Financial Resource Management and Decision-Making Report - Finance

This report examines the financial resource management and decision-making processes for Sweet Menu Restaurant. It begins by identifying and evaluating various sources of finance, including internal sources like retained earnings and external sources such as share issues and bank loans, assessing their implications and appropriateness for expansion plans. The report then analyzes the costs associated with different financing options and emphasizes the importance of financial planning. It also assesses the information needs of decision-makers and evaluates the impact of financing choices on financial statements. Furthermore, the report delves into budgeting, pricing decisions, and investment appraisal techniques like Net Present Value (NPV) to assess project viability. Finally, it covers financial statements, their formats, and the application of ratio analysis to interpret financial performance. The report provides a comprehensive overview of financial management principles and their application in a real-world business scenario.

Managing Financial
Resources and Decisions

TABLE OF CONTENTS
TABLE OF CONTENTS.................................................................................................................2
INTRODUCTION...........................................................................................................................4
task 1................................................................................................................................................4
1.1 Available sources of finance for Sweet Menu Restaurant Ltd..............................................4
1.2 Assessment of implications of the sources of finance...........................................................6
1.3 Evaluations of the most appropriate sources of finance for Sweet Menu Restaurant
expansion plans............................................................................................................................6
Task 2...............................................................................................................................................7
2.1 Analyses of the costs of the different sources of finance......................................................7
2.2 Importance of financial planning for Sweet Menu Restaurant..............................................8
2.3 Assessment of the information needs of different decision makers in Sweet Menu
Restaurant....................................................................................................................................8
2.4 Impact of sources of finance on financial statements of Sweet Menu Restaurant................9
Task 3.............................................................................................................................................10
3.1 Analysis of the budget and appropriate decisions...............................................................10
3.2 Calculation of the unit costs (meal cost) and making pricing decisions..............................11
3.3 Assessment of the viability of two projects using investment appraisal techniques...........11
b) Net Present Value (NPV)..............................................................................................13
Task 4.............................................................................................................................................14
4.1 Main financial statements of an organization......................................................................14
4.2 Comparison of appropriate formats of financial statements for different types of business
...................................................................................................................................................14
4.3 Interpretation of the financial statements using ratio analysis.............................................15
conclusion......................................................................................................................................16
references.......................................................................................................................................17

TABLE OF FIGURES
LIST OF TABLES

INTRODUCTION
Financial Management (FM) can be defined as an effective and efficient allocation of the
available funds for attaining organizational objective in effective manner (Khamees and Al-
Thuneibat, 2010). It is a very important function of every organization because it helps in
increasing profitability and wealth. Moreover, it assists in managing cash flow and minimizing
cost of the organization. The current research project is based on managing financial resources
and decisions. Regarding this, it will focus on the different business scenarios. Study will
comprise of different ways of implication of finance as a resource within a business. It includes
cost of the different financial resources which can affect the company in positive and negative
manner. Further, it focuses on different financial decisions and required information of funds.
Along with this, research also evaluates the financial performance of the business by analyzing
financial statements and applying different tools and techniques of finance such as ratio analysis,
etc.
TASK 1
1.1 Available sources of finance for Sweet Menu Restaurant Ltd.
As per the given business scenario, Sweet Menu Restaurant has strong financial
performance in the market and wants to expand its business. Regarding this, it wishes to start two
new restaurants in different locations; Central London and Croydon. Sweet Menu Restaurant
requires £300,000 and £500,000 for this expansion(Brigham, 2013). So, there are different
internal and external sources of funds which help in raising capital for the organization. All these
sources are described as under:
Figure 1: Financial Resources
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Internal sources of finance: Retained earnings: It is also known as remaining part of profit which can be used by
organization for its business operations. Sweet Menu Restaurant has a strong profitability
position. So, it has appropriate amount of profit. Hence, Company can use this amount of
fund at the time of starting its two new branches at two different locations. It will be
appropriate because it a cost free source of fund. Sales of assets or stock: Organization is operating its business since last many years. So,
company will have large number of assets and stocks of past projects which are not used
by organization at present. So, restaurant can raise its capital by selling these assets. It
will help them in getting funds for business expansion (Correia and Flynn, 2012).
