Financial Management Practices and Challenges

The assignment delves into diverse aspects of financial management. It examines prevalent practices across sectors like public, private, and agricultural finance. The focus extends to analyzing challenges faced in implementing effective financial management strategies. The role of financial tools such as ratio analysis in assessing performance and identifying areas for improvement is also discussed. Additionally, the document highlights the importance of sound financial management principles for organizational success.

MANAGING
FINANCIAL
RESOURCES AND
DECISIONS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1 FINANCIAL SOURCES FOR BUSINESS......................................................................1
1.1 Sources of finance for Sweet Menu.......................................................................................1
1.2 Implications of sources..........................................................................................................2
1.3 Evaluation of sources.............................................................................................................3
TASK 2 IMPLICATION OF FINANCE........................................................................................3
2.1 Costs associated with the sources..........................................................................................3
2.2 Importance of financial planning...........................................................................................4
2.3 Information needs of decision makers...................................................................................5
2.4 Impact of finance on financial statements.............................................................................6
TASK 3 FINANCIAL DECISIONS BASED ON FINANCIAL INFORMATION.......................6
3.1 Analyse budget......................................................................................................................6
3.2 Calculation of unit costs........................................................................................................8
3.3 Capital Investment Methods..................................................................................................8
TASK 4 EVALUATE THE FINANCIAL PERFORMANCE OF COMPANY...........................11
4.1 Financial statements.............................................................................................................11
4.2 Difference between the statements......................................................................................11
4.3 Ratio Analysis......................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial resources play an important role in the functioning of the business. The funds
are essential for survival. The purpose of this report is to understand the sources of finance
available to the restaurant company Sweet Menu. It will reflect how the financial decisions are
made on the basis of the available information. It will also show the feasibility of different
business projects by making use of investment appraisal methods. Some financial ratios are also
calculated at the end in order to evaluate the financial position of the business. It is expected that
report will be able to achieve its goals and objectives.
TASK 1 FINANCIAL SOURCES FOR BUSINESS
1.1 Sources of finance for Sweet Menu
Figure 1: Source of Finance
Sweet Menu restaurant is making plans about opening its two new branches in Central
London and Croydon. A sum of £ 300000 and £500000 are needed for the investment (Ball,
Jayaraman and Shivakumar, 2012). Hence, finance can be arranged from the two sources:
Internal Sources
 Retained profits – This amount is preserved after disposing off all the debts and
liabilities. The source is mainly used in meeting the future contingencies such as
expansion, retrenchment etc (Bhowmik and Saha, 2013).
1

 Sale of assets – It is the most easily available source within business. Funds can be
arranged by selling some of the assets such as machinery, land, etc.
 Personal savings – It is the most common form of finance available for the
entrepreneurs. Three owners of Sweet Menu can arrange money from their respective
personal savings.
External Sources
 Bank Loan – Most of the people arrange money from this source only. In these days,
loans are available at easy formalities. Loan can be taken after fulfilment of certain
requirements (Brigham and Ehrhardt, 2011).
 Bank overdraft – The company will need liquid cash for managing its day to day
operations. This need arises due to time gap between the collection and payments. In
order to fulfil such gap, bank overdraft is the most preferred option.
 Issue of shares – It is another good option for Sweet Menu. Shares can be issued for
subscription among the public. It can be an IPO that is initial public offering.
1.2 Implications of sources
The implications of the sources can be stated in the following manner:
 Retained earnings – The use of retained earnings can have an impact on the divided
policy of the company. The amount of dividend for the shareholders may get lower.
However, there is no dilution of control and ownership in this option (Dada, Azim and
Ullah, 2014). There is no effect on the financial liabilities as money arising from this
mode is regarded as the part of reserve and surplus.
 Bank loan – Under the option of bank loan, business owners of Sweet Menu are required
to perform all the legal formalities. The deposition of collateral security to the bank is
also made (Winand and et. al. 2012). On completion of all the legal formalities, owners
can make use of funds because the ownership is transferred to them. On the other hand, if
business does not succeed, then collateral security given by the owners can go on sale.
 Bank overdraft – In this option, lender gives additional money to the entrepreneur. The
ownership remains unaffected. Issues related to cash flows may arise because bank
demands overdraft to be repaid at a short notice (Ittelson, 2009).
2

