Financial Resource Management Report for Sweet Menu Restaurant

This report analyzes the financial resource management and decision-making processes of Sweet Menu Restaurant. It covers various sources of finance, including debt and equity, and evaluates their implications for the restaurant's expansion. The report emphasizes the importance of financial planning, assessing information needs of decision-makers (management, government, shareholders), and analyzing the impact of different finance sources on the company's financial statements. It also delves into budgeting (cash and trade payables), unit cost calculations, and the viability of investment appraisal techniques. Furthermore, the report examines the main financial statements, their format, and the application of accounting ratios to assess the restaurant's financial health. The analysis includes a comparison of Sweet Menu Restaurant's financial strategies with those of Blue Island Restaurant, offering a comprehensive overview of financial management within the context of the restaurant industry.

MANAGING FINANCIAL
RESOURCES AND
DECISIONS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Types of Sources of Finance............................................................................................1
1.2 Implications of sources of Finance...................................................................................2
1.3 Evaluation of Most Appropriate sources of finance for the Restaurant...........................2
TASK 2............................................................................................................................................3
2.1Analysis of costs for different sources of finance.............................................................3
2.2 Importance of Financial Planning....................................................................................3
2.3 Assessment of information needs of different decision makers.......................................4
2.4 Impact of Sources of Finance...........................................................................................5
TASK 3............................................................................................................................................5
3.1 Analysis of Budgets..........................................................................................................5
3.2 Calculation of Unit costs of Items and pricing decision...................................................6
3.3 Assessment of viability of investment appraisal techniques............................................7
TASK 4............................................................................................................................................8
4.1Main Financial Statements................................................................................................8
4.2 Format-financial-statement...............................................................................................9
4.3 Accounting ratios............................................................................................................11
Conclusion.....................................................................................................................................12
REFERENCES..............................................................................................................................12

INTRODUCTION
The management of financial resources is an important element in operating business.
Different organizations render different services which require money to finance those services
(Higgins and Gulati, 2006). Management of financial resources means getting benefits from
financial resources which is possessed by the organization. To achieve the best financial
management, there should be a proper plan in a company. To promote success of an
organization, entrepreneur is required to keep enough resources to operate sufficiently and
efficiently (Rose and Hudgins, 2014). In this context, analysis of requirement of financial
resources and importance of financial planning in context of Sweet Menu Restaurant Ltd and
comparison of projects of the said company and Blue Island Restaurant has been presented in
this report.
TASK 1
1.1 Types of Sources of FinanceThere are two sources of finance one is internal and other one is
external for new business, existing business or in case of expansion of business etc. (Darroch,
2005).Various sources of finance are capital markets i.e. new shares issue, loan stock, retained
earnings, bank borrowings, government grants, venture capital and franchising etc. In short,
sources of finance are of two types debt and equity finance.
 Debt finance is external source of finance provided by external lender. For example bank
loan, debenture issue etc.
 Equity finance is internal source of finance provided by shareholders of the company. For
example issue of equity and preference share capital, retained earnings etc.
There are different sources of finance for expansion of an ongoing business. In given case
of Sweet Menu Restaurant which is engaged in restaurant business, its four owners are planning
to expand the business by establishing its two branches in Central London and Croydon. They
need different sources to finance for expanding new business. The first source of finance for an
existing company is earnings retained by them for future period. Investors who want to invest in
this expansion can also be treated as another source of finance (Becker and Huselid, 2006).
Further, public offer for issue of share capital can help in funding expansion. Other sources are
bank loans, investor’s money, government grants etc. (Swayne, Duncan and Ginter, 2012).
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1.2 Implications of sources of Finance
At the time of starting a new business or at the time of its expansion, source of finance to
be chosen should be correct because if the selection is wrong it might create hindrance for the
company (Amit and Schoemaker, 2012). Following is the analysis of different sources of finance
and their implications. Funds raised from investors: The investors are major source of finance for a company
(Mathauer and Imhoff, 2006). This company while expanding its business cannot raise
entire capital alone; the firm needs investors for finance. Investors can be the present
stakeholders as well as the outsiders. Bank Loans: Banks are considered as an external source of funding (Chandra, 2011).
