Financial Resources Report: Sources, Implications, and Decisions

This report provides a comprehensive analysis of managing financial resources, specifically tailored for a restaurant business. It begins by identifying various sources of finance, including internal sources like personal savings and retained profits, and external sources such as bank loans, overdrafts, and venture capitalists. The report then delves into the implications of each source, discussing factors like collateral requirements, dividend policies, and the potential impact on ownership and cash flow. Furthermore, it evaluates the suitability of different financing options for the restaurant, considering factors like flexibility and interest rates. The report also explores the costs associated with each financial source and highlights the significance of financial planning, emphasizing its role in managing cash flow, allocating resources, and anticipating future uncertainties. It examines the information needs of various decision-makers, including employees, suppliers, customers, and creditors. The report concludes by analyzing major financial statements and applying ratio analysis to assess the financial performance of the business. The report gives a detailed overview of how financial decisions are made using financial information.

MANAGING
FINANCIAL
RESOURCES

TABLE OF CONTENTS
MANAGING FINANCIAL RESOURCES....................................................................................1
Introduction......................................................................................................................................1
TASK 1 Sources of finance available to the business.....................................................................1
1.1 Sources of finance for Restaurant..........................................................................................1
1.2 Implications of sources..........................................................................................................2
1.3 Evaluation of sources.............................................................................................................3
TASK 2 Implications of finance as a resource................................................................................4
2.1 Costs associated with the sources..........................................................................................4
2.2 Significance of Financial Planning........................................................................................5
2.3 Information needs of different decision makers....................................................................6
2.4 Impact of finance on financial statements.............................................................................7
TASK 3 financial decisions based on financial information...........................................................8
3.1 Analyse Budget......................................................................................................................8
3.2 Calculation of unit costs........................................................................................................8
3.3 Capital Appraisal Methods....................................................................................................9
TASK 4..........................................................................................................................................12
4.1 Major financial statements...................................................................................................12
4.2 Difference between the statements......................................................................................13
4.3 Ratio Analysis......................................................................................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................16

Introduction
Finance is the backbone of every business whether it is small size or big size. The most
difficult task in front of the company is the management of financial resources. For that purpose,
knowledge of certain financial practices is must. The purpose of this report is understand the
sources of finance available for restaurant businesses. The study will show the implications of
finance as a resource within business. It will also reflect how the financial decisions are made on
the basis of available information. It will show the application and use of different investment
appraisal methods. At last the report will end in analysing the calculated ratios for the firms.
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TASK 1 Sources of finance available to the business
1.1 Sources of finance for Restaurant
Figure 1 Source of Finance
(Source: Bhowmik and Saha, 2013)
Sweet Menu restaurant is planning to open two new branches in Central London and
Croydon. Business will need amount of £ 300000 and £500000. For that purpose, finance can be
raised from two sources which are as follows:
Internal Sources
 Personal savings – It is the most common form of finance available for the entrepreneurs.
The three owners can arrange money from their personal savings which has been retained
apart from the business (Abraham, Deo and Irvine, 2008).
 Retained Profits – It is the amount which is kept after paying of all the debts and profits.
These are mainly kept for meeting the future contingencies such as expansion or
retrenchment etc.
 Friends & Family – It is another lender of the last resort option available for the new
business. Money can be arranged on the basis of personal relations with friends and
family members (Ball, Jayaraman and Shivakumar, 2012)
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External Sources:
 Bank Loan – These days’ loans are available at very considerable rate of interests and
requirements. Sweet Menu can obtain loan from any financial institution after submitting
the required formalities.
 Bank overdraft – Sweet Menu will require cash for handling its day to day operations.
This need arses due to time gap between the collections and payments. To fulfil such gap,
bank overdraft is the preferred option (Bhowmik and Saha, 2013)
 Venture Capitalists – These people are known as venture capitalists, as the capital is
invested generally at the initial stage of the business. The three owners can invite other
people to make investment within the operations.
1.2 Implications of sources
The implications of the identified sources can be defined in the following manner:
 Bank Loan – Under bank loan, the owners of Sweet Menu are required to perform all the
legal formalities along with the deposition of collateral security to the bank. After the
completion of the paper work, the owners can make the use of funds as the ownership is
transferred to them (Ogayar, and Vidal, 2009). In case if the expansion fails and bank
does not receive payment, then the collateral security provided by the owners will go on
sale.
 Retained earnings – Use of retained earnings will have an impact on the dividend policy
of the company. It can reduce the amount of dividend payments for the shareholders.
