Managing Financial Resources and Decision Making - Exeter Cafe

This report examines the financial aspects of establishing a coffee concession, focusing on managing financial resources and making sound decisions. It begins by identifying various sources of finance, including equity, debt, and lease options, evaluating their implications, and determining the most suitable sources for the business. The report then delves into cost analysis of different finance sources, emphasizing the importance of financial planning and outlining the information needs of key decision-makers like shareholders and creditors. It includes the creation of cash and sales budgets, calculation of unit costs, and application of project evaluation methods such as payback period, ARR, NPV, and IRR to assess project viability. Furthermore, the report presents financial statements, including income statements and balance sheets, and concludes with a ratio analysis to evaluate the firm's performance. Overall, the report provides a comprehensive overview of financial management principles applied to a real-world business scenario, offering valuable insights for students and professionals alike.

MANAGING FINANCIAL RESOURCES
AND DECISION MAKING

TABLE OF CONTENTS
INTRODUCTION.....................................................................................................................................4
TASK 1.......................................................................................................................................................4
1.1Sources of finance available to the business firms..............................................................................4
1.2 Implications of different sources of finance.......................................................................................5
1.3 Appropriate source of finance for business projects..........................................................................6
TASK 2.......................................................................................................................................................7
2.1 Analysis of cost of varied source of finance......................................................................................7
2.2 Importance of financial planning.......................................................................................................7
2.3 Information needs of different decision makers.................................................................................8
2.4 Impact of finance on the financial statements....................................................................................9
TASK 3.....................................................................................................................................................10
3.1Cash budgets and sales budget for business firm..............................................................................10
3.2 Calculation of unit cost....................................................................................................................11
3.3 Project evaluation method...............................................................................................................11
TASK 4.....................................................................................................................................................14
4.1 Financial statement of business firms..............................................................................................14
4.2 Format of financial statements.........................................................................................................15
4.3 Ratio analysis...................................................................................................................................20
CONCLUSION........................................................................................................................................20
REFERENCES........................................................................................................................................22
Table 1 Computation of cash budget.............................................................................................10
Table 2 Sales budget......................................................................................................................10
Table 3 Computation of unit cost..................................................................................................11
Table 4 Calculation of payback period..........................................................................................11
Table 5 Calculation of ARR..........................................................................................................12
Table 6 Calculation of NPV..........................................................................................................12
Table 7 Computation of IRR.........................................................................................................13
Table 8 Ratio analysis....................................................................................................................20

Figure 1 income statement of partners...........................................................................................16
Figure 2 Income statement of sole trader......................................................................................16
Figure 3 Balance sheet of sole trader.............................................................................................17
Figure 4 Income statement of company.........................................................................................18
Figure 5Balance sheet of company................................................................................................19

INTRODUCTION
A contract for an opening of Coffee concession is obtained. Café premises will be established in
the 1350 sq feet that offer 65 covers. This café will be opened in the museum and art gallery of the
Exeter. There is a huge opportunity in this business. Office of the firm will be opened in the Cleevdon
area of England. Firm is new in the industry and lots of financial problems will come in existence in
upcoming time period. Finance is the important resource for the firm and it must be used with due
care because mentioned resource is scarcely available to the business firms. In the report sources
of finance are described and their cost is evaluated. In middle part of the report, budgets are
prepared and their values are interpreted in proper way. Project evaluation techniques are applied
on cash flows and most viable project is selected for the firm. At end of the report, ratio analysis
is done and comments are given on the firm performance.
TASK 1
1.1Sources of finance available to the business firms
There are varied sources of finance that are available to the Coffee concession. All these
sources of finance have some merits and demerits. It depends on the firm that which source of
finance it think is suitable for its business. Some sources of finance that readily available to the
business firms are as follows.
External sources of finance
 Equity: It is the source of finance that are widely used by the business firms. Venture capital
and private equity are common variants that are used by small size firms in their business.
Café business is opened at small level and for same there is no need to make use of equity.
However, on large scale small size firms make use of this source of finance.
 Debt: It is a source of finance that is commonly used by each and every sort of the business
firm irrespective of its size (Cao and Zhang., 2011). Debt is available at fixed and floating
interest rate and firm have to select any option from available alternatives according to its
requirements. Fixed interest rate debt is one in which finance cost remain fixed and remain
unchanged even market conditions get changed. Contrary to this, in case of floating interest
rate finance cost get changed with slight variation in interest rates of central bank. Fixed rate
debt provide safe zone to firms and most of them prefer to take debt at fixed interest rate.