External sources of finance:
 Issues of share: As per the given business scenario, Sweet Menu Restaurant is a
listed company so, company can arrange funds by issue of share also. It will help in
getting quick, instant and high amount of money on the cost of dividend to shareholders.
It also helps in raising goodwill of the restaurant in hospitality market. Bank loan: Sweet Menu Restaurant can make arrangement of funds by taking
long term or short term loan from bank. But, organization needs to provide appropriate
amount of security for these types of sources. Along with this, it is provided by financial
institute for a specific time period and on the basis of fixed and floating interest rate on
principle amount of loan. Leasing: It is also one of the important sources of fund for Sweet Menu Restaurant. In
this source, organization can use the asset of other party on the basis of installment
amount for a specific time period without transfer of ownership of assets. It helps in
reducing the initial investment of the company because restaurant can use this sources for
using land, building and other assets (Cox, and Fardon, 2005).
 Hire purchase: In this agreement, company uses the assets of another party on the
basis of monthly installments. But with the last installment, ownership of the assets
transfers to the organization. So, Sweet Menu Restaurant can use this source of fund for
using machinery and other equipment.
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1.2 Assessment of implications of the sources of finance
Implication of financial resources can be asses by determining advantages and
disadvantages of funds. There are different sources of funds which are appropriate for Sweet
menu restaurant. Retained earnings is beneficial because there is no legal requirement and
formalities for using this types of source. Along with this, there is no needs to repay the principle
amount to organization. But, it is associated with the opportunity cost which can affect the future
FM of the firm (Davis and McKevitt, 2013). Similarly, bank loan is beneficial because company
can get huge amount of money for long term but it is associated with interest payment and
security amount. Along with this, issue of share are significant for the company because there is
no requirement of any kind of security for raising funds using this source but company needs to
pay dividend to shareholders which can increase the total cost for the firm. Therefore, each and
every source of fund is associated with some benefits and drawbacks which can affect the
implication of financial resources (Dayananda, 2002).
Leasing is beneficial for organization because it provides an opportunity to use assets on
behalf of installment amount. So, it reduces the initial investment of the company. Along with
this, it does not increase the cost burden on company by which Sweet Menu restaurant can
maintain a steady cash flow for long years. But on the other hand lease payment is treated as
expenses rather than equality payment towards an asset. So, it augments total expenditure of
restaurant and reduce the total income and profitability of the firm.
Issue of share helps in increasing attraction of new investors and enhance the company
revenue. Along with this, there is no requirement to repay the investment amount to
shareholders. So, it reduce the cost burden and increase the finance capital of the organization.
But, on the other hand issue of share increases the dividend amount on company which reduce
the total income of the organization.
1.3 Evaluations of the most appropriate sources of finance for Sweet Menu Restaurant expansion
plans
As per the give case study, the most appropriate source of funds can be evaluated on the basis of
cost and its implication in business operations. Restaurant requires £300,000 and £500,000 for
starting its two new branches. Regarding the same, appropriate resources will be bank loans
compare to retained earnings, issue of shares and sale of assets, etc. Hence; long term bank loan
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will be the most suitable source of finance for satisfying the financial needs of the organization.
It will be suitable because company can get a huge amount of money for long term. Retained
earnings is associated with the opportunity cost but bank loan is not related to the any kind of
opportunity cost so, it is netter financial resources for Sweet Menu Restaurant as compare to
retained earnings. Issue of share is linked with high amount of dividend to shareholders as well
as it also transfer the ownership of the company. But, interest payment of bank loan is low as
compare to dividend payment and there is not required to transfer the ownership of the company
to bank. So, loan is appropriate source of finance as compare to issue of share. Along with this,
cost of bank loan is low as compare to leasing, sale of assets, etc. In addition, using bank loan,
company can get high amount of money as compare to other sources so, it is fruitful for
organization (Gitman, 2013).