There is no dilution of control or ownership in this source (Winand and et. al. 2012).
Funds from this source is considered as the part of reserve and surplus hence it does not
affect the financial obligations.
 Venture Capitalist – The level of ownership depends upon the terms and conditions of the
agreement which has been established between the parties (Benedict and Elliott, 2008). It
may be possible that venture capitalist can withdraw their investment from the business.
 Bank Overdraft – In case of bank overdraft, extra money is provided by the lender to the
entrepreneur. There is no impact on the ownership, however cash flow issues can arise of
the bank demands the overdraft to be repaid at a short notice (Dada, Azim and Ullah,
2014).
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 Hire purchasing & Leasing – When there is shortage of cash, this source of finance is
used. Hire purchasing and leasing can be done for any kind of machinery or equipment or
tools needed for business (Flynn, Uliana and Wormald, 2012). In this case the ownership
is transferred to the owner after the payment of the last instalments. This creates loss for
the hire purchasing company.
1.3 Evaluation of sources
After analysing the implications for all the financial sources, following sources have been
selected for Sweet Menu:
Bank Loan – This will be the best option for the restaurant owners. It is because the amount
needed for expansion is huge and is also enclosed with many risks. As compared to other
options, bank loan offers high flexibility (Gallén, 2006). These days the loan is available at very
flexible a considerable rate of interests. Further the process of obtaining funds is quicker in case
of this option. All that need is the fulfilment of all the legal formalities and guidelines.
Retained Earnings – It is another good option for the restaurant. As per the given information,
Sweet Menu is running its business operations from last 10 years. It is anticipated that company
has gathered an adequate amount of retained profits within the business due to such solid
reputation among the consumers (Sabău 2013). In such option, company will not have to incur
any legal charges or other financial obligations because the option is available from within the
business. This choice is very feasible in case if the financial position of the restaurant is good and
well equipped. It also appreciate the capital which ultimately enhance the market value of the
shares.
Bank Overdraft - It is also good for the two new ventures. This option is very useful in
handling the mismatch of the cash flows. It can help in maintaining a god payment history as any
kind of payment made through cheque does not bounce due to lack of funds. Overdraft makes
sure that timely payments are made and no late payments penalties are charged (Drake and
Fabozzi, 2012). Further there is very less involvement of paper work. Hence it can be a very
feasible source of money for Sweet Menu. It also provides immediate access to the cash. Making
payment to the suppliers becomes easy at any point of time. The short term operations can be
financed very easily
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TASK 2 Implications of finance as a resource
2.1 Costs associated with the sources
Every source of finance has costs associated with it. Sweet Menu is needed to perform
effective cost benefits analysis with every source so that suitable options can be availed for
raising the finance.
Bank Loan – It is not easy to avail a bank loan. It requires submission of different types of legal
formalities. The costs associated with the source is amount of interests which is charged on the
loan amount (Gibson, 2012). These interest charges can act as burden for the business. In case of
restaurant the amount of capital is high so interest charges will also be high on the loan. Further
fulfilment of legal requirements and paper work also require incurring of some charges which
can also be painful for the entrepreneurs. These associated costs are required to be managed in
effective manner.
Retained earnings – In such case there may be the problem of improper utilization of the funds.
If the objective related to utilization of retained earnings is not clearly stated, then it may incur
some unnecessary charges for the business (Palepu and Healy, 2007). Problem of over
capitalization may also arise which can be very difficult to handle. Another thing is the low rate
of dividend for the shareholders of the business which can be costly.
Bank Overdraft - This source of finance is also enclosed with some costs. It comes with high
interest charges and it is usually higher than the other sources of borrowing. The charges may get
increased, if the borrower exceeds the overdraft limit (Vickerstaff and Johal, 2014). It has to be
remembered that it is a kind of temporary loan and needs regular revisit by the lending
institutions.
2.2 Significance of Financial Planning
Financial planning is the most essential part of running a particular business. The Sweet
Menu is planning to open two new restaurant branches in Central London and Croydon. The
planning is to be done in careful manner to make sure that all the things goes in the right
direction (Zoan, 2014). In respect with new ventures it can help in different ways
 The planning will help in managing the cash inflow and cash outflow within the
operations by offering an appropriate structure for the company
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 It becomes easy to monitor all the expenses related to the day to day operations and this
facilitates smooth working of all the business functions (Ball, Jayaraman and
Shivakumar, 2012)
 Financial planning also offers strong capital foundation, hence in this manner it becomes
easy to allocate all the financial resources in effective manner.
