Managing Financial Resources and Decisions: Sweet Menu Report

This report provides a detailed analysis of the financial resources and decisions of the Sweet Menu restaurant. It explores various sources of finance, including internal sources like retained profits and sale of assets, and external sources such as bank loans, overdrafts, and the issuance of shares, considering their implications and costs. The report emphasizes the importance of financial planning for managing cash flow, allocating resources, and making strategic decisions. It examines the information needs of decision-makers, including suppliers, creditors, employees, and tax authorities, and assesses the impact of finance on financial statements. Furthermore, the report analyzes budgeting, unit cost calculations, and capital investment methods to evaluate the financial performance of the company, including ratio analysis based on financial statements.

MANAGING
FINANCIAL
RESOURCES AND
DECISIONS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1 FINANCIAL SOURCES FOR BUSINESS......................................................................1
1.1 Sources of finance for Sweet Menu.......................................................................................1
1.2 Implications of sources..........................................................................................................2
1.3 Evaluation of sources.............................................................................................................3
TASK 2 IMPLICATION OF FINANCE........................................................................................3
2.1 Costs associated with the sources..........................................................................................3
2.2 Importance of financial planning...........................................................................................4
2.3 Information needs of decision makers...................................................................................5
2.4 Impact of finance on financial statements.............................................................................6
TASK 3 FINANCIAL DECISIONS BASED ON FINANCIAL INFORMATION.......................6
3.1 Analyse budget......................................................................................................................6
3.2 Calculation of unit costs........................................................................................................8
3.3 Capital Investment Methods..................................................................................................8
TASK 4 EVALUATE THE FINANCIAL PERFORMANCE OF COMPANY...........................11
4.1 Financial statements.............................................................................................................11
4.2 Difference between the statements......................................................................................11
4.3 Ratio Analysis......................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial resources play an important role in the functioning of the business. The funds
are essential for survival. The purpose of this report is to understand the sources of finance
available to the restaurant company Sweet Menu. It will reflect how the financial decisions are
made on the basis of the available information. It will also show the feasibility of different
business projects by making use of investment appraisal methods. Some financial ratios are also
calculated at the end in order to evaluate the financial position of the business. It is expected that
report will be able to achieve its goals and objectives.
TASK 1 FINANCIAL SOURCES FOR BUSINESS
1.1 Sources of finance for Sweet Menu
Figure 1: Source of Finance
Sweet Menu restaurant is making plans about opening its two new branches in Central
London and Croydon. A sum of £ 300000 and £500000 are needed for the investment (Ball,
Jayaraman and Shivakumar, 2012). Hence, finance can be arranged from the two sources:
Internal Sources
 Retained profits – This amount is preserved after disposing off all the debts and
liabilities. The source is mainly used in meeting the future contingencies such as
expansion, retrenchment etc (Bhowmik and Saha, 2013).
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 Sale of assets – It is the most easily available source within business. Funds can be
arranged by selling some of the assets such as machinery, land, etc.
 Personal savings – It is the most common form of finance available for the
entrepreneurs. Three owners of Sweet Menu can arrange money from their respective
personal savings.
External Sources
 Bank Loan – Most of the people arrange money from this source only. In these days,
loans are available at easy formalities. Loan can be taken after fulfilment of certain
requirements (Brigham and Ehrhardt, 2011).
 Bank overdraft – The company will need liquid cash for managing its day to day
operations. This need arises due to time gap between the collection and payments. In
order to fulfil such gap, bank overdraft is the most preferred option.
 Issue of shares – It is another good option for Sweet Menu. Shares can be issued for
subscription among the public. It can be an IPO that is initial public offering.
1.2 Implications of sources
The implications of the sources can be stated in the following manner:
 Retained earnings – The use of retained earnings can have an impact on the divided
policy of the company. The amount of dividend for the shareholders may get lower.
However, there is no dilution of control and ownership in this option (Dada, Azim and
Ullah, 2014). There is no effect on the financial liabilities as money arising from this
mode is regarded as the part of reserve and surplus.
 Bank loan – Under the option of bank loan, business owners of Sweet Menu are required
to perform all the legal formalities. The deposition of collateral security to the bank is
also made (Winand and et. al. 2012). On completion of all the legal formalities, owners
can make use of funds because the ownership is transferred to them. On the other hand, if
business does not succeed, then collateral security given by the owners can go on sale.
 Bank overdraft – In this option, lender gives additional money to the entrepreneur. The
ownership remains unaffected. Issues related to cash flows may arise because bank
demands overdraft to be repaid at a short notice (Ittelson, 2009).
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 Hire purchasing and leasing – It is the most effective option when there is shortage of
cash. Hire purchasing and leasing can be done for any kind of machinery or equipment or
tools. The ownership is transferred to the owner after making payment for the last
instalments. Hence, it is a kind of loss for the hire purchasing organization.
