................................................................10
4.3 Interpretation of the financial statements by making analysis of the ratios of both the
restaurants..................................................................................................................................15
CONCLUSION .............................................................................................................................17
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INTRODUCTION
In modern era, managing finance resources is considered as one of the most important
aspect of every business. Further, it is only because of the effective decision regrading utilization
of financial resources which helps a company to grow and developed. This report demonstrate
various sources of finances which are available with Sweet menu restaurant. Along with this, the
report also highlights the cost and implications of all the available sources of finance.
TASK 1
1.1 Identification of the sources of finance available
Every company is required to determine various sources of finances at the time of growth
and expansion. Sweet Menu Restaurant Ltd. is planning to open two new stores in Central
London and Crovdon. For this purpose there are various long term and short terms sources
available with the company. One of the major difference between short and long term sources is
that short terms sources provides finance for short span of time whereas long terms sources
provides money for long time period. The sources are mentioned below as:
 Bank loans- It is considered as one of the best and trustful sources from which Sweet
Menu can raise finance for opening two new stores. Bank can provide amount to the
restaurant in the form of loan. Further interest will be charged by the bank regarding the
same. There are two types of interest rates on which banks provides loans and the rates
are fixed and floating (Sources of finance. 2012).
 Venture capital- According to this sources of finance, other companies or parties invest
money in projects of a firm. Sweet Menu Restaurant Ltd. Can also use this sources of
finance and it will be required to provide shareholding to the party which has provided
the funds. In addition to this, the party will also have right in day to day activities and
decision making process of the restaurant.
 Retained earnings- This is also termed as an internal sources of finance in which the
restaurant can use its own earnings in order to open two new stores. The earning which
will the one which remains after deducting expense form the revenue.
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 Debentures- The restaurant can also issue debentures in general public in order to raise
finance for its new project. Further Sweet Menu Restaurant Ltd. will be required to pay
interest to all the debentures holders.
 Hire purchasing: This is the most important external sources of finance in which
company purchases assets on instalment. A significant amount of down payment is paid
first and rest amount is paid through instalments. However, the ownership of assets is
transferred after payment of last instalment.
1.2 Implications of sources of finance
Sources of
finance
Advantages Disadvantages Legal Cost
Bank loan The company is
not required to
control the
dilution
Loan at floating
interest rate will
results in
increasing the
overall cost of
finance.
The restaurant is
required to preset
the complete
document which
are required by
the bank
The interest paid
on loan will
termed as the cost
of finance
Retained
earnings
There is no cost
of finance on
retained earnings
If the earnings are
not used in
effective manner
then the
opportunity cost
will directly gets
increased
There is no legal
requirements in
case of retained
earnings
Opportunity cost
is considered as
the cost of
retained earnings
as a source of
financing
Venture capital The cost of
finance cannot be
adjusted which is
one of the major
advantage of this
Organizations
have control on
dilution (Gibson,
2012)
As per law, a
contract is
required to be
signed between
venture capital
The cost of
venture capital is
return provided to
firm which has
given venture
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source firm and
organization
which is issuing it
capital.
Debentures The control do
not gets diluted
The interest paid
to debenture
holders become
financial burden
to organization
Companies are
strictly required
to adhere and
follow the rules
and regulations
regarding issue of
debentures
The cost of this
source of finance
is the interest
which is required
to be paid by the
firm to debenture
holder (Brigham,
2013.)
1.3 Appropriate source of finance for Sweet menu restaurant
The size of Sweet menu restaurant is small and thus it can be stated that sources such as
debentures and ventures capital are not appropriate for the restaurant. Such sources are more
suitable for large organizations and multinational companies.