 Hire purchasing and leasing – It is the most effective option when there is shortage of
cash. Hire purchasing and leasing can be done for any kind of machinery or equipment or
tools. The ownership is transferred to the owner after making payment for the last
instalments. Hence, it is a kind of loss for the hire purchasing organization.
 Sale of assets – Under this option, assets can be sold on lease or on complete sale. The
ownership is transferred after making a certain agreement (Siano, Kitchen and Confetto,
2010).
1.3 Evaluation of sources
Following sources of finance have been selected for the restaurant:
Bank loan – Bank loan is the most commonly availed option for business owners. It is evident
that amount needed for expansion in restaurant industry is high. There are different types of risks
associated with it (Flynn, Uliana and Wormald, 2012). Bank loan gives high level of flexibility
as compared to the other sources. Loans can be obtained easily after fulfilment of certain legal
formalities.
Bank overdraft - It can be used by these two new restaurants as it is very effectual in achieving
balance between cash inflows and cash outflows. Further, a good record of payments can be
maintained because any kind of cheque does not discard due to lack of money. There is no
burden of late payment penalties and payments within business are made on time. No paperwork
is involved in the process (Keller, 2013). Cash can be accessed any time and the payment can be
made to the suppliers with ease. Day to day business operations can be handled in an effective
manner.
Retained earnings - Another feasible option for Sweet Menu is retained earnings. The company
has been running its business operations since last 10 years. It can be estimated that restaurant
has earned high amount of profits within business due to such good reputation among the masses
(Leung, 2011). There are no legal formalities and financial obligations associated with it as
sources are easily available within the business. It can be very feasible if company is in good
financial position.
3

TASK 2 IMPLICATION OF FINANCE
2.1 Costs associated with the sources
Every source of finance has a cost associated with it. These can be described in the following
manner:
 Retained earnings – There is a problem of improper utilization of funds. Some
unessential charges may emerged in case if, objective related to use of retained earnings
is not stated clearly (Murty Kopparthi and Kagabo, 2012). Further, an issue of
overcapitalization may also arise. Low rate of dividend for the shareholders can lead to
dissatisfaction among them.
 Bank loan – Bank loan is a common option but sometimes it may also be difficult to use.
There is a need to submit different types of legal formalities. Cost in the case of bank
loan is the amount of interest which is being charged on the borrowed amount. However,
interest charges can also act as burden for the business (Price, 2015). In case of Sweet
Menu Company, amount of investment in two proposal is high hence, interest charges
will also be high on the loan. There are some costs associated with the paper work which
can also be a burden for the entrepreneurs.
 Bank overdraft - This option is also having some costs. There are many high interest
charges and they are usually higher as compared to other sources of borrowing. However,
expenses may increase if the limit of overdraft exceeds (Simser, 2011). Borrower must
keep into mind that bank overdraft is a kind of temporary loan and it requires regular
revisit from the lending institutions.
 Government grant – It is also a loan for the company. It is likely to be appeared in the
cash flow statement (Zhang and Chen, 2014). It will be shown under the heading of cash
flow from financing activities. It is recorded as a liability under the balance sheet.
2.2 Importance of financial planning
Sweet Menu is required to perform good financial planning with regard to the opening of
two new restaurants. It plays an important role within the company. This planning is to be
performed carefully in order to make sure that all the things are going into the right direction. It
helps in managing cash inflows and cash outflows within the business (Abraham, Deo and
Irvine, 2008). There is a need of strong capital foundation and financial planning. It becomes
4