 Sale of assets – Under this option, assets can be sold on lease or on complete sale. The
ownership is transferred after making a certain agreement (Siano, Kitchen and Confetto,
2010).
1.3 Evaluation of sources
Following sources of finance have been selected for the restaurant:
Bank loan – Bank loan is the most commonly availed option for business owners. It is evident
that amount needed for expansion in restaurant industry is high. There are different types of risks
associated with it (Flynn, Uliana and Wormald, 2012). Bank loan gives high level of flexibility
as compared to the other sources. Loans can be obtained easily after fulfilment of certain legal
formalities.
Bank overdraft - It can be used by these two new restaurants as it is very effectual in achieving
balance between cash inflows and cash outflows. Further, a good record of payments can be
maintained because any kind of cheque does not discard due to lack of money. There is no
burden of late payment penalties and payments within business are made on time. No paperwork
is involved in the process (Keller, 2013). Cash can be accessed any time and the payment can be
made to the suppliers with ease. Day to day business operations can be handled in an effective
manner.
Retained earnings - Another feasible option for Sweet Menu is retained earnings. The company
has been running its business operations since last 10 years. It can be estimated that restaurant
has earned high amount of profits within business due to such good reputation among the masses
(Leung, 2011). There are no legal formalities and financial obligations associated with it as
sources are easily available within the business. It can be very feasible if company is in good
financial position.
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TASK 2 IMPLICATION OF FINANCE
2.1 Costs associated with the sources
Every source of finance has a cost associated with it. These can be described in the following
manner:
 Retained earnings – There is a problem of improper utilization of funds. Some
unessential charges may emerged in case if, objective related to use of retained earnings
is not stated clearly (Murty Kopparthi and Kagabo, 2012). Further, an issue of
overcapitalization may also arise. Low rate of dividend for the shareholders can lead to
dissatisfaction among them.
 Bank loan – Bank loan is a common option but sometimes it may also be difficult to use.
There is a need to submit different types of legal formalities. Cost in the case of bank
loan is the amount of interest which is being charged on the borrowed amount. However,
interest charges can also act as burden for the business (Price, 2015). In case of Sweet
Menu Company, amount of investment in two proposal is high hence, interest charges
will also be high on the loan. There are some costs associated with the paper work which
can also be a burden for the entrepreneurs.
 Bank overdraft - This option is also having some costs. There are many high interest
charges and they are usually higher as compared to other sources of borrowing. However,
expenses may increase if the limit of overdraft exceeds (Simser, 2011). Borrower must
keep into mind that bank overdraft is a kind of temporary loan and it requires regular
revisit from the lending institutions.
 Government grant – It is also a loan for the company. It is likely to be appeared in the
cash flow statement (Zhang and Chen, 2014). It will be shown under the heading of cash
flow from financing activities. It is recorded as a liability under the balance sheet.
2.2 Importance of financial planning
Sweet Menu is required to perform good financial planning with regard to the opening of
two new restaurants. It plays an important role within the company. This planning is to be
performed carefully in order to make sure that all the things are going into the right direction. It
helps in managing cash inflows and cash outflows within the business (Abraham, Deo and
Irvine, 2008). There is a need of strong capital foundation and financial planning. It becomes
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easy to allocate all the resources. All the day to day expenses can be managed with ease as with
the help of planning, financial needs are fulfilled on the immediate basis. Future and scope of
these two ventures can be decided in a well manner through financial planning.
There are many uncertainties related to the future and proper planning helps in removing
those uncertainties. It also assists in taking corrective actions at immediate point of time. It also
creates a link between the existing and future requirements by estimating sales and growth plans
for the business (Menifield, 2013). There is an increase in the cash flow also and this leads to
increase in the capital also. Financial planning also facilitates the use of best and suitable source
of finance for the business. Company will always need a stable and effective source of money so
that its business operations can be financed with ease. Unessential payment of taxes can be
avoided as this activity also covers tax planning. High level of control can be seen on the
selection of sources (Noor, 2013).
2.3 Information needs of decision makers
Decisions that are made within the company are evaluated at these levels:
 Strategic level – At this level, directors that mean the three owners of Sweet Menu
restaurant will be involved. They are responsible for making more strategic and crucial
decisions (Petch, 2012).
 Tactical level – At this level, middle level managers are engaged in the process.
Generally, they take decision more of technical nature.
 Operational level – It is the last level in the organization where supervisors are involved
in order to take decisions. Here, decisions are related with day to day operations.
There are various decisions makers within the business of Sweet Menu. These are as follows:
 Suppliers – Suppliers would like to maintain healthy business relations with the
company. They expect that business should give them timely payments for the supply of
all the inputs and raw materials (Financial Management and Control, 2014).
 Creditors – These are the ones who owns credit from the firm. Creditors show their
interest in evaluating the financial position of business because they want to know
whether organization has the ability to pay back the credit or not.