After assessment of all the sources, it can be stated that retained earnings and bank loans are the
two common and appropriate sources which can be used by the restaurant. It is also required by
Sweet menu restaurant to take bank loan on fixed interest rates rather than taking them on
floating interest rates. Along with this, source such as retained earning can be also taken into
consideration in order to raise finances for opening two new branches (Sabău, 2013). Further the
restaurant is required to make use of its retained earning in best possible and effective manner. If
the best possible use is not made than the restaurant will be required to bear opportunity cost
which is a loss. Thus, it can be stated that bank loans and retained earnings are the two suitable
sources from which finance can be raised by Sweet menu restaurant. In addition to this, some
part of the total investment can be issued as bank loan and other can be issues as retained
earning.
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TASK 2
2.1 Cost of sources of finance
The appropriate sources of finance for Sweet menu restaurant are Bank and Retained
earnings, however such sources of finance put significant impact on business and company has
to pay specific cost for acquiring such sources of finance. The cost of acquiring bank loan and
retained earnings are stated below : Cost for acquiring bank loan- In case the company takes loan from the bank, it has to
pay significant interest on a fixed rate or floating rate. In this manner the interest cost is
to be bear by the company for acquiring bank loan. It can be witnessed that the interest
rate of banks is going to be changed as per the changes held in economy situation. On
the other hand company has to put some securities with bank (Hayre, 2015).
 Cost for acquiring retained earnings- Retained earning is the part of profits that is
acquired by the company in previous years. On the use of retained earning for opening
new outlets the company has to bear the opportunity cost. However , there is no such
financial cost associated with using this source of finance. The company can loss the
opportunity to invest the saving in more profitable option (Broadbent and Cullen, 2012).
2.2 Importance of financial planning
Financial planning is the most important aspect of a business that is used to attain
organizational success. The use of financial planning is must for Sweet menu restaurant so as to
access the most suitable sources of finance. Making use of financial planning the company can
use its available sources of finance in the most optimal manner to earn profits. Budgeting is the
most appropriate aspect of financial planing in which company can determine how to use fund
to project future courses of actions (Paramasivan, 2009). As per the present case the hospitality
organization is planning to open new restaurants in different areas of UK so financial planning
will be helpful in deciding the expenditures on building, land and other assets and preparing a
plan an estimated investment. Furthermore, financial planning is important in allocating funds to
different activities which allows for making the best use of funds for operations (Kung, Huang
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and Cheng, 2013). Financial planning is important in making the best use of available resources
and plan to acquire the external sources while conducting specific cost and value analysis of
using such sources. Financial planing is also important in conducting financial forecasting for the
business and making viable investing decisions.
2.3 Assessment of the information needs of the different decision maker of Sweet menu
Financial information is acquired from different financial statement such as balance
sheet, income statement and cash flow statements. Such information is needed by different
stakeholder for supporting their decision making. The points below represent the information and
its use for various stakeholders: Shareholders: These are the people who invest their funds in the organization with
expecting good returns. These stakeholders are interested in acquiring the information of
profits gained by the company and dividend paid in previous years so they can make
investment decisions. In case of Sweet Menu Restaurant, those stakeholders are willing to
know about divided that are acquired from their investment. Managers-The information of finance available in the business is required by the
managers of Sweet Menu Restaurant so as to prepare financial strategies and making
decision for investing funds. The information available in financial statement is used to
find out a feasibility of making investments into new outlets (Shahrokhi, 2008). Fund providers: The find providers such as financial institutions require the information
regarding the creditworthiness of business or the interested knowing about the financial
position of the company so they can make decisions for providing loans to the company.
As Sweet Menu Restaurant is planning to take loan from bank hence, it has to meet the
expectations of fund providers regarding information need. Investors: Investors are the people who require the information in respect with the
profitability of company so that they can investor in profitable firm to gain higher interest
and returns.
 Government- Government looks over the information pertains to financial statements so
as to identify if company is paying accurate amount of tax or not. The evaluation of
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financial statements allows government to identify other operations of firms (Sabău,
2013).