 The future and scope for two new branches can also be decided through this function
(Financial Management and Control, 2014)
 Another important thing is that any kind of financial uncertainties related to the future
can be anticipated and the corrective actions can be taken at that time only
 The tax planning can also be performed effectively as the unessential payment of taxes
can be avoided.
 It also establishes a link between the future and the present requirements through the
estimation of sales & growth plans of the organization
 The planning also facilities increase in the cash flow and this further enhance the increase
in capital. It is evident that if business has adequate capital, then the management can
think about making other investments (Lampe and Hofmann, 2013)
 Greater amount of control on the income can be seen and further any suitable source of
finance can be selected for the business.
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2.3 Information needs of different decision makers
Figure 2 : Various Stakeholders of business
(Source: Menifield, 2013)
There are different decision makers associated with the business of the Sweet Menu.
These people can be described as follows:
Employees – These people show their interests in the financial information so that they can take
various decisions about their career and development. It is a general tendency that every
individual desires to work with a company who has good reputation in the society and which
provides very good employment opportunities for them (Porter and Norton, 2009)
Suppliers – These people expects to maintain healthy business relations with the organization.
Further they desire for timely payments from the business in return for the raw materials &
inputs (Funke, 2007)
Customers – Customers are interested in the products and services of the restaurant. They expect
a quality food at affordable prices and that is what has been offered by Sweet Menu for the last
10 years (McMenamin, 2002)
Creditors – There are the ones who own money from the company. They are interested in the
financial information in order to identify whether the company has the ability to pay back the
credit on time or not.
Tax authorities - The tax authorities are responsible for ensuring that every company makes
timely payment of taxes and all the business duties (Brigham and Ehrhardt, 2011.). They keep an
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eye on the financial information to identify whether there is any illegal tax avoidance from the
side of the business.
Shareholders – These people takes their decisions related to buying and selling of shares.
Shareholders always expects a decent return on the shares which they have invested in the
market. (Ittelson, 2009)
Government – Governing authorities wants to make sure that company is fulfilling all its
corporate social responsibilities to the fullest. All business practices are to be performed within
the confined ethical framework and as per the laws.
The decisions related to the stakeholders are made at these levels:
 Strategic level - In the making of these decisions, the directors of the organization are
involved. These are very crucial and sensitive decisions.
 Tactical level – The middle level managers are involved in the decision making process.
At this level, more technical decisions are made
 Operational level – At this level, supervisors are involved to make the decisions. These
are related to day to day operations and working.
2.4 Impact of finance on financial statements
The selected source of finance will have an impact on the different financial statements:
Source of finance Impact on financial statements
Bank Loan This option will bring an increase in the value of liabilities
under the balance sheet and amount of capital will
increase. This activity will be recorded in the cash flow
statement under the heading of cash flow from financing
activities. The interest applied on the loan amount will be
recorded under the profit and loss account (Project and
Investment Appraisal for Sustainable Value Creation.
2013)
Retained profit This option will have an impact on the reserve & surplus
within the balance sheet. This activity will be recorded in
the cash flow statement under the heading of cash flow
from investing activities. It will also have an impact on the
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profit and loss statement (Porter and Norton, 2009)
Bank overdraft This source will enhance the value of liabilities within the
balance sheet and the amount of capital will also increase.
The event will be recorded under the heading of cash flow
from financing activities within the cash flow statement
The interest charges applied on the overdraft will be
recorded in the profit and loss statement (Lampe and
Hofmann, 2013)
Government grant It is a kind of loan for the company. It will appear in the
cash flow statement under the heading of cash flow from
financing activities (Ball, Jayaraman and Shivakumar,
2012). It is recorded as a liability in the balance sheet.
TASK 3 financial decisions based on financial information
3.1 Analyse Budget
Budget is a forecasting tool which contributes towards finding out the financial position
of the company and also identifies the risks and uncertainties concerned with the functioning of
the business in future. The presented cash budget is of Blue Island Restaurant. From the figures
of the cash budget it can be analysed that sales are showing a fluctuating trend (Vickerstaff and
Johal, 2014). It is affecting the demand of the service of the restaurant within the market. The
outflows in the month of the September are indicating the inability of the business is meeting its
expenses through cash sales. Expenses related to Van, Furniture and Fittings are showing
negative balances. However in the month of October, the business managed to generate positive
net balance of 3870 (Drake and Fabozzi, 2012). The level of expenditures was also decreased. In
the month of November due to increasing demand for products, company is able to maintain a
positive cash balance of 4770. It shows the competency level and efficiency of the business. In
the last month of the cash budget, the expense on Furniture and Fittings raised the outflow. This
thing generated negative balance despite of increase in the revenue. Above all it can be said that
financial position of the Blue Island Restaurant is stable and there are many opportunities for
then to explore (Gibson, 2012).