 Lease: Many times cost of buying an asset is very high and it is not possible to make
investment in same due to lack of finance. By taking asset on lease contractor can finance its
business. There are varied sort of contracts that can be formed by lessor with lessee. Hence,
one according to business requirement can enter in to specific type of contract of lease (Nam
and et.al., 2011).
Internal source of finance
 Retained earnings: It is a part of revenue that remain at end of the year after deducting
expenses from same. There is no cost of this source of finance and due to this reason it is
used by most business firms.
1.2 Implications of different sources of finance
Following are the implications of varied source of finance.
Sources of
finance
Finance
implications
Legal
implications
Dilution of
control
Bankruptcy
Equity Finance cost of
equity is very
high because
rate of dividend
is always higher
then rate of
interest on debt.
Additionally,
firm have to bear
share issue
expenses which
further elevate
cost of equity.
In order to issue
equity through
venture capital
or private equity
it is necessary to
submit relevant
paper documents
to the investor
firm (Whan Park
and et.al., 2010).
Dilution of
control takes
place in case of
equity.
In case of
bankruptcy of
business firm
priority is given
to the creditors
over
shareholders in
relation to
repayment of
capital.
Debt Finance cost is
very low but it is
necessary to pay
interest every
It is necessary to
submit financial
statements to the
bank for
Control does not
get dilute.
If firm get
bankrupt then it
is liable first of
all to creditors

year or quarterly
to the creditors
of Coffee
concession. In
case firm failed
to pay bank loan
financial
institute can sue
same.
obtaining loan
amount. Apart
from this it is
also inevitable to
complete some
relevant paper
formalities.
then to
shareholders in
terms of
payment of
amount.
Lease Rent paid by
lessor to lessee
is the finance
cost of lease.
Amount of rent
vary from
contract to
contract for
same property
with similar
features.
Inevitable to
sign paper
contract with
owner of
property.
Same as above. Same as above.
Retained
earnings
No financial
implications.
Not legal
implications
(Bolenz and
et.al., 2010).
Same as above. Same as above.
1.3 Appropriate source of finance for business projects
All sources of finance that are listed above have some merits and demerits. Each and
every source of finance cannot be suitable for all firms. This is because business conditions of
each venture is different from each other. Therefore, fund requirements vary for each and every
business firm. Thus, before selecting any source of finance it is very important to evaluate all of
them on specific factors. Equity is not the best source of finance for the Coffee concession. This is

because it is going to build a small café for which huge investment is not required. Debt is best
source of finance that is available to the contractor. It can take loan at fixed interest rate and can
eliminate the market risk. At same time he will be able to control elevation in finance cost. Lease
is another best alternative that can be used by contractor. If he needs to purchase machine then
instead of buying same machine can be taken on lease (Hacker and Pierson, 2011). By doing so
firm can abstain from making heavy capital investment on project. It can invest money elsewhere
and can elevate return on investment. Retained earnings is the another source of finance that can
be used by the business firm because it does not have any cost of capital. Hence, these were
appropriate source of finance for the contractor.
TASK 2
2.1 Analysis of cost of varied source of finance
Cost of different sources of finance is explained below.
 Equity: Cost of equity always remain whether fund is raised through issue of shares from
stock market or through venture capital firm. Dividend that firm pay to its shareholders is the
cost of finance for equity. With issue of shares firm lose control on the business which is
intangible cost of the mentioned source of finance.
 Debt: Interest paid on debt is the cost of finance for bank loan. As mentioned above loan can
be taken at the fixed or floating interest rate by the Coffee concession. Finance cost may
decline or increase if debt will be taken at floating interest rate (Brockhaus and et.al., 2012).
The main benefit of debt is that firm get deduction in income tax for interest and principal
amount it paid to the bank or financial institution.
 Lease: Rent paid for the use of specific asset to the property owner is the finance cost of this
source of finance. The interesting point is that one can keep finance cost low in case of this
source of finance. In lease contract is formed between lessor and lessee. It is terms of
contract that determine cost of lease for the business firm. Hence, firm by obtaining consent
of property owner on its terms can lower cost of lease. No tax benefits are received by the
firm on lease.
 Retained earnings: There is no cost of finance of retained earnings because it is a portion of
profit that remain after deducting expenses from revenue of the Coffee concession. However,

