Financial Decision Making Report: Roast Limited Business Analysis

This report provides a comprehensive analysis of financial decision-making, focusing on the coffee house industry in the UK, using Roast Limited as a case study. It begins with an executive summary and a review of the coffee house industry, discussing its market size, key players, and growth trends. The report then delves into financial analysis, including the preparation and interpretation of the Statement of Profit or Loss and the Statement of Financial Position for Roast Limited. It utilizes ratio analysis to evaluate the company's performance, covering gross profit, operating profit, operating expenses, finance cost, net profit, inventory turnover, receivable turnover, payable turnover, current, quick, cash, debt-to-equity, and debt-to-assets ratios. Furthermore, the report addresses investment appraisal techniques, such as Net Present Value (NPV), payback period, and average accounting return, to aid in business expansion decisions. The analysis highlights the impact of economic factors and external events like the COVID-19 pandemic on the industry. The report concludes by discussing sources of finance, particularly equity, relevant to the company's financial strategies.

Financial Decision Making

Contents
Contents...........................................................................................................................................2
EXECUTIVE SUMEERY...............................................................................................................1
TASK 1............................................................................................................................................1
Coffee house industry review......................................................................................................1
TASK 2............................................................................................................................................2
2.1 Statement of Profit or Loss....................................................................................................2
2.3 Statement of Cash Flows.......................................................................................................8
TASK 3............................................................................................................................................8
3.1 Investment Appraisal.............................................................................................................8
Sources of Finance.......................................................................................................................9
Equity...........................................................................................................................................9
REFRENCES...................................................................................................................................9

EXECUTIVE SUMEERY
Financial decision making is a process in which manager take decision regarding expansion
of their business through acquiring new machines, investment or take loan , or introduce
new product in market or not. For this purpose they use capital budgeting technician. In this
report a brief study of procedure of decision making has been describe. Roast Limited has
been taken, this company is situated in London and it provides coffee service to various
market areas in UK. This report show view of coffee industry of UK and it also includes
how ratio analysis, cash flow technique help in analysing business performance. And uses
of NPV, payback period and average accounting method used in taking decision reading
expansion of business units.
TASK 1
Coffee house industry review
Coffee house industry includes business organizations that provides primary services of
various types of coffee to their customers. It includes coffee shop, cafe, and coffeehouse.
Their range is start from small shops to large business organization. In United Kingdom
coffee in one of the most utilized product. Various types of coffee serve by Coffee houses
which included, espresso, cappuccino, late in UK. The increasing demand of coffee
takeover the tea place in UK. Public become more addicted to coffee.
These industries deals with coffee, food and other beverages products, they retailing coffee,
food and non alcoholic beverages at their shop.
UK has become 7th biggest coffee importer county in world, the companies sell coffee
through coffeehouse supply chain (Chen, .2018).
In UK, Costa limited, Pert A Manager limited, Starbucks Coffee Company Limited and Cafe
Nero Group Limited are hold the largest market area of the country.
It has been observed that more than 16199 shops are provided coffee services in market, in
theses organizations, 101034 employees are presently provided their services. Coffee
industry cover 6 billion market area of United Kingdom. Costa covers the highest number of
small coffee shops in UK , The company covers largest are of the Coffee Starbucks also
given toughest competitions, it is non British organization still te company take higher
number of coffee shop as company to other multinational coffee organization of UK,
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Coffee house industry has been growing in upcoming years also and that also faces heavy
competition of foreign competitors. The coffee market has been grown since 10 years in UK
. In the offices of UK more than 220 million coffees has been consumed
Organizations introduced new products and services related to coffee which includes,
healthier snacks, salad, cold brew coffee in market theses are help in increasing revenue of
the market.
The coffee house indirectly focus on selling of coffee product in addition to hot and cold
drink. Performance of this sector depends on the factors of economical, social, growth rate
of the country available of natural resource, interest of consumers. It has been observed that
the revenue rate of this industry would be raise with more than 5 % of annual rate and their
growth rate is 2%.
Coffeehouse industry provides opportunities to increase revenue and maintain the GDP rat
wog the Britain as due to the BRETIX agreement industrial sector of UK suffers from many
issue but Coffee sector is not affected with it more observe their profits increase after this
agreement as organization generate profits by selling their product in European union, but it
will affected by COVID 19 pandemic, as due to this problem, production houses are closed
and no shops are open due to lockdown in the country , organization cannot export their
coffee product, it will adversely effected on the profit of coffee house industry.
Roast limited is one of the popular coffee house in UK which provides best service of coffee
with free wi fi, digital service for their customers in their coffee cafe. This organization is
part of chain s supply, the organization is famous for their brand coffee of product.