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3.2 Calculation of unit costs
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
Calculation of Food Cost Percentage
Food Cost Percentage = Total Costs of Ingredients/ Selling Price * 100
Food Cost Percentage = 10/16*100
Food Cost Percentage = 62.50%
The above calculation shows that 62.50% of food costs has to be beard by the restaurant.
At the selling price of £16 per meal, business is generating a profit of £6. Although restaurant is
expecting a 40% profit on the mark up cost and 20% of VAT. The VAT is to be imposed by the
third party that is government which is to be charged from the customers.
3.3 Capital Appraisal Methods
Blue Island is looking to assess the viability of two business proposals. The viability of
the options is judged through two capital investment techniques which are Net Present Value and
Payback Period.
The cash Flows
Year Proposal 1 Proposal 2
0 £1200 £1200
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1 800 300
2 600 400
3 400 500
4 200 600
5 50 500
Residual value 0 50
Payback Period
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
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
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Results – After the application of the Payback Period technique it can be interpreted that payback
period of proposal 1 is lesser as compared to proposal 2. Hence this indicates that business
should select proposal 1 for the investment.
Net Present Value
Proposal 1
Year Inflow PV Factor
@10%
Inflow by considering pv
factor
1 £800 0.909 £727
2 £600 0.826 £496
3 £400 0.751 £300
4 £200 0.683 £137
5 £50 0.62 £31
Residual value £0.00 0.62 £0.00
Total inflow £1,691.00
Less: Initial
investment
£1,200
Net present value £491.00
Proposal 2
Year Inflow PV Factor
@10%
Inflow by considering pv factor
1 £300 0.909 £273
2 £400 0.826 £330
3 £500 0.751 £376
4 £600 0.683 £410
5 £500 0.62 £310
Residual value £50 0.62 £31
Total inflow £1,729.00
Less: Initial £1,200
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investment
Net present value £529.00
Results – After the application of Net Present Value technique, it can be interpreted that net
present value of proposal 2 is higher as compared to proposal 1. This indicates that business
should make select proposal 2 for the investment.
Recommendation
It is recommended that Blue Island should select project 2 for the investment because this
project is gaining positive feedback from the Net Present Value technique. The results of this
technique can be trusted because it considers time value of money which is the biggest advantage
of this method. Further proposal 2 is comparatively better in terms of return and revenues as
compared to proposal 1.
TASK 4
4.1 Major financial statements
Summary reports that show financial position of a company is known as financial
statement. Organizations have mainly three statement which can be described as follows;
Balance sheet - This statement shows financial position of a particular organization on a specific
date. It presents company's assets, liabilities, and owners’ equity in summarised form. It also
represent the accounting equation (Assets = liabilities + Owners' equity). It is encoded with all
the assets and liabilities like; fixed assets, current assets, tangible and intangible assets, current
liabilities, and long-term debt (Benedict and Elliott, 2008).
Income statement - This statement is a reflection of how better organization's management
perform over a certain period. This statement shows explanation of income and expenses of a
company for a specific time period. It cover organization's revenue, sales, and cost of goods sold
in that period. It provide figures for the gross profit or gross loss (Drake and Fabozzi, 2012)
Cash flow statement - The statement shows cash inflow and outflow from investing, financing
and operating activity. It can be used in both ways; internal and external. Internally it use by
management for making long term as well as short term plans. Externally it use by creditors,
investors, and Govt. authorities (Gibson, 2012).
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4.2 Difference between the statements
There are various categories of businesses operating in UK. All the business are required
to prepare their own financial statements in an appropriate format and with some requirements.
The following businesses are:
 Sole entrepreneurship - It is a self-managed business and owned by a single individual. It
is not mandatory for the sole owns to prepare all the major financial statements. Their
preparation depends on their willingness and requirements. Generally the owner prepared
only the profit and loss statement in order to keep the transactions (Drake and Fabozzi,
2012). Here owner of the business act as self-regulatory and controller.
 Partnership – In this case there are two or more partners who manages and controls the
functioning of the operations in an agreed ratio. It is essential for all the partners to
prepare all the major financial statements. Along with that they are also required to
prepare their own partner’s capital account (Winand and et. al. 2012). Other partners can
decide to discard the share of a partner who has committed a fraud in the business.