there is opportunity cost of retained earnings. Opportunity cost means the benefit that firm
cannot obtain because it is not possible to make next best use of specific asset.
2.2 Importance of financial planning
Financial planning refers to the plan under which it is determined that how cash will be
raised from the market and the way in which it will be utilized in the business. It is a tool that is
used to allocate funds among varied business activities in systematic way. In order to develop
café many things needs to be purchased like bricks and cement etc. Apart from this, many other
items will be purchased to evolve café in the park. Financial plan will be beneficial for the
chosen contract because by using same effective allocation of cash will be done among varied
business activities that are related to the Coffee concession. Allocation will be done in such a way
so that contractor does not face problem cash shortage in its business. Financial planning is
undertaken by the firm by following a systematic procedure (Wang and Shultz, 2010). Under this
budgeted amount is determined and thereafter list of business activities is prepared. Ranking on
the basis of priority is given to these activities. On the basis of ranking and availability of budget
amount allocation of fund is done among varied business activities. It is very important to
identify surplus and deficit balance under cash budget as part of financial planning. By preparing
suitable strategy deficit amount can be reduced or efforts can be made to arrange additional
finance on time. If there will be lack of finance then project will take long time to complete and
cost of same will increase.
2.3 Information needs of different decision makers
There are different stakeholders of the firm and they always needs some information to
make business decisions and to ensure that their interest are safe with the firm. Information needs
of different decision makers is given below.
 Shareholders: These are those who makes an investment in the company or intends to do
same. In both cases then needed financial statements of the firm to make business decisions.
If one already makes an investment in the firm then he needed financial statements in order
to decide whether he must keep an investment in the firm or exit same from the company
(Bascom, 2016). On other hand, one who intends to make investment in the firm also needed
financial statements in order to assess firm profitability and making investment decisions.
Shareholders apart from financial statements also needed annual report because from same

they come to know about challenges faced by the firm during the year and the way in which
handle challenges. These things reflect management capability handle business. Hence, apart
from accounting information annual report is also needed by the shareholders to make
investment decisions.
 Creditors: These are the entities who lend money to the business firm like Coffee concession
and expect from the firm that it will pay interest on time and principal amount. Creditors in
order to ensure that they will receive payment on time require company financial statements.
On the basis of financial statements creditors identify the days that are taken by the firm to
make payment to its creditors. If they identify that management is taking more time in
paying debt amount then same abstain from further giving a loan to the business firm.
 Employees: These are those who works for the firm and its growth entirely depends on their
performance (Nicot and Scanlon, 2012). Employees also needed firm financial statements in
order to obtain information about the firm business condition. If firm is not in profit for some
time then it is possible that it deny from making payment to the employees for two to six
months. Hence, on the basis of financial statements managers evaluate firm condition and
determine whether they must remain in the firm or leave same.
 Managers: It is an entity that plays a very important role in growth of an organization like
Coffee concession. This is because it is managers who look after effective implementation of
the strategy that is formulated by the top managers (Frankel, 2010). Managers needed
financial statements in order to obtain an information about the direction in which firm is
going. On the basis of analysis of financial statements managers identify strong and weak
points of the firm. They create tactics that makes firm strong on those areas in which earlier it
was weak.
 Government: Government also needed financial statements of the firm because it receive tax
from the company. On the basis of analysis of statements it ensured that firm pay accurate
amount of tax to the relevant authority.
2.4 Impact of finance on the financial statements
Finance to great extent affects the financial statement of the firm. If contractor take a debt
of 10,000£ then this transaction will affect both income statement and balance sheet of the firm.
Debt is taken by the contractor which means that he will pay interest on same at end of the year.
Interest amount will be deducted from the gross profit. Hence, firm profit will decline by the