TASK 2
2.1 Statement of Profit or Loss
Statement of Profit and Loss for the year ending
Particular 2018 2017
Sales 2,534 2,022
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Cost of Sales (1,990) 2,022
Gross Profit 544 517
Other operating income 6 60 0
Operating Expenses: 477 (466)
Operating Profit/ 127 51
Finance costs ( (26) (6)
Profit/(Loss) before Tax 101 45
Income Tax expense (20) (9)
Profit/(Loss) for the period 81 36
Profit and Loss statement: This statement has been prepared for calculation of overall income
and expenses incurred within a specific period of time. It contains each item of expenses it will
help analysis and comparison of each item which is used during production and selling and
distribution process It provides base for formulation of balance sheet following are the ratio has
been used which can be ciliated through using Profit and Loss statement.
Ratio analysis:
Gross Profit ratio:
Particular Formula 2018 2017
Gross Margin ratio Gross Profit / Net
Sales *100
21.46 25.56
Interpretation: Gross profit ratio used to identify relationship between profit and net sales. I will
help in find the gross profit organization earn through their operational activites. Higher gross
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profit show high efficient of earnings. Roast Limited has been earn 21.46 % gross profit in 2018
and 25,56 % in 2017, this mean s that organization will earn more revenue from their operational
activities as compare to 2018.
Operation profit ratio
Particular Formula 2018 2017
Operation profit ratio Operating profit / Net
Sales * 100
5.01 2.52
Interpretation: This ratio has been calculated to find the connection between operating profit and
net sales it will represent the % of operating profit organization will earn through by their
operating activites. It can be calculated by deduction of operating expenses and cost of goods
sold from net revenue. In 2018 operating ratio of Roast limited was 5.01 and in 2017 was 2.52,
this mean that organization earns more profit in 2018 then 2017. It represent tat company more
focus on controlling their extra circular activites in 2018.
Operating Expenses ratio
Particular Formula 2018 2017
Operating Expenses
ratio
Operating expenses /
Net profit * 100
18.82 23.04
Interpretation: Operating expenses ratio has been calculated by dividing operating expenses with
net sales. This ratio show the relationship with operating expenses and net profit, it will help in
determine how much expense company can control by applying their net profit. In 2018 to
operating expenses ratio was 18.82 and in 2017 it was 23.04 this means that organization
incurred more expenses as compare 2018 in 2017. It meaning managers focus on controlling
cost of operations in 2018.
Finance cost ratio
Particular Formula 2018 2017
Finance cost ratio Financial cost / Net
Sales * 100
1.026 .29
Interpretation: Financial cost ratio has been calucat3e through dividing overall financial cost
incurr3eed in special time period with total deal of the organization. Higher ratio show high
expense. In Roast organization the financial cost ratio as high in 2028 as compare to previous
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year thus it has been observe that the cost more incurred on 2018 as compare to 2017 (Chen,
T.Y., 2018).
Net profit ratio
Particular Formula 2018 2017
Net profit ratio Net Profit / Net Sales
* 100
3.19 1.78
Interpretation: Net profit ratio can be identifies by dividing net profit through net sales of the
company. Net profit ratio represents relationship of net profit with net sales of the organization.
Higher net profit ratio represent higher rate of earning and capacity of profit. In 218 the
organization gain 3, 19 net profit and in 12017 the ratio was 1,78 , 2018 ratio was double as
compare t 2918 which represent that organization generate more profit with growth rate
2.2 Statement of Financial Position
Ratio analysis
Efficiency ratio: Theses types of ratio has been used by managers to determine efficiency rate of
the organization. Higher rate of ratio show high rate of level of efficiency of the business
organization. Following are the efficiency ratio of the Roast limited:
Inventory turnover ratio
Particular Formula 2018 2017
Stock turnover ratio Cost of goods sold /
Average stock
6.65 12.54
Interpretation: This ratio has been calculated to identify the time stock take to sale and replace
their stock . Higher inventory ratio indicated that company quickly sae their products. In 2018
the inventory turnover ratio of Roast limited is 6.65 and n 2017 it is 12.54 this means that the
efficiency rat of 2017 is more as compare to 2018.
Receivable turnover ratio
Particular Formula 2018 2017
Receivable turnover
ratio
Net revenue / Average
receivables
17.12 21.74
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Interpretation: Receivables ratio used has been used to determine time taken by organization to
collect their debt amount from their debtors. It can be calculated by dividing average receivables
from net sales. In 2028 the receivables ratio was 17,. 12 and in 2018 it was 21.74 which means
that organization take more time as compare o 2018 (Koehler, Langstaff, and Liu, 2015).
Payable turnover ratio
Particular Formula 2018 2017
Payable turnover ratio Net Purchase /
Average Creditors
Interpretation: Payable turnover ratio has been used to determine time period organization take to
pay their debt liabilities to their creditors higher ratio organization took more time to fulfil their
debt.