 Limited companies - It could be a private or public limited company. It is mandatory for
a public limited organization to disclose all its major financial statements in front of the
public. This is done to make sure that all the needs and wants of the shareholders can be
satisfied in effective manner (Ball, Jayaraman and Shivakumar, 2012). The statements
are to be prepared as per the guidelines of GAAP and IFRS.
4.3 Ratio Analysis
Ratios Formula Sweet Menu
Restaurant
Blue Island
Restaurant
Net Profit margin Net profit/sales 0.01 0.13
Gross Profit margin Gross profit/sales 0.63 0.66
Current Ratio Current assets/
current liabilities
1.78 0.63
Quick Ratio Current assets – 0.63 0.15
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Inventory/ current
liabilities
Asset Turnover Net sales / net assets 1.79 2.4
Debt/equity ratio Debt/Equity 0.41 0.58
 Net Profit margin – It is the percentage of net profit which is in relation to the revenue
earned during the period. The net profit margin for Blue Island is better as compared to
Sweet Menu (Advantages and Limitations of Ratio Analysis, 2014). From this it can be
interpreted that Blue Island is able to convert its sales revenue into the net profit. The
return on assets are very good for the company
 Gross Profit margin – It is the percentage of gross profit relative to the revenue earned
during a period. It reflect the underlying profitability of the business. Here gross margin
of Blue Island is better than Sweet Menu. This shows that Blue Island is generating very
adequate amount of sales (Lampe and Hofmann, 2013). It is making the business more
profitable and productive.
 Current Ratio – This ratio shows the ability of the company in fulfilling its short term
obligations. It is showing better results for Sweet Menu. This shows that liquidity
position of SM is better as compared to BI. The ratio greater than 1 indicates that
unforeseeable contingencies which might arise in the short term.
 Quick Ratio - - This ratio also measures the liquidity position of the business. Here also
Sweet Menu is carrying better results as compared to BI. This again shows that SM is
capable of fulfilling its short term obligations (Menifield, 2013)
 Asset Turnover – It measures the ability of the firm in generating sales from its assets.
Here Blue Island is surpassing the Sweet Menu. It can be interpreted that BI is utilizing
its assets more efficiently. Ratio above 1 is always favourable for the business.
Conclusion
From the above study it can be concluded that financial management is very crucial to the
business of the organization. The sources of finance are to be selected on the basis of size and
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scale of the project. Every ratio has its own use and ratio analysis is a very effective technique of
judging the financial performance. However it does not take into consideration the past and
present factors. Among all the investment appraisal methods, results of NPV can be trusted
because it takes into consideration the time value of money. Hence it can be said that liquidity,
solvency and efficiency of the business is important to evaluate and to make decisions.
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References
Books and journals
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Ball, R., Jayaraman, S. and Shivakumar, L., 2012. Audited financial reporting and voluntary
disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting
and Economics. 53(1). pp. 136-166
Benedict, A. and Elliott, B., 2008. Financial Accounting: An Introduction. Harlow: FT Prentice
Hall
Bhowmik, K. S. and Saha, D., 2013. Sources of Finance. Financial Institution of the
Marginalized India Studies in Business and Economics. Pp. 61-71.
Brigham, F. E. and Ehrhardt, C. M., 2011. Financial Management: Theory and Practice. 8th ed.
Cengage Learning.
Dada, A. O., Azim, M. S. and Ullah, M. S., 2014. The Imperatives of Innovative Sources of
Development Finance: Evidence from Nigeria. Research Journal of Finance and
Accounting. 5(14). pp.62-66.
Drake, P. and Fabozzi, F.J., 2012. Analysis of Financial Statements. John Wiley & Sons.
Flynn, D.K., Uliana, E. and Wormald, M. 2012. Financial Managemnt-6th Edition, Juta and
Company Limited.
Funke, C., 2007. Ownership structure as determinant of capital structure. GRIN Verlag.
Gallén, T., 2006. Managers and strategic decisions: does the cognitive style matter. Journal of
Management Development. 25(2). pp. 118 – 133.
Gibson, C., 2012. Financial Reporting and Analysis. Cengage Learning.
Ittelson, R. T., 2009. Financial Statements: A Step-by-Step Guide to Understanding and
Creating Financial Reports. Career Press.
Lampe, K. and Hofmann, E., 2013. Financial statement analysis of logistics service providers:
ways of enhancing performance. International Journal of Physical Distribution &
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McMenamin, J., 2002. Financial Management: An Introduction. Routledge.
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