easy to allocate all the resources. All the day to day expenses can be managed with ease as with
the help of planning, financial needs are fulfilled on the immediate basis. Future and scope of
these two ventures can be decided in a well manner through financial planning.
There are many uncertainties related to the future and proper planning helps in removing
those uncertainties. It also assists in taking corrective actions at immediate point of time. It also
creates a link between the existing and future requirements by estimating sales and growth plans
for the business (Menifield, 2013). There is an increase in the cash flow also and this leads to
increase in the capital also. Financial planning also facilitates the use of best and suitable source
of finance for the business. Company will always need a stable and effective source of money so
that its business operations can be financed with ease. Unessential payment of taxes can be
avoided as this activity also covers tax planning. High level of control can be seen on the
selection of sources (Noor, 2013).
2.3 Information needs of decision makers
Decisions that are made within the company are evaluated at these levels:
 Strategic level – At this level, directors that mean the three owners of Sweet Menu
restaurant will be involved. They are responsible for making more strategic and crucial
decisions (Petch, 2012).
 Tactical level – At this level, middle level managers are engaged in the process.
Generally, they take decision more of technical nature.
 Operational level – It is the last level in the organization where supervisors are involved
in order to take decisions. Here, decisions are related with day to day operations.
There are various decisions makers within the business of Sweet Menu. These are as follows:
 Suppliers – Suppliers would like to maintain healthy business relations with the
company. They expect that business should give them timely payments for the supply of
all the inputs and raw materials (Financial Management and Control, 2014).
 Creditors – These are the ones who owns credit from the firm. Creditors show their
interest in evaluating the financial position of business because they want to know
whether organization has the ability to pay back the credit or not.
5

 Employees – These people take decisions related to their career opportunities and growth
within the organization (Bhowmik and Saha, 2013). They want to work with a name
which has a good name and which operates on a high scale.
 Customers – These customers are interested in the products and services offered by the
company. For the last 10 years, Sweet Menu has developed a very solid reputation among
its customers with regard to food quality and taste.
 Tax authorities – These authorities make sure that company is making timely payment of
taxes or not. These bodies also make sure that there should not be any illegal tax
avoidance from the side of company (Davies and Drexler, 2010).
2.4 Impact of finance on financial statements
Selected sources of finance will have an impact on the different financial statements:
Bank Loan – This source can increase the value of liabilities under the balance sheet. The
amount of capital will also increase (Evans and Porter, 2010). This event is likely to be recorded
under the heading of cash flow from financing activities in the cash flow statement. However,
interest applied on the loan amount will be recorded in the profit and loss account.
Bank overdraft – This source will enhance the value of liabilities within the balance sheet that is
leading to increase in the amount of capital also. This transaction will be recorded under the cash
flow statement as well as under the heading of cash flow from financing activities (Mayne and
Zapico-Goni, 2007). However, interest charges are to be recorded in the profit and loss
statement.
Retained profits – It will create an impact on the balance sheet that also affects reserve &
surplus. This activity will be recorded under the heading of cash flow from investing activities
within the cash flow statement. The profit and loss statement will also be affected due to retained
earnings.
Government grant – It is also a loan for the company. The event is likely to be recorded as a
liability under the balance sheet (Merton and Bodie, 2010). It will appear within the cash flow
from financing activities under the cash flow statement.
6

TASK 3 FINANCIAL DECISIONS BASED ON FINANCIAL
INFORMATION
3.1 Analyse budget
Cash Budget
Receipts
September
£
October
£
November
£
December
£
Total
£
Cash sales 15000 13000 15000 18000 58000
Total 15000 15500 18000 20000 58000
Payments
Van 12000 12000
Furniture & 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 40850 11630 13230 24280 89990
Net balance (25850) 3870 4770 (4280) (21490)
Balance b/fwd 18500 (7350) (3480) 1290 8690
Balance c/fwd (7350) (3480) 1290 (2990) (12530)
Budget is a quantitative statement which discloses the financial position of the business.
Budgeting is performed keeping in mind the future and hence it also identifies the risks
associated with the future. The given cash budget is of Blue Island Restaurant. Following
observations can be made from the budget:
 The sales are reflecting a fluctuating trend and it is affecting the demand of the service of
the restaurant within the market (Beck, Levine and Loayza, 2015).
 The outflows for the month of September are showing the inability of the firm in meeting
the expenses through cash sales. Expenses such as furniture, van and fittings are showing
negative balances.
7