Liquidity ratio: Theses types of ratio has been utilized by management department to identify the
liquidity position of the business entity. Following are the ratio of Roast Limited
Current ratio
Particular Formula 2018 2017
Current ratio Current Assets /
Current Liabilities
1.45 2.51
Interpretation: This ratio has been used to identify the liquidity position of an organization to
pay their current liability to run day to day business activites. Current ratio can be calculated
dividend current asset with current liabilities. Ideal current ratio is 1: 1 which mean tat
organization has to be equal assets and liabilities to run their business. In this case Roast limited
current ration in 2018 was 1,45 and in 2027 it Ws 2.51 this means that company have more
current assets to pay their cash liabilities in 2017 as compare t 2018 but this define that
organization can not optimally utilize their current assets resource.
Quick ratio
Particular Formula 2018 2017
Quick ratio Quick Assets/ Current
Liabilities
.48 1.64
Interpretation: Quick ratio has been used to determine the relationship between quick assets with
current liabilities it represent that how many assets and organization have in liquid format to pay
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their debt liabilities, In 2018 the quick ratio as .48 and in 2017 it Ws 1,64 that means that
organization have more assts in 2017 in the form of cash as compare to their next year.
Cash ratio
Particular Formula 2018 2017
Cash ratio Cash / Current
Liabilities
0 .97
Interpretation: Cash ratio has been part of liquidity ratio which can be calculated by dividing
cash assets with current liabilities. This ratio has been used for determine the level of cash
organization have to fulfil current liabilities. Only using cash and cash equivalent assets which
can be easily converted into cash. The company have 0 balance of cash in 2018 and it was .97
this means tat company have efficient amount of money to pay current debt liabilities.
Solvency ratio: Th4ses ratio has been sed to analysis of organizations solvency rate. Following
are the ratio of Roast limited:
Debt to equity ratio
Particular Formula 2018 2017
Debt to equity ratio Total Liabilities /
Total Equity
0.67 .30
Interpretation: Debt to equity ratio used to determine the part of contribution of assts and liability
have in an organization. It can be calculated by dividing debt with equity of the organization. In
2018 the organization debt equity ratio was .67 and in 2017 it was .30 which means that portion
of assets in 2018 equity have more than 2017.
Debt to assets ratio
Particular Formula 2018 2017
Debt to assets ratio Total debt / Total
Assets
.40 .23
Interpretation: Debt to assets ratio has been calculated by the business organizations in order to
determine the contribution of assets to debt liabilities though which organization can easily
evolution portion of assets organization have to fulfil all the long terms as well as short term
liabilities of the organization. In 2018 the debt assets ratio was. 40 and in 2017 it was .23 this
means that the capacity of paying debt in 2018 is more these as compare to 2017.
Dividend payout ratio
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2.3 Statement of Cash Flows
2018 was good year for Roast limit, its inflow generates more income as compare to
2017, the organization charge depreciation their inventories amount decreases which
means company sell more units of coffee, also their trade receivable goes down . Roast
limited liability has been increase which means that company is liable to Pay future debt
although it also a sign of cash inflow . Organization pay their tax liability. Company
invest in purchasing of new equipment due to which heir cash outflow increases. Roast
limited also borrow long term funds for operating their business. Organizations cash and
cash equivalent balance has been goes down at the year ending due to purchasing of
heavy investment. In 2018 the revenue of the organization was high as compare to the
year 2017, also company engaged in a case with Coffee Tastato, in January 2018,
although Court took decision in Roast company and they get £ 45000 as damage money.
The organization focusing on providing g best service to their customer thus they
outsourcing products and human resource due to high cost of this organization decided
not to give dividend to their shareholder it will beneficial for them as company suffers
from high cost and their production process go down due to various reason thud they
apply effective dividend policy (Smith Echelbarger, M., Gelman, and Rick, 2018.).
TASK 3
3.1 Investment Appraisal
It is a systemically approach of financial management which used to determine whether long
term investment of the organizations are worthily to fund cash and money by using capital suture
of the organization. Investment appraisal is a mechanism of allocation of long term fund for
expansion of business. Various technique of investment appraisal used to identify whether all the
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investment are able to provides future benefits to the organization. Manager only plan for
expansion of their organization when all the long term investment strategies help in gaining
profit for future. Following are the technique Roast Limited will be used to determine whether
their investment proposal of Romania is worth full or not for their business organization.
Management forecasting: It is a tool of managerial planning process which will help in
predication of future business activites. It will help indecision making process. By using various
tools of forecasting manager of Roast limited could be easily analysing and take decision
regarding their expansion of business in Rumania and other area of United Kingdom.
