Detailed Report: Finance Resource Management for Taste Business

This report provides a comprehensive analysis of financial resource management for Taste, a medium-sized catering business seeking expansion. It explores various sources of finance, including short-term options like bank overdrafts and leases, and long-term options like share capital, bank loans, and debentures, comparing the advantages and disadvantages of each. The report also examines financial statements (profit and loss, financial position, cash flow) and their impact, including ratio analysis, and discusses investment appraisal techniques like payback period and net present value. It provides recommendations for financing buildings and working capital, emphasizing the importance of financial planning, cash flow management, and the needs of financial statement users. The analysis culminates in advice to the Taste business on interpreting financial statements and making informed financial decisions for sustainable growth.

MANAGING FINANCE
RESOURCE DECISION

TABLE OF CONTENTS
1. INTRODUCTION..................................................................................................................1
2. Sources of finance..................................................................................................................1
AC 2.1 Type of businesses................................................................................................1
AC 2.2 sources available to business................................................................................1
AC 2.3 Comparison between rights issue and loan stocks...............................................3
AC 2.3.1 Rights Issue.......................................................................................................3
AC 2.3.2 Loan Stock.........................................................................................................3
AC 2.3.3 Comparison.......................................................................................................3
AC 2.4 Beneficial source of finance for the Buildings and noncurrent assets.................3
AC 2.5 Advice to the Board of Directors on finance source for working capital.............4
AC 2.5.1 Definition of working capital ...........................................................................4
AC 2.5.2 Importance of working capital..........................................................................4
AC 2.5.3 Sources available for working capital...............................................................4
3. Financial statements...............................................................................................................5
AC 3.1 Statement of profits or loss...................................................................................5
AC 3.2 Statement of financial position.............................................................................5
AC 3.3 statement of cash flow..........................................................................................5
AC 3.4 Impact on financial statements.............................................................................5
AC 3.4.2 Gearing ratio......................................................................................................7
AC 3.4.3 Impact of the financial plans on the financial statements.................................7
AC 3.5 Calculation of EPS...............................................................................................7
AC 3.5.1 Information........................................................................................................7
AC 3.5.2 Calculation of EPS............................................................................................7
AC 3.5.3 Explanation........................................................................................................8
TasK 4 INVEstment Appraisal...................................................................................................8
AC 4.1 Investment appraisal importance..........................................................................8
AC 4.2 Risk to future cash flows and future values vs. present value..............................8
AC 4.3 Types of techniques..............................................................................................9
AC 4.3.1 Pay back period.................................................................................................9
AC 4.3.2 Calculation and explanation of pay back period...............................................9
AC 4.3.3 Net present value...............................................................................................9
AC 4.3.4 Calculation and explanation of net present value...........................................10

AC 4.4 Recommendation for the investment opportunity..............................................10
AC 4.5 Unit cost.............................................................................................................11
AC 4.5.1 Importance of cost per unit and its calculation................................................11
AC 4.6 Factors to be considered while deciding the selling prices................................11
TASK 5 CASH FLOW VS. Profits..........................................................................................12
AC 5.1 Need of cash budget and trends of the Taste business budget...........................12
AC 5.2 Importance of financial planning.......................................................................13
AC 5.3 Liquidity problems with having proper availability of profits...........................13
AC 5.4 Users of the accounts..........................................................................................14
AC 5.4.1 Users................................................................................................................14
AC 5.4.2 Information need and importance....................................................................14
TASK 6 Interpretation of financial statements.........................................................................14
AC 6.1 Ratio Analysis....................................................................................................14
AC 6.1.1 Profitability ratio.............................................................................................15
AC 6.1.2 Liquidity ratio..................................................................................................15
AC 6.2 Advice to the Taste Business..............................................................................16
TASK 7 Financial statements of sole trader, partnership and limited companies...................16
Conclusion................................................................................................................................17
REFERENCES.........................................................................................................................18

INDEX OF TABLES
Table 1: Calculation of enterprise value for computing WACC of 5, 00,000 shares................4
Table 2: Computation of WACC...............................................................................................4
Table 3: Calculation of enterprise value for computing WACC for loan stocks.......................5
Table 4: Calculation of WACC..................................................................................................5
Table 5: Calculation of enterprise value for computing WACC for stocks and loan................5
Table 6: Calculation of WACC.................................................................................................6
Table 7: Calculation of EPS.......................................................................................................6
Table 8: Calculation of cash flows.............................................................................................8
Table 9: Calculation of payback period.....................................................................................8
Table 10: Calculation of net present value.................................................................................8

1. INTRODUCTION
Managing financial resources is very important activity for the organization success.