interest amount. On other hand, contractor receive a bank loan of mentioned amount. Hence,
bank loan in long term loan section of liability side of balance sheet will increase. Bank give loan
to contractor which means he receive cash. Hence, cash on current assets side of balance sheet
will increase. In this way debt transaction affects the financial statements of the firm. In case of
equity also same thing is observed and shareholder equity in liability side of balance sheet get
increased. Similarly, cash on assets side of balance sheet also increases. In case dividend if
declared by the firm then revenue amount reduced by the dividend amount. It can be said that
both debt and equity affects financial statements in same way. If business is finance by lease then
leased asset are shown in asset side of balance sheet (Gertler, Kiyotaki and Queralto, 2012). Rent
amount is recorded in the income statement. By rent amount firm profit get reduced. Retained
earnings amount is added in the balance sheet under shareholder equity section of liability. On
same time cash section of asset also increase by retained earnings amount.
TASK 3
3.1Cash budgets and sales budget for business firm
Table 1 Computation of cash budget
October November December January February March
Opening balance 2000 17300 28800 36900 39800
Sales 20000 25000 24000 22000 19000 22000
Total 20000 27000 41300 50800 55900 61800
Expense
Purchase 2000 2200 2500 3000 2700 2800
Salary 5000 6000 8000 9000 12000 12000
CAPEX 10000 0 0 0 0
Creditors 1000 1500 2000 1900 1400 2300
Total 18000 9700 12500 13900 16100 17100
Net balance 2000 17300 28800 36900 39800 44700
Interpretation
It can be seen from the table that net balance of cash budget is positive and is increasing
consistently. It can also be observed from the table that net balance which is surplus is growing
at slow pace. From October to November month there is demand of the product but thereafter

demand for same declined till the month of February. Trend get reversed in last month of March
in which sales elevate to some extent for the Coffee concession. It can be observed from the table
that even sales decline the also expenses increase at rapid pace in the month of December and
January. However, in month of February and April good control was maintained on expenses.
This reflect that firm needs to evaluate surrounding conditions very closely in order to make
business decisions.
Table 2 Sales budget
October
Novembe
r December January
Februar
y March
Forecasted sales units 200 250 240 220 190 220
Price per unit 100 100 100 100 100 100
Total sales 20000 25000 24000 22000 19000 22000
Interpretation
Sales budget is clearly indicating that sales is fluctuating consistently. In the month from
December to February sales is declining consistently. However, in the month of March recovery
is observed in sales which is good for the business firm.
3.2 Calculation of unit cost
Table 3 Computation of unit cost
Fixed cost 10000
Variable cost 60000
Total cost 70000
Mark up percentage 30%
Sales price cost 91000
Interpretation
Unit cost for Coffee concession is 70,000 and its sales price is 91000£. This is computed
by following a formula under which fixed and variable cost is added and further markup
percentage is added on same to compute sales price. Fixed cost refers to the expenses that remain
fixed during life of the firm (Bamberger, Biron and Meshoulam, 2014). Whereas, variable
expenses are one which keeps on changing consistently irrespective of the firm profitability.

3.3 Project evaluation method
Table 4 Calculation of payback period
Project A Project
B
Initial
investment
-
180000
-
150000
1 60000 -
120000 35000 -
115000
2 65000 -55000 40000 -75000
3 70000 15000 48000 -27000
4 75000 90000 55000 28000
5 80000 170000 60000 88000
6 85000 255000 65000 153000
Interpretation
It is a method which is reflecting the duration for which firm need to wait in order to earn
profit in the project (DeTienne, 2010). Project A is taking 2 year and project B is taking three
year to cover cost. Hence, former one is profitable for the firm.
Table 5 Calculation of ARR
Project A Project
B
Initial
investment 180000 150000
1 60000 35000
2 65000 40000
3 70000 48000
4 75000 55000
5 80000 60000
6 85000 65000
Total 435000 303000