The management of the company can take loans from banks at a nominal interest rate,
chargeable at fixed intervals. The company will be able to easily repay bank loans, once
they have secured their position in market.
 Government Grants: The UK Small Business Administration provides help to new
ventures and supports existing ventures in the expansion (Darnall and Edwards, 2006).
Grants are given by government for expansion of restaurant along with interest payment
at lower rate than the banks.
1.3 Evaluation of Most Appropriate sources of finance for the Restaurant
Sources which provide consistency, accountability, transparency, integrity etc are
considered as the most appropriate source of finance (Shapiro, 2008). The restaurant is
expanding its business in other parts of London so it needs to be financed through various
sources. Equity share capital is the best source of finance for a company, because the shares
become famous among the various investors in the market. (Kaplan and Atkinson, 2015). Bank
loan will help them to get higher amount of loan at relatively low interest payment within a fixed
period. Other source of finance i.e. government grant is helpful in its initial periods of expansion
only by fulfilling certain conditions. Assets which are needed in the restaurant can be taken on
lease for a fixed term by paying lease rentals. Retained earnings are also an appropriate source
because they are used in case of emergencies only. Investors can also help in the expansion
process of the company. Venture capitalists are the best source of finance for this company, since
it is an established restaurant and famous for its best services and earning revenues therefore they
can take help from venture capitalists.
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TASK 2
2.1Analysis of costs for different sources of finance
These are cost associated with various sources of finance in relation to expansion of the
company.
 Costs, in relation to debt financing are the interest payments attached to them. The
company has to pay interest on loans raised from bank and other financial institutions.
 In case of raising finance through issuing equity capital dividends and share in profits are
required to be paid to the shareholders.
 In case of raising finance from investors, they have to be given equal right to take part in
decision making process and attend general meeting (Stevens and et. al., 2005).
 In case of raising finance from government through grants, terms and conditions attached
to them have to be fulfilled and there should be certainty that grants will be received.
Interest at comparatively lower rate is to be paid on the grants, so received.
 Lease rentals are to be payable in case of taking assets on lease and in case of hire
purchase, hire purchase instalments are to be paid.
 In case of venture capitalists, cost involved is share in profits of the company and they
hold power to attend the annual meetings.
2.2 Importance of Financial Planning
It is important for a company in case of expanding its business to manage financial
resources so that operations can be done effectively and smoothly. For this company, it is
essential to do financial planning for proper utilisation and administration of funds (Voss,
Sirdeshmukh and Voss, 2008). Financial planning is done to raise funds for business and to see
that resources are not used unnecessarily.
Firstly in planning, the restaurant is required to identify total capital needed. In case of
expansion, new sales forecast is to be done by managers, to increase sales and services, better
and qualitative services are to be provided to customers and it should be better than competitors.
To increase sales and services, working capital of company, should be higher. The next step of
financial planning is choosing the methods to raise finance. It can be raised internally within the
business and can be raised from external sources like equity share capital, preference share
capital, debentures and loans etc. Financial planning in this business is not only to raise finance
but also to make long term investments. In the restaurant business, it also helps in collection of
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sufficient funds and deciding most convenient capital structure. It will be a guiding tool for the
said company to invest in the correct projects. It helps in operating, investing and financing
activities.
2.3 Assessment of information needs of different decision makers.
The company has four owners, who formed restaurant 10 years ago. They are now
expanding same business in other parts of London. The expansion strategy cannot be planned by
the owners only as there are other persons also who take part in the decision making process.
They are investors, banks, government and management. Brief discussion about their
information is presented here. Management: In decision making process, the management plays an important role. The
information they share about the financial position of the company, helps in the growth of
the company. (Brimley, Garfield and Verstegen, 2005). Strategic management includes
top executives which develops overall organizational goals, policies and strategies. The
tactical management includes unit managers and professionals who develop short and
medium range plans and budgets. Government: The government departments are also included in the decision making
process. They take decisions in respect of taxes and duties which are to be payable by
company on revenues they have earned during the year.. For assessing, they see
company’s Balance sheets, Profit and loss account, cash flow statements and other
financial statements and proof of tax deducted like income tax returns etc. In case of
shortage of tax paid, the department raises demand of shortage to the company.