2.4 Impact of the sources of finance upon the financial statements of Sweet menu which are
undertaken by them to meet their financial needs
From the case study, it is seen that Sweet menu restaurant is taking loan from Bank of
€5000 so that the amount in liabilities side of business will increase in the balance sheet and
interest amount paid against loan will decrease in income statement. However in case flow the
amount of cash inflow will increase.
The interest paid to bank loan will decrease the amount of profits for business. In case the
company will use retained earnings, the amount in reserves and surplus will be declined
however, there will be no such financial impact of using such source.
TASK 3
3.1 Analysis of the budget and appropriate business decision based upon it
The budget is showing that the case sales of company is increasing continuously, hence,
the growth percentage in increasing simultaneously. In September and October salaries amount
paid was contract but in upcoming years it is increased to a significant rate. Purchase in the
month of November and December is growing rapidly. The case budgets shows that products
offered by cited restaurant are able of generate demand. The outflow made during the month of
September, represents that company was not able to meet the expenditure through the cash sales
due to increased expenses such as Van, furniture and fittings etc. it represents the clear deficit in
entire month. However, in the month of October restaurant earned good sales which led to
positive closing balance of £3870. In addition the month of November, demand increased in
respect with food thus, maintaining the positive closing balance. However, acute fluctuations are
seen in case sales. The improved sales in November is proved to a positive cash balance however
at the end expenses are sharply increasing and cash balance becomes negative even sales
increase by 20%. The company has to control the cash within business and should overcome the
expenses.
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3.2 Unit cost to determine the pricing of the product and services offered by Blue Island
restaurant
Items Costs £
Steak 3
Vegetables and other ingredients 1.5
labour 3.5
Overheads 2
Total Costs 10
Mark Up (40%) 4
VAT 2
Selling Price 16
Food Cost Percentage = Total Costs of Ingredients/ Selling Price * 100
Food Cost Percentage = 10/16*100
Food Cost Percentage = 62.50%
From the calculation, it has been seen that the company has to bear 62.50% of the costs
for carrying out its operations in successful manner Nonetheless, this could be said that
£16/meal selling price on which the restaurant will generate a profit of £6..
3.3 Investment appraisal tools to assess viability of projects
Table 1: Payback period
Year Proposal 1
Cash flows
Proposal 2
Cash flows
0 (£1,200) (£1,200)
1 £800 (£400) £300 (£900)
2 £600 £200 £400 (£500)
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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: result of payback period shows that investment in Proposal 1 is
favorable option for the business in compare to investment in Proposal 2. This method helps to
determine that amount of investment will be covered in which year and on calculating the
payback period of Proposal 1, it was assess that it will be recovered in Year-2 only whereas
investment in Proposal will be recovered in Year-3.
Table 2: Net Present Value Method
Proposal 1 DF @10% Present value Proposal 2 DF@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 0.621 £31.1 £500 0.621 £310.5
Residual Value £0 0.621 £0 £50 0.621 £31.1
NPV £491 £530
Net Present Value Method: This method calculates the cash inflow of the project by
considering the rate of discounting factor and on the basis of which yearly cash inflows are
determined. In the given two different proposals, Net Present Value of Proposals were positive
and investment in this projects is favorable option. But the NPV of Proposal 1 is £491, which is
lower in compare to NPV of Proposal 2 that is £530. Investment in Proposal 2 will give better
return to the organization and also one of the feasible option(Chan and et.al., 2001).
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TASK 4
4.1 Financial statements
Income Statement: It also stated as Profit & loss account of the organization. This
financial statement shows the expenses and income received by the organization during the year.
All the expenses are debited and incomes are credited in this account and on the basis of which
profit or loss is determined for the business.
Balance Sheet: Balance sheet of the organization shows the financial position of the
business as it includes the amount of owner’s capital, liabilities and assets owned by the
organization. This financial statement is prepared at the end of the financial year and shows the
financial position of the business that performance of the company is improved or not (Butters,
2004)
Cash flow statement: It includes three different activities which are operating activities,
investment activities and financial activities of the business. This records only the cash and bank
transactions of the organization which are incurred during the year to assess all the cash inflow
and outflows (Shahrokhi, 2008).