TASK 2
2.1 Analyses of the costs of the different sources of finance
Every source of finance is associated with the monetary and non-monetary cost which
can affect the decisions of the company about the selection of resources. As per the above
discussion appropriate sources of funds for Sweet Menu Restaurant are retained earnings, bank
loan, issue of share and sale of assets and stock, etc. Retained earnings is known as cost free
source of fund for organization because there is no needs to repay the amount of retained
earnings to company. Along with this, organization can get money without any interest and down
payment. So, there is no monetary cost of retained earnings for restaurant. But, it is associated
with the opportunity cost of the firm because restaurant can use this amount of money in future
for other purpose. So, it is an opportunity cost for Sweet Menu Restaurant. Similarly,
organization can apply for the loan amount on behalf of security amount as well as company
needs to pay specific interest rates on principle amount of loan. So, it may be a very costly
source of funds for organization but company can get big amount of money using this source so,
it is included in suitable source of funds (Gorchels, L 2006).
Issue of share is also appropriate source of fund for restaurant but company needs to pay
appropriate amount of dividend to each shareholder which increases the cost of this source.
Similarly, sale of assets can decline the amount of assets due to the depreciation amount. OS it is
also shows a high cost for the company. But, it is one of the most liquidate source of funds so, it
is considered suitable for sweet menu restaurant.
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Cost of leasing include the security amount and interest payment which augment the total
expenses of the company. Along with this, organization needs to pay installment amount on
behalf of asset in specific time. It also raise the total cost of leasing for organization.
2.2 Importance of financial planning for Sweet Menu Restaurant
Financial planning can be defined as a process of financial management which include
different stages such as formulation of financial objectives, identification of required amount of
finance, arrangement of funds and allocation of finance, etc. Financial planning is very important
for Sweet Menu Restaurant in different aspects. It is very beneficial for managing income and
profitability of the company. Along with this, financial planning is very effective for managing
cash flow and other expenses of the company. Restaurant can develop appropriate financial plans
and manage available and required finance of the company. Along with this, using appropriate
financial planning company can determine short and long term financial goals which can guide
in developing a balance plan for meeting all these requirements in effective manner (Grieve,
2013). Along with this, a systematic process of financial management can help in reducing the
unnecessary expenses which leads minimization in the total cost of the company. Further, a
proper financial plan plays important role in selecting a suitable investment project for business
expansion. Organization can manage all financial risks and uncertainties in appropriate manner.
Overall, if is very important for increasing profitability, income, sales revenue, management of
funds and selection of investment options, etc. Similarly, it is also very appropriate for reducing
the total cost and other expenses of the organization. So, Sweet Menu Restaurant needs to follow
appropriate financial planning method for managing available and required funds (Helfert,
2004).
2.3 Assessment of the information needs of different decision makers in Sweet Menu Restaurant
As per the given case, Sweet Menu Restaurant wants to invest a big amount of money in
business expansion project. So, for this project organization needs to take different types of
decisions which require various amount of information which are described as under: Financial decision makers: These are very important decision makers who take
decisions for managing available and required financial resources. Regarding this, they
required information about the long term and short terms financial goals which will help
in analyzing the current and future requirement of restaurant. Along with this, financial
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manager is also required information about past and present performance of the company
because it will help in developing a future financial plans of the organization (Hildreth,
2004). Financial managers are also required investment information for selecting
decision about a most profitable investment for organization. Marketing decision makers: These types of decision makers take decisions about
marketing and advertising activities of the company. Regarding this company needs to
take decision about the selection of marketing channels, etc. Regarding this manager
require information of the available marketing budget of the restaurant. For managing
marketing budget company needs to focus on managing cost of different advertising and
promotion activities of the firm. Operational decision makers: These decision makers takes decisions about
improvement in production and operation of restaurant. In addition, they focus on
reducing the total cost and appropriate allocation of resources. Regarding this, operation
manager require information about the available financial resources for managing
different activities such as production, purchase of inventory, etc.
 Human resource decision makers: For taking decisions related to personnel manager
important information include HR budget of the company. Along with this, HR manager
must needs to know about the information such as training and development cost,
recruitment and selection cost of the company, etc.
 Suppliers: Suppliers of the company decides to supply the Raw material for production
purpose. So, organization needs to communicate the information about the required
amount of raw material on timely basis.
 Government: Organization needs to communicate information about the financial
position of the restaurant so, it will help in tax decision making of government.