Payback period: It de4fiend as the number of years required for the proposal “ cumulative
inflows to be equal to its cash outflow. In other words the pay back period is the leanght of time
require to cover the initial cost of the project. In this case Roast organization took 4 years to
cover up teir cost of investment. concept as well as in its applications. in
Advantage:
Simple to operate: the payback period is easy to operate concept in its applications as wel as in
its operations. an indication of liquidity.
Risk of obsolescence high: Payback period deals with the risk also. The project with the shorter
payback period will be less risky as compared to project with a longer payback period.
Disadvantage:
Ignore cash inflow: The payback period entirely ignores many of the cash inflows which
occurred after the payback period.
Ignore salvage value: The payback period also ignore the salvage value and the total economic
life of the project.( Graham Harvey and Puri, 2015).
Method of capital recovery: It is a method of capital recovery rather than a measure of
profitability of a project.
Liquidity indication: It gives
Accounting Rate of Return
: The capital investment proposal are judge on the basis of their relative profitability. Capital
income is determined according to commonly accepted accounting principle and practices over
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the entire economic life of the project and then average calculated. In this case the return i high
thus it will be effective decision to take for Roast company.
Advantage:
Easy to calculate: It is easy to calculate because it makes use of readily available accounting
information .
Consider entire cash flow: It takes into consideration the entire cash inflow during the project life
Disadvantage
Problem of comparability: There are two ways to calculated the accounting rate of return
which causes a problem of comparatability.
Determination of cost: In this method calculation of accurate cost is really hard to determine.
: Net Present Value
he second : The cash inflow in different years are discounted to their present value by applying
the appropriate discount factor or rate and the gross or total present value of cash flows old
different years are certain.
Advantage:
Time value: The most significant benefit of this method is that this technique has been
considering time value of factors.
Sound method of appraisal’s It also fulfils the second attributes of a sound method of capital
budgeting . In that it considers the total benefits arising out of proposal over life time
Disadvantage:
Difficult to understand: It is difficult to calculate as well as to understand and se in comparison
with payback or together method of appraisal. Absolute measure: This method will consider
project with higher present rate value. But it is likely that this project may also include manager
initial outlay (Cook, and Sadeghein, 2018).
Sources of Finance
Financial needs are the peculiar nature r business organization. Every business has different
needs which depends on various factors, social, economical, size, culture of the organization.
Roast Limited is medium size organization which operates coffee business in London, for taking
decision regarding acquisition of manufacturing machine, they can collect funds fro the below
source of finance:
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Venture Capital: It is the best way of sourcing., it defined as long term equity investment in
advance technology based projects with Italy project and fulfilling is play potential for
significant growth and financial return. It is beneficial for Roast to invest in project and fulfilling
the needs of 40000. The capital which is available for financing the new business venture is
called Venture capital. Generally it involves lending fiancé growing companies . In a broad sense
venture capital is investing of long term equity finance where the venture capitalist earns their
return
Advantage
They can provides large sums of equity fiancé, bring either wealth of expertise business.
Successfully attracting a VC help in business to find out easier and secure funding from other
sources.
They could be a part of economic growth.
Disadvantage:
Securing a deal with a VC can be long and complex process.
Person will be required to draw up a detailed business plan including financial projection which
the entrepreneur may need professional help .
It is risky source of financing
Debenture: usefully lower than the rate of dividend of share. A debenture is an instrument by the
company under the seal acknowledging indebtedness ton some person to secure the some
advance. It include in liabilities as it increase of payment to organization. It is one of the useful
source of financial. In debenture organization needs to pay interest to their debuted
holders(Marson, Kerr, and McLaren, 2016)
Advantage:
Low rate of interest: The rate of interest payable on debenture is not only fixed but is also us the
needs of 40000:
Trading on equity: By issuing denature company is unable to trade on equity because the rate of
interest on debenture is lower that the rate of earnings and thus organization can uses it.
Disadvantage:
Fixed charge on investment: Debenture carry a fixed charges on all assets of the organization
hence the company can not raise loan on such assets aging.
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Risk of winding up’s The debenture holder have right to claim winding up of the organization in
case of the interest on debenture are and paid by the organization thus it is risky.
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Smith, C.E., Echelbarger, M., Gelman, S.A. and Rick, S.I., 2018. Spendthrifts and tightwads in
childhood: Feelings about spending predict children's financial decision
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Graham, J.R., Harvey, C.R. and Puri, M., 2015. Capital allocation and delegation of decision-
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Cook, L.A. and Sadeghein, R., 2018. Effects of perceived scarcity on financial decision
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Marson, D.C., Kerr, D.L. and McLaren, D.G., 2016. Financial decision-making and capacity in
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