 Shareholders: They require prospectus and annual reports from the company. They need
to know through prospectus about the future prospects of investing in company or not.
With the help of annual reports, shareholders get to know the performance of company
during the previous year.
2.4 Impact of Sources of Finance
Observation of Balance sheet and Profit and loss account of this company shows
following impact of sources of finance.
1. Equity Finance: Company has 60000 ordinary shares with a paid up value of £1 per
share which reflects that company has raised finance from issue of equity share capital
which gave power of voting in the company.
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2. Loan from banks and other financial instruments: The Balance sheet for the year
ending 31st December 2014 is showed in noncurrent liability, long term loan taken from
banks and other financial institutions which is payable in more than twelve months period
(Molina-Azorín and et.al., 2009). Interest payable is shown in the profit and loss account
as shown in the question.
3. Retained Earnings: The Balance sheet shows profits in the form of revenue reserves
which includes profits earned during the current year and previous years. These profits
are used to finance new business expansion.
4. Creditors: The creditors are also considered as the source of finance to the company as
they give the money which is due to the supplier or seller for the goods sold and the
services rendered by the company.
5. Lease and Hire purchase: The balance sheet shows the noncurrent assets i.e. fixed assets
like equipment, delivery vans and furniture fittings. The company has taken the
equipment on lease and for which it is paying lease rentals.
TASK 3
3.1 Analysis of Budgets
The budget given in the question is cash and trade payables budget. The company has
prepared the cash budget of 4 months to analyse the variances between the receipts and payments
made during this period. Cash Budget: It is prepared by the company for estimating all future cash receipts and
expenditures which will take place in the future time (Surroca, Tribó and Waddock,
2010). In this budget, it seems that sales were declined in October in compare with
September but ultimately increased in December. The company should keep an
increasing trend in the sales. Expenditures should be in proportion to sales, neither too
high nor too less. Cash balance in this budget is negative which is not acceptable, so
company should increase sales and reduce expenses to an acceptably low level. The sales
are most important source of revenue for the company and it should not decline at any
cost. So, the restaurant should have to take steps in improving sales fluctuations in the
coming years.
 Trade Payable Budget: Creditors are those, to whom company is liable for payment ,
regarding the purchases made by them.. The given budget shows percentage increase in
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trade payables in compare to previous month. The purchases in September, October and
November are high but in December purchases are low and due to which payables are
reduced. But total payments from all 4 months have been increased. The company
should take necessary steps to keep balance between sales and purchases.
3.2 Calculation of Unit costs of Items and pricing decision
Calculation of unit cost of meals with the help of data given in the question is as follows.
Food Cost Percentage = Total cost of ingredients */ Sales price **
= £10/ £16
= 62.5%
(Working Notes)
* Total cost of ingredients = 3+1.5+3.5+2 =10
** Sales price = Cost price + profit Mark up + VAT
= 10+2+4
= £16
Pricing Decision: If company and products are new in the market it has to reduce price of these
items to be charged because company is required to penetrate market for its products and
services (Neville, Bell and Mengüç, 2005). Once product is well established in the market,
company can raise its prices. In case of existing company, prices to be charged should be higher
to recover expenditures which it has incurred to launch product in the market. After sometime, to
seek customer attention company should reduce its price. In the given case, the organization has
used cost plus pricing policy which is also a relevant method of pricing decision making. To
survive in the long run, company could adopt competition pricing policy so that they can
compete with their competitors in prices.