 In the month of October, firm has achieved the positive net balance of 3870. The level of
expenditures has also shown a decrease in the value.
 In the month of November a positive cash balance of 4770 has been maintained due to
increasing demand for products (Ittelson, 2009). It reflects that business is having high
competency level and efficiency.
 In the month of December, there is hike in the furniture and fitting expenses. It has raised
the outflow for the company. It has resulted in negative balance however the amount of
revenue has increased.
From the above analysis it can be interpreted that financial position of the Blue Island
Restaurant is good and company has the potential to achieve expansion. There is a need to adopt
appropriate measures to fill out the gapes (Sources of finance, 2012).
3.2 Calculation of unit costs
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
Computation of Food Cost Percentage
Food Cost Percentage = Total Costs of Ingredients/ Selling Price * 100
Food Cost Percentage = 10/16*100
Food Cost Percentage = 62.50%
After analysing the above calculation, it can be said that 6.50% of the food costs is likely
to be beard by the restaurant. A profit of £6 is being generated on the selling price of £16 per
8

meal. In order to achieve good financial position, the restaurant is expecting a 40% profit on the
mark up cost and 20% VAT on the products.
3.3 Capital Investment Methods
Blue Island is making plans to assess the viability of two business proposals. The
feasibility of the two projects can be examined through application of capital investment
techniques.
The cash Flows
Year Proposal 1 Proposal 2
0 £1200 £1200
1 800 300
2 600 400
3 400 500
4 200 600
5 50 500
Residual value 0 50
Payback Period
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
Year Inflow Cumulative inflow
0 -£1,200 -£1,200
1 £300 -£900
9

2 £400 -£500
3 £500 £0
4 £600 £600
5 £500 £1,100
Residual Value £50 £1,150
Payback Period 3 Years
Interpretation
After deriving the results of payback period, it can be interpreted that payback period of
proposal 2 is higher as compared to proposal 1. It means the initial investment in case of option 2
is being recovered early.
Net Present Value
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
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
10

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
Interpretation – After deriving the results of NPV technique, it can be interpreted that net
present value of project 2 is higher. It means this project is generating high returns for the
company.
Recommendation
It is recommended that Blue Island is required to select proposal 2 for the investment as it
is rendering good returns for the company. The results of this method can be trusted because it
takes into consideration the time value of money. Project 2 has huge business potential as
compared to project 1.
TASK 4 EVALUATE THE FINANCIAL PERFORMANCE OF COMPANY
4.1 Financial statements
The statements which shows financial position of the company from different angles are known
as financial statements. There are mainly three types of financial statements which are as
follows:
Income statement – It is a document showing all the income and expenses for the company. It
shows how better the business performs over a certain period. It states figures of gross profit and
gross loss (Evans and Porter, 2010). Amount of revenue, sales and cost of goods sold are also
defined in that period.
Cash flow statement – It is a statement reflecting the cash inflow and outflow from three
different types of activities. It is having both internal and external use. It is used for making long
term as well as short term plans in an internal manner. Further it is used by the external
stakeholders such as creditors, investors, government for the purpose of making certain financial
decisions.
11

Balance sheet – It is a statement reflecting the financial position of a particular company at a
particular time (Mayne and Zapico-Goni, 2007). Company’s assets, liabilities and owner’s
equity are presented in summarized form. It covers an equation which is as follows:
(Assets = liabilities + Owners' equity)
It includes different types of assets and liabilities which are fixed assets, current assets, current
liabilities, long term debt, loan capital etc.
4.2 Difference between the statements
Different types of businesses operates in UK. All the business need to prepare their own
financial statements in an appropriate format. There are some requirements which are needed to
be fulfilled. Following are the businesses:
Partnership – It is important for all the partners to prepare the financial statements. The partners
are required to prepare all the major financial statements (Zhang and Chen, 2014). In case if a
partner has committed some wrong or fraud into the business, the other partners can discard his
share.
Sole entrepreneurship – This type of business is owned and managed by a single owner. It is
not compulsory for the owner to prepare all the major financial statements. The owner of the
business is responsible for regulation and monitoring.
Limited companies – It is mandatory for a public limited company to disclose all the major
financial statements for public viewing (Financial Management and Control, 2014). The
statements are prepared as per the provisions of GAAP and IFRS.
4.3 Ratio Analysis
Ratios Formula Sweet Menu
Restaurant
Blue Island
Restaurant
Net Profit margin Net profit/sales 0.01 0.13
Gross Profit margin Gross profit/sales 0.63 0.66
Current Ratio Current assets/
current liabilities
1.78 0.63
Quick Ratio Current assets – 0.63 0.15
12