Adequate availability and efficient management of finance resources helps business to
operate successfully. There are different sources available to the organizations for fulfilling
its finance requirement. Taste is a medium size company that want to expand its catering
business therefore business need finance requirement. Present report will helps us in
identifying the available short term as well as long term fund sources for the businesses. In
addition to it, organization needs to take decisions for pricing, investment and budgeting.
Therefore, the report describes the decision making process so as to take efficient and
strategic decisions. Investment appraisal techniques help the businesses to take effective
investment decisions that yield higher the profits. On contrary, the importance of financial
planning will have been discussed for achieving the organization objectives. Furthermore, the
preparation of financial statements helps companies to determine their operating and financial
performance. Business corporations can take better decisions by analysing and interpreting
their financial statements.
2. SOURCES OF FINANCE
AC 2.1 Type of businesses
Sole proprietorship: It is the most common form of business. Under this business
organization, only a single entrepreneur establishes the business hence, all the business
profits as well as losses are available for themselves.
Partnership: Under this form of business organization, two or more individual can
start the business operations. Therefore, all the business profits and losses are share in their
decided profit loss sharing ratio.
Company: It is a legal body that came into existence by following the companies act.
Shareholders are the owners of the company who make investment in the business and get the
return.
AC 2.2 sources available to business
In order to operate successfully business need to have adequate availability of
working capital. There are distinct sources available for fulfilling short term as well as long
term finance requirement that are explained below:
Sources Feature Advantage Disadvantage
Short term Bank Overdraft: It is a The advantage of this The disadvantage of
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facility that bank provided
to all the businesses. Taste
company can take bank
overdraft and withdrawal
higher the amount from the
Bank deposits (Sources of
finance. 2010).
method is that it
mitigates the urgent
and immediate
finance requirements.
this method is that
bank charges a high
rate of interest on
overdraft. Further, the
overdraft facility is
provided up to a
certain limit.
Short term Lease: It is a hiring process
through which Taste can use
the assets without having its
ownership.
The advantage is that
through paying only
the hiring charges,
company can use the
assets. It does not
require purchasing the
assets.
However, the main
disadvantage is that
Taste requires paying
instalment plus the
interest charges it.
Thus, it create
financial burden to
the company.
Long term Share capital: Taste
company can issue both
equity and preference shares
in the market to fulfil its
long term financial need.
The advantage is that
Taste company do not
need to pay regularly
dividend to the
shareholders. Thus, it
does not create
financial risk to the
business.
The disadvantage is
that shareholders have
voting rights through
which they can
control and manage
the business
operations.
Long term Bank loan: It is the major
source of finance. Thus.
Taste company can take
long term loans from bank.
The advantage is that
this is comparatively
a linent finance
sources than equity
because the interest is
allowable expenditure
for tax purpose
(Arffa, 2001)
Disadvantage is that
Taste business
requires paying
timely the instalment
and the interest
charges on browed
funds.
Long term Debentures: Along with the The advantage is that Disadvantage is that it
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share capital, Taste
company can also issue
debentures for getting funds.
it fulfils the financial
requirement to a great
extent. Therefore,
Taste can use this
source to acquire
larger the funds.
create fixed financial
burden to the
company. The reason
behind that is Taste
business requires to
pay timely interest to
the debenture holders.
AC 2.3 Comparison between rights issue and loan stocks
AC 2.3.1 Rights Issue
Right issue: It is a way of raising the equity capital of the business. It is an offer and
invitation to the existing shareholders to purchase new shares proportionate to their holdings.
Equity is an instrument for issuing rights to the shareholders.
AC 2.3.2 Loan Stock
Loan stock: Debenture is the instrument for acquiring loan stock which is an
acknowledgement of company's debt capital. It is a long term debt capital on which
businesses requires paying interest.