3.3 Assessment of viability of investment appraisal techniques
Table 1 Calculation of Net Present Value
Project 1 Pv @10% Present value Project 2 PV @10%
Present
value
Initial
investment 1200 1200
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1 800 0.91 727.27 300 0.91 272.73
2 600 0.83 495.87 400 0.83 330.58
3 400 0.75 300.53 500 0.75 375.66
4 200 0.68 136.6 600 0.68 409.81
5 50 0.62 31.05 550 0.62 341.51
Total 1691.32 1730.28
NPV 491.32 530.28
Payback Period : Initial Investment/ Cash flow per period
Table 2 Calculation of Payback Period
Year Project 1 Project 2
Cash flow (£) Cumulative value Cash flow (£) Cumulative
value
Initial Cost 1200 1200
1 800 800 300 300
2 600 1400 400 700
3 400 1800 500 1200
4 200 2000 600 1800
5 50 2050 550 2350
For uneven cash flows,
A = last year with a negative cumulative cash flow
B = absolute value of cumulative cash flow at the end of the period A
C = total cash flow while the period after A
For project 1 = 1+ 1200-800/1400
=1.2857 years
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For project 2 = 2+ 1200-700/1200
= 2.4167 Years
As per net present value method, the proposal 2 is having higher NPV than proposal 1. So
project 2 is viable.
As per Payback period method, the proposal 1 is having lower payback period, so it will
be selected.
TASK 4
4.1Main Financial Statements
Main elements of financial statements are Balance sheet, Profit and loss account and cash
flow statement. Brief discussion about financial statements of the company is as follows.
 Balance Sheet: This reflects position of the company at the end of financial year. It can
be made vertically or horizontally. The Liability side includes share capital, reserves and
surplus, long term and short term borrowings, bank loans, trade payables, outstanding
salaries etc. similarly asset side shows tangible and intangible assets, current and
noncurrent investments, current assets including inventories, cash and bank balances and
trade receivables (Bodie, Merton and Cleeton, 2009).
 Profit and Loss Account: This shows net profit after taxes earned by the company
during previous year. It has following elements like revenue from sales and from
rendering of services, other incomes, expenses like directors' remuneration, interest
charges, purchases of stores and consumables, travelling and other petty expenses.
 Cash flow Statements: It reflects the cash position of the company during year. It
includes cash inflow and outflow from operating, investing and financing activities, that
taken place during the year (Brigham and Houston, 2011).
4.2 Format-financial-statement
Different kind of businesses has to maintain different types of financial statements. In the
case of sole proprietorship, they have to maintain individual balance sheet and income statement
only in case if their sales exceeds a particular limit prescribed by law (Nagelkerk, Reick and
Meengs, 2006). In case of partnership they maintain partner's capital account. In case of public
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limited companies, they have to make financial statements like balance sheets, profit and loss
account and cash flow statement as per the laws applicable in the country. Lastly, for private
limited companies they have to make all three financial statements mentioned above.
Income statement
Table 3 Format of Income Statement
PARTICULARS
Revenue:
Gross Sales
Less : Sales Returns / Allowance
Net Sales
Cost of Goods Sold:
Purchases
Delivery Charges
Cost of goods sold
Gross sales profit (Loss)
Expenses:
Expenses 1
Expenses 2
Expenses 3
Total Expenses:
Net Operating Income
Other Income:
Income 1 (Format of a Financial
Statement, 2013)
Income 2
Income 3
Total Other Income:
Net Income (Loss): *( Format of a Financial
Statement, 2013)
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
Balance Sheet
Table 4: Format of Balance Sheet
Liabilities Amount Assets Amount
Current Liabilities
Creditors XXXX.XX
Current Assets
Cash in bank XXXX.XX
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Bills Payable
Bank Overdraft
Fixed Liabilities
Bank Loan
Secured Loan
Other long term Loan
Capital and Net Profit
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
Accounts receivable
Inventory
Prepaid Expenses
Other Current Assets
Total Current Assets
Fixed Assets
Machinery &
Equipment’s
Furniture & Fixtures
Leasehold Improvements
Land & Buildings
Other Fixed Assets (Less
Accumulated
depreciation)
Total Fixed Assets
Other Assets
Intangibles
Deposits
Goodwill
Other
Total assets
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
XXXX.XX
4.3 Accounting ratios
Ratios Formula 1995 1996
Liquidity
Ratios
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