Inventory/ current
liabilities
Asset Turnover Net sales / net assets 1.79 2.4
Debt/equity ratio Debt/Equity 0.41 0.58
 Current ratio – It is a liquidity ratio which shows the ability of the company in fulfilling
its short term obligations. The ratio is showing better results for Sweet Menu. The
liquidity position of Sweet Menu is better as compared to Blue Island. The ratio is higher
than the ideal ratio which indicates that SM has the potential to fulfil its short term
obligations at any time (Advantages and Limitations of Ratio Analysis, 2014).
 Quick ratio – It is also a measurable of liquidity position. The quick ratio is showing
good results for SM as compared to BI. It again reflects that restaurant is fulfilling its
short term liabilities in effective manner.
 Asset turnover – This ratio measures the ability of the company in generating the sales
from the assets. The Blue Island is delivering good results hence it can be interpreted that
company is utilizing its assets more efficiently (Flynn, Uliana and Wormald, 2012). Ratio
above 1 is considered very positive from the business point of view.
 Debt to equity ratio - It is a ratio which measures the financial leverage of the company.
The ratio for both the companies has been maintained around .5. This denotes that there
are half as many liabilities as there is equity (Murty Kopparthi and Kagabo, 2012). It
shows that assets of the company are funded in the ratio of 2:1 by investors to creditors.
 Net profit margin – It is the proportion of net profit which is in relation to the revenue
earned during the period (Brigham and Ehrhardt, 2011). It can be seen that net profit
margin for Blue Island is better as compared to the Sweet Menu. It shows that BI is
successfully converting the sales revenue into the profits. Company is earning good
returns on its assets
 Gross profit margin – It is the proportion of gross profits in relation to the revenue earned
during a period. Underlying profitability of the business can be noticed from this ratio.
The gross margin for BI is better than SM (Ball, Jayaraman and Shivakumar, 2012). It is
a sign of good financial position and business is earning good amount of sales.
13

CONCLUSION
From the above study it can be concluded that business is required to make optimum
utilization of all the financial resources. Selection of sources depends upon many factors. The
pros and cons of every source is needed to be evaluated. Among all the capital appraisal
methods, Net Present Value is mots effectual because it takes into consideration the time value of
money. Ratio analysis is very impressive tool for measurement of financial performance. It helps
in judging the liquidity, solvency and profitability within the business.
14

REFERENCES
Books and Journals
Abraham, A., Deo, H. and Irvine, H., 2008. What lies beneath? Financial reporting and corporate
governance in Australian banks. Asian Review of Accounting. 16(1). pp. 4 – 20.
Ball, R., Jayaraman, S. and Shivakumar, L., 2012. Audited financial reporting and voluntary
disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting
and Economics. 53(1). pp. 136-166
Beck, T., Levine, R. and Loayza, N., 2015. Finance and the sources of growth. Journal of
Financial Economics. 58(1-2). pp. 261-300.
Bhowmik, K. S. and Saha, D., 2013. Sources of Finance. Financial Institution of the
Marginalized India Studies in Business and Economics. Pp. 61-71.
Brigham, F. E. and Ehrhardt, C. M., 2011. Financial Management: Theory and Practice. 8th ed.
Cengage Learning.
Dada, A. O., Azim, M. S. and Ullah, M. S., 2014. The Imperatives of Innovative Sources of
Development Finance: Evidence from Nigeria. Research Journal of Finance and
Accounting. 5(14). pp.62-66.
Davies, H. and Drexler, M. 2010. Financial Development, Capital Flows, and Capital Controls.
In The Financial Development Report 2010. Geneva and New York: World Economic
Forum. Pp. 31–47.
Evans, M. and Porter, R., 2010. Real estate financial reporting and accounting. Journal of
Property Investment & Finance. 28(5). Pp. 105-111.
Flynn, D.K., Uliana, E. and Wormald, M. (2012). Financial Managemnt-6th Edition, Juta and
Company Limited
Ittelson, R. T., 2009. Financial Statements: A Step-by-Step Guide to Understanding and
Creating Financial Reports. Career Press.
Keller, A., 2013. Finance and financial management. GRIN Verlag.
Leung, A., 2011. Financial management practices and social reproduction. Qualitative Market
Research: An International Journal. 14(2). pp.218 – 239.
Mayne, J. and Zapico-Goni, E., 2007. Monitoring performance in the public sector: future
directions from International Experience. Transaction publishers.
Menifield, E. C., 2013. The Basics of Public Budgeting and Financial Management Updates.
University Press of America.
15