AC 2.3.3 Comparison
There are many advantages and disadvantages of issuing rights to the shareholders. In
context to Taste business, one of the main advantages for the company is that it does not
require making any payments as it is not the borrowings. Further, it can increase the business
credit rating therefore; company can take borrowings easier in future period. However, the
disadvantage is that it provides ownership to the shareholders (Baum and Crosby, 2014).
Thus, they have rights to take part in business decisions. Further, they invest their funds with
the purpose of getting higher the return. Therefore Taste company need to pay dividend
payments. Further, in case of any default it can hurt the business reputation and share prices
in an adverse manner. However, The advantage of the loan stock is that bondholders have not
any controlling rights hence; they cannot take part in the business management. Moreover,
the interest payment is deducted for computing tax (Burton, 2007). On contrary, the
disadvantage is that Taste company need to pay fixed interest payment periodically.
Therefore, it brings fixed financial burden to the company. Thus, it may create cash flow
problems and reduce profitability.
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AC 2.4 Beneficial source of finance for the Buildings and noncurrent assets
As per the scenario, Taste wants to expand its business in market therefore the
company require to invest £1000000 in building and other noncurrent assets. On the basis of
above mentioned benefits and disadvantages, it can be advised to Taste business that issuing
loan stocks will be more beneficial finance source. Company can issue debt capital and invest
acquired funds in the building and its noncurrent assets (Cowton, 2004). The reason for such
decision is that scenario indicate that Taste business have good track record and growing
continuously over the past six years. Thus, it is clear that company is financially strong and
having adequate availability of profits. Therefore, Taste business can bear fixed financial
burden for making timely interest payments. Further, by doing that, business do not require
diversifying its controlling rights and managing its operations on its own basis. Moreover,
Taste can acquire funds at easier the rate helps to minimize the finance cost and increase the
business profits (Fridson and Alvarez, 2011). Another benefit will be that the interest
payments made by Taste will be deducted so as to calculate business tax liability and reduce
the tax payments.
AC 2.5 Advice to the Board of Directors on finance source for working capital
AC 2.5.1 Definition of working capital
The type of capital that is needed to run business operating functions is known as
working capital. The need for working capital arises for operational purpose.
AC 2.5.2 Importance of working capital
The need for working capital arises for operational purpose. Every business
organization needs adequate availability of working capital to run business operations in an
effective manner.
AC 2.5.3 Sources available for working capital
As disused earlier, it is clear that both short term and long term finance sources are
available for fulfil Taste business working capital need. Under the short term finance sources,
bank overdraft and lease sources are available to the company. However, loan capital,
debentures and share capital are available as long term sources (Gonenc, 2005). On the basis
of above information it can be concluded that share capital will be the best finance source for
Taste Company. Company can issue shares in the market and get the required funds. The
reason for such decision is that company do not require paying regular payment of dividend
to the shareholders. Further, company is growing continuously in the market therefore it can
easily attract the investors due to higher the profitability (Gotze, Northcott and Schuster,
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2007). Moreover, through providing regular return, Taste business can enhance its share
prices and credit rating. This in turn, business can enjoy long term success and sustainability.
3. FINANCIAL STATEMENTS
AC 3.1 Statement of profits or loss
Profit or loss is a profitability statement that helps to determine the operational result
of the business. All the business expenditures and incomes are shown in profit or loss
account. It determines the business operational performance through determining profits or
loss.
AC 3.2 Statement of financial position
Balance sheet is known as statement of financial position. It combines all the business
assets and liabilities so as to determine the financial position. Assets include all the fixed,
current and noncurrent assets. However, balance sheet involves the current liabilities, long
term debt and equity capital. Financial performance can be determined through the balance
sheet.
AC 3.3 statement of cash flow
Cash flow statement: It combines all the cash incomes and cash expenditures. Cash
incomes are the cash sources whereas cash expenditures indicate the application of cash
funds. The purpose of the statement is to determine the cash changes between two balance
sheet dates. Cash flow from operating activities determined so as to identify the cash earning
capacity. Cash flow from investing activities indicate the acquisition and selling of business
assets. In addition to it, cash flow from financing activities identifies the sources through
which funds are generated and payment made to them.