4.2 Comparing the formats of financial statements for the different types of business organization
There are three kinds of business such as Sole trader, Limited Company and Partnership
firm. There are various similarities in financial statements of all business firms but all have to
faced difference in terms of preparation of financial statements, the companies have to prepare
statement while concerning IFRS and GAAP guidelines
Sole trader
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I
llustration 1: Balance sheet for sole trader

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Illustration 2: Income statement of sole trader

Partnership
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Illustration 3: Income statement of partnership

Company
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Illustration 4: Company balance sheet

4.3 Interpretation of the financial statements by making analysis of the ratios of both the
restaurants
Table 3: Ratio analysis
Ratios Sweet Menu
Restaurant Blue Island Restaurant
Gross profit £222,500 £198,000
Net sales £350,000 £299,000
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Gross profit ratio 63.57% 66.22%
Net profit £85,000 £94,800
Net sales £350,000 £299,000
Net profit ratio 24.28% 31.70%
Current assets £68,000 £41,000
Current liability £195,000 £123,000
Current ratio 0.35 0.33
Liquid assets £24,000 £10,000
Current liability £195,000 £123,000
Quick ratio 0.12 0.081
Sales £350,000 £299,000
Stock £44,000 £31,000
Stock turnover ratio 0.12 0.10
Debt £31,000 £5,000
Equity £164,000 £118,000
Debt equity ratio 0.19 0.04
Debt £31,000 £5,000
Assets £233,000 £188,000
Debt to assets ratio 0.13 0.02
Gross Profit Ratio: On analyzing the gross profit ratio of Sweet Menu restaurant and
Blue Island restaurant, it was assess that gross margin of Blue Island restaurant was 66.22%
which was higher in compare to Sweet Menu, 63.57%. Reason behind higher gross profit of the
restaurant was due to low cost of production in their business.
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Net Profit Ratio: It shows the relationship between the sales and final profit achieved by
the restaurant after incurring all its costs and expenses. Net profit of Sweet Menu was 24.28%
which is lower in compare to Net profit of Blue Island that is 31.70%. It states that Blue Island is
effectively managing its operational costs and also the cost of production in their restaurant
business. This has made direct impact on profitability of the business.
Current Ratio: Current ratio of the organization depicts about the liquidity position. This
ratio of Sweet Menu was 0.35 times which shows that capability of restaurant to meet its short
term obligations is better in compare to the current ratio of Blue Island as its current ratio is 0.33.
It also indicates that proportion of current liability is higher in compare to current assets of the
business.
Quick Ratio: These ratio determines the liquidity of the organization by considering only
the liquid assets and liability excluding the stocks (White, 2006). Quick ratio of Sweet menu was
higher when it’s matched with the Blue Island, it shows that Sweet Menu is effectively managing
its short term obligations.
Stock Turnover Ratio: Stock Turnover Ratio shows the efficiency of the company to turn
its stocks into sales and on assessing the performance of both restaurant it was evaluated that
efficiency of Sweet Menu was higher that is 0.12 times.
Debt Equity Ratio: Sweet menu has dent equity ratio of 0.19 which indicates that debt of
Sweet menu was lower and higher investment of owner capital. On the other side the proportion
of Blue Island restaurant in debt is much lower in contrast to owner’s capital.
Debt assets ratio: This ratios shows the proportion of debts over the total assets of the
restaurant and on assessing the performance of both restaurant, it was examine that Sweet menu
has 13% and Blue Island has 2% of Debt on the total assets of the company.
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CONCLUSION
From the above report it can be concluded that it is very essential for organizations to
chose the source of finance available. Before selecting any of the sources, companies are
required to evaluate their fundamental and liquidity positions. It can be also concluded that with
the help of project evaluation technique best and most appropriate project can be selected by
organizations.
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