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 Employees – These people take decisions related to their career opportunities and growth
within the organization (Bhowmik and Saha, 2013). They want to work with a name
which has a good name and which operates on a high scale.
 Customers – These customers are interested in the products and services offered by the
company. For the last 10 years, Sweet Menu has developed a very solid reputation among
its customers with regard to food quality and taste.
 Tax authorities – These authorities make sure that company is making timely payment of
taxes or not. These bodies also make sure that there should not be any illegal tax
avoidance from the side of company (Davies and Drexler, 2010).
2.4 Impact of finance on financial statements
Selected sources of finance will have an impact on the different financial statements:
Bank Loan – This source can increase the value of liabilities under the balance sheet. The
amount of capital will also increase (Evans and Porter, 2010). This event is likely to be recorded
under the heading of cash flow from financing activities in the cash flow statement. However,
interest applied on the loan amount will be recorded in the profit and loss account.
Bank overdraft – This source will enhance the value of liabilities within the balance sheet that is
leading to increase in the amount of capital also. This transaction will be recorded under the cash
flow statement as well as under the heading of cash flow from financing activities (Mayne and
Zapico-Goni, 2007). However, interest charges are to be recorded in the profit and loss
statement.
Retained profits – It will create an impact on the balance sheet that also affects reserve &
surplus. This activity will be recorded under the heading of cash flow from investing activities
within the cash flow statement. The profit and loss statement will also be affected due to retained
earnings.
Government grant – It is also a loan for the company. The event is likely to be recorded as a
liability under the balance sheet (Merton and Bodie, 2010). It will appear within the cash flow
from financing activities under the cash flow statement.
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TASK 3 FINANCIAL DECISIONS BASED ON FINANCIAL
INFORMATION
3.1 Analyse budget
Cash Budget
Receipts
September
£
October
£
November
£
December
£
Total
£
Cash sales 15000 13000 15000 18000 58000
Total 15000 15500 18000 20000 58000
Payments
Van 12000 12000
Furniture & Fittings 18000 10000 28000
Salaries & wages 7500 7500 8500 9000 32500
Petrol 280 280 280 840
Lighting & Energy 500 600 650 1750
Insurance 350 350 350 350 1400
Purchases - inventory 3000 3000 3500 4000 13500
Total 40850 11630 13230 24280 89990
Net balance (25850) 3870 4770 (4280) (21490)
Balance b/fwd 18500 (7350) (3480) 1290 8690
Balance c/fwd (7350) (3480) 1290 (2990) (12530)
Budget is a quantitative statement which discloses the financial position of the business.
Budgeting is performed keeping in mind the future and hence it also identifies the risks
associated with the future. The given cash budget is of Blue Island Restaurant. Following
observations can be made from the budget:
 The sales are reflecting a fluctuating trend and it is affecting the demand of the service of
the restaurant within the market (Beck, Levine and Loayza, 2015).
 The outflows for the month of September are showing the inability of the firm in meeting
the expenses through cash sales. Expenses such as furniture, van and fittings are showing
negative balances.
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 In the month of October, firm has achieved the positive net balance of 3870. The level of
expenditures has also shown a decrease in the value.
 In the month of November a positive cash balance of 4770 has been maintained due to
increasing demand for products (Ittelson, 2009). It reflects that business is having high
competency level and efficiency.
 In the month of December, there is hike in the furniture and fitting expenses. It has raised
the outflow for the company. It has resulted in negative balance however the amount of
revenue has increased.
From the above analysis it can be interpreted that financial position of the Blue Island
Restaurant is good and company has the potential to achieve expansion. There is a need to adopt
appropriate measures to fill out the gapes (Sources of finance, 2012).
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
Computation 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%
After analysing the above calculation, it can be said that 6.50% of the food costs is likely
to be beard by the restaurant. A profit of £6 is being generated on the selling price of £16 per
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meal. In order to achieve good financial position, the restaurant is expecting a 40% profit on the
mark up cost and 20% VAT on the products.
3.3 Capital Investment Methods
Blue Island is making plans to assess the viability of two business proposals. The
feasibility of the two projects can be examined through application of capital investment
techniques.
The cash Flows
Year Proposal 1 Proposal 2
0 £1200 £1200
1 800 300
2 600 400
3 400 500
4 200 600
5 50 500
Residual value 0 50
Payback Period
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
Year Inflow Cumulative inflow
0 -£1,200 -£1,200
1 £300 -£900
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2 £400 -£500
3 £500 £0
4 £600 £600
5 £500 £1,100
Residual Value £50 £1,150
Payback Period 3 Years
Interpretation
After deriving the results of payback period, it can be interpreted that payback period of
proposal 2 is higher as compared to proposal 1. It means the initial investment in case of option 2
is being recovered early.
Net Present Value
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
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
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