Average 72500 50500
ARR 40% 34%
Interpretation
ARR reveal mean profit that can be earned on the project which is related to Coffee
concession. Mean return of project A is greater than project B. Hence, former one is assumed
profitable for the contractor.
Table 6 Calculation of NPV
Project A Pv
@10%
Present
value
Project
B
PV
@10%
Present
value
Initial
investment 180000 150000
1 60000 0.909 54540 35000 0.909 31815
2 65000 0.909 59085 40000 0.909 36360
3 70000 0.909 63630 48000 0.909 43632
4 75000 0.909 68175 55000 0.909 49995
5 80000 0.909 72720 60000 0.909 54540
6 85000 0.909 77265 65000 0.909 59085
Total 395415 275427
NPV 215415 125427
Interpretation
Present value after subtracting invested corpus from sum of present value of cash flows is
high in case of project A (Coalter, 2010). Hence, it is considered viable for the contractor.
Table 7 Computation of IRR
Project A Project
B
Initial
investment -180000 -
150000
1 60000 35000

2 65000 40000
3 70000 48000
4 75000 55000
5 80000 60000
6 85000 65000
IRR 30.46% 21.69%
Interpretation
IRR is a technique which reveal real return percentage that can be gained on the project
(Zimlichman and et.al., 2013). IRR of project A is greater than project B and one this basis of
project is considered viable for the firm.
It is recommended that contractor must choose project A then B.
TASK 4
4.1 Financial statement of business firms
 Income statement: It is a statement that cover an information about revenue and expenses
made in the business of Coffee concession. The main purpose of preparing this statement is to
access profitability of business firm.
 Balance sheet: It cover assets and liabilities of the business. In asset current and fixed assets
are covered (Brigham and Houston, 2012). Whereas, in liability long term and current
liability is covered. Main purpose of preparing balance sheet is to access financial position of
the firm.
 Cash flow statement: It contain amount of cash inflow and outflow that take place from
varied business activities like operating, investing and financing activity. The main purpose
of preparing this statement is to identify sources from which money is raised and places
where same is invested.

4.2 Format of financial statements
Figure 1 Balance sheet of partners
(Manova, 2013)

Figure 1 income statement of partners
(Edwards, 2013)
Sole trader
Figure 2 Income statement of sole trader
(Russo and Perrini, 2010)

Figure 3 Balance sheet of sole trader
(Zeichner, 2010)
Company

Figure 4 Income statement of company
(Source: Lusardi, A. and Mitchell, O.S., 2011)

Figure 5Balance sheet of company
(Biesbroek and et.al., 2010)
There is minor difference in financial statement of sole trader, partnership and company.
Some key points are as follows.
 Financial statement of company is prepared by following GAAP principles while in case
of sole trader and partnership it is not necessary.
 In case of company financial statement number of things are covered (Kruck, 2011).
Contrary to this, in case of sole trader and partners less items are revealed because size of
business operations is small.

 In case of partnership profit, loss, assets and liabilities are shared at end of statement.
This thing is not observed in case of company and sole trader.
4.3 Ratio analysis
Table 8 Ratio analysis
Sainsbury Tesco
Gross profit 1387 -2112
Net sales 23949 62284
Gross profit ratio 6% -3%
Current assets 4362 14828
Current liability 6765 19714
Current ratio 0.64478936 0.75
Sales 23949 62284
Creditor 2250 4545
Creditor turnover
ratio 10.644 13.7
 Gross profit ratio: It indicate firm cost control capacity. It can be seen from the table that
Sainsbury gross profit ratio is 6% and same of Tesco is negative. Hence, former firm is in
better condition than latter firm.
 Current ratio: Current ratio indicate the liquidity position of the firm. It can be seen the
ratio is high in case of Tesco (0.75) in comparison to Sainsbury (0.64). However, on front
of liquidity both firms condition is critical.
 Creditor turnover ratio: This ratio reflect the firm ability to generate sales by taking debt
from suppliers. Tesco is making better use of creditor to generate sale as its creditor
turnover ratio is higher than Sainsbury.

CONCLUSION
On the basis of above discussion it is concluded there are multiple sources of finance and
firms according to their condition must select appropriate source of finance. Cost of finance must
be considered before selecting any specific source of finance. Top managers must no pick
specific project on the basis of their discretion. Instead of this they must use project evaluation
techniques in order to select most viable project for the firm. Ratio analysis must be used to
evaluate firm performance. By using same weak areas can be made stronger for the firm.

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