AC 3.4 Impact on financial statements
AC 3.4.1 Weighted average cost of capital
Table 1: Calculation of enterprise value for computing WACC of 5, 00,000 shares
Enterprise Value (EV)
Current Market Price 2
Diluted Shares 35,00,000
Market Capitalisation 70,00,000
Long Term Liabilities 1,100
Less: Cash & Cash Equivalents 1,800
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Enterprise Value (in lacks) 69,99,300
Table 2: Computation of WACC
Debt Equity Weight age
E/(D+E) @ Enterprise Value 99.98%
D/(D+E) @ Enterprise Value 0.02%
Interest Rate (%) 0%
Tax Rate (@) 30%
WACC Calculation
WACC 3.88%
Table 3: Calculation of enterprise value for computing WACC for loan stocks
Enterprise Value (EV)
Current Market Price 2
Diluted Shares 31,00,000
Market Capitalisation 62,00,000
Long Term Liabilities 1,100
Less: Cash & Cash Equivalents 1,800
Enterprise Value (in lacks) 61,99,300
Table 4: Calculation of WACC
Debt Equity Weight age
E/(D+E) @ Enterprise Value 99.98%
D/(D+E) @ Enterprise Value 0.02%
Interest Rate (%) 6%
Tax Rate (@) 30%
WACC Calculation
WACC 0.92%
Table 5: Calculation of enterprise value for computing WACC for stocks and loan
Enterprise Value (EV)
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Current Market Price 2
Diluted Shares 32,50,000
Market Capitalisation 65,00,000
Long Term Liabilities 5,01,100
Less: Cash & Cash Equivalents 1,800
Enterprise Value (in lacks) 69,99,300
Table 6: Calculation of WACC
Debt Equity Weight age
E/(D+E) @ Enterprise Value 92.84%
D/(D+E) @ Enterprise Value 7.16%
Interest Rate (%) 6%
Tax Rate (@) 30%
WACC Calculation
WACC 0.30%
AC 3.4.2 Gearing ratio
Gearing ratio: It measures the proportion of debt capital and owner's equity in the
organization, also known as leverage ratio.
Calculation of gearing ratio
Particular 1st Option 2nd Option 3rd Option
Debt - 1000 500
Equity 8200 7200 7700
Gearing ratio Nil 0.14 0.64
AC 3.4.3 Impact of the financial plans on the financial statements
It is advisable to the Board of directors that third option is best for the firm because in
this option WACC is very low in comparison to other two alternatives. In this alternative
corpus is arranged by issuing shares and loan stocks. This leads to reduction in aggregate cost
of raising capital (Greenwood, 2002). This also leads to less dilution of the control of owners
on the firm. Hence, third option is best for the firm. By following this option cost of capital
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will reduced which will lead to less reduction in profitability. Hence, this will benefit to the
shareholders in terms of dividend receipt from the company.
These financial plans to large extent will affect firm financial statements. If shares are
issued alone then shareholder equity will increase. In other words, it can be said that liability
side will increase in the balance sheet. If loan stocks and ordinary shares are issued then long
term loan amount will increase in balance sheet and shareholder equity will also increase in
same (Ho, Liu and Tsay, 2008). If loan shares are issued then ordinary shares and loan
amount will increase in the liability side of balance sheet.
AC 3.5 Calculation of EPS
AC 3.5.1 Information
Earning per share indicate the shareholders return on each share. All the business
shareholders have the objective of getting larger the return on their invested funds. Thus, it is
important for the companies to provide increased return to the shareholders.
AC 3.5.2 Calculation of EPS
Table 7: Calculation of EPS
PBIT 720000
Outstanding shares 3000000
EPS 0.24
AC 3.5.3 Explanation
EPS refers to the part of earning that is coming on each and every unit of share
(Langdon, 2002). Dividend is paid to the shareholders from the EPS on per unit basis. EPS of
the shares is 0.24 and it indicates that there is a very low earning on per unit of share. This
happens because there is large number of outstanding shares. Hence, it can be said that firm is
giving poor performance to its shareholders.
4. INVESTMENT APPRAISAL
AC 4.1 Investment appraisal importance
As per the scenario, Taste has a branch in Cattibbean that providing food, leisure and
accommodation facility to large number of tourists from all over the world. Company's Board
of Directors wants to acquire other similar organization that operates in other parts of the
world. The Chief Executive Officer (CEO) of the company considers a possible takeover of
hotel chain in Europe and Asia.
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