2.4 Impact of sources of finance on financial statements of Sweet Menu Restaurant
As per the given financial statement of the sweet Menu Restaurant, company is using
different sources of funds for increasing available financial capital of the company. These are
long term loan from bank and issue of shares, etc. These sources are associated with some
specific costs so, it can affect the financial statements of the company As per the given stamen
long term loan from bank has direct impact on balance sheet and cash flow statement of the
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company. Long term loan increases liabilities of balance sheet which can harm the financial
performance of the firm. On the other hand, it increases the cash inflow in cash flow statement of
the organization which can augment available cash of the company as well as it will also play
very significant role in business expansion project of the Sweet menu restaurant.
On the other hand, restaurant is also using issue of share for increasing the financial
capital of the company. It has a positive impact on balance sheet because it increases the
shareholder’s equity in balance sheet. But, for this financial resources company needs to pay
appropriate amount of dividend to shareholders which has negative impact on profit and loss
account of the company. Dividend payment reduces the total profitability and income of the
organization. Therefore, sources of finance has positive as well as negative impact of financial
statements.
TASK 3
3.1 Analysis of the budget and appropriate decisions
Budget is one of the important tool for analyzing the financial position of the
organization in more effective manner. Along with this using financial budget Blue Island
Restaurant can take different finance decisions about increment in profitability and sales of the
organization, etc. along with this, financial budget also help in managing future risks and
financial activities of the company.
As per the given cash budget of Blue Island Restaurant, company is generating sufficient
amount of the cash sales in 4 months of budget which is 58000. But, total expenses of the
company is 89990 that is very high as compare to net sales so, it leads negative balance of 12530
at the end of the months. So, for managing income and expenses in effective manner restaurant
needs to focus on reducing expenses to increasing total cash sales of the firm. In month of
October Company is generating positive net balance of 1290 because of high net sales. Company
can reduce the expenses of the organization by improving the inventory management process
because in this process company is investing huge amount of money which leads negative cash
balance at the end of month. Including this company needs to focus on reducing the overhead
expenses of restaurant which will also help in increasing the total operating income of restaurant.
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3.2 Calculation of the unit costs (meal cost) and making pricing decisions
Unit cost can be defined as a total cost which is required for producing a single unit of
products and services of an organization. Every organization takes pricing decisions on the basis
of the total cost of the products and desired amount of profit. So, calculation of unit cost and
pricing decision is described as under:
Table 1: Calculation of unit cost and selling price
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
As per the above calculation food cost percentage is 62.505. Organization needs to
manage this cost in effective manner and decide price as per this cost which will help in
generating required amount of profit and managing total cost. According to the above
calculation, selling price of product and service will be 16 which will help in generating profit of
£6. This selling price if decided by restaurant because markup cost is 40% and VAT is 20%.
Therefore, calculation of unit cost is helpful for deciding the pricing policy of restaurant (Melo,
2012).
3.3 Assessment of the viability of two projects using investment appraisal techniques
There are different investment appraisal techniques which help in determining profitable
projects for an organization. These methods include discounted and non-discounted methods.
Discounted methods focuses on the time value money approach which states that present value
of cash flow is more worth full for organization as compare to the future value. It include Net
Present Value (NPV) and Internal Rate of Return (IRR). On the other hand, non-discounted
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methods do not focus on the present value and time value of money approach. It comprises
Payback period and Average Rate of Return (ARR) (Khamees and Al-Thuneibat, 2010). As per
the given case scenario Blue Island Restaurant has two different investment proposals and for
checking investment viability organization can use two distinct methods such as payback period
and Net Present Value method which are presented as under:
a) Payback period method:
Proposal 1:
Table 2: Payback period for proposal 1
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
Proposal 2:
Table 3: Payback period for proposal 2
Year Inflow Cumulative inflow
0 -£1,200 -£1,200
1 £300 -£900
2 £400 -£500
3 £500 £0
4 £600 £600
5 £500 £1,100
Residual Value £50 £1,150
Payback Period 3 Years
As per the above calculation of the payback period Blue Island restaurant can get their
money back if a specific time period. Payback period of Proposal 1 is 1.5 year and for proposal 2
it is 3 years. So, company can get back its investment amount early in proposal 1 as compare to
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