Financial Resource Management Report: Sweet Menu Restaurant Analysis

This report provides a detailed analysis of financial resource management, specifically focusing on a restaurant business, Sweet Menu. It begins by identifying and evaluating various sources of finance, including internal sources like personal savings and retained profits, and external sources such as bank loans and venture capitalists. The report then explores the implications of these sources, considering costs, ownership, and potential risks. It emphasizes the significance of financial planning for managing cash flow, allocating resources, and making informed decisions. The report also examines the information needs of different stakeholders, including employees, suppliers, customers, creditors, tax authorities, and shareholders. Furthermore, it delves into financial decision-making processes, analyzing budgets, calculating unit costs, and applying capital appraisal methods. Finally, the report concludes by analyzing major financial statements and conducting ratio analysis to assess the financial performance of the restaurant.

MANAGING
FINANCIAL
RESOURCES

TABLE OF CONTENTS
MANAGING FINANCIAL RESOURCES...........................................................................1
Introduction .......................................................................................................................3
TASK 1 Sources of finance available to the business ......................................................3
1.1 Sources of finance for Restaurant...........................................................................3
1.2 Implications of sources ............................................................................................4
1.3 Evaluation of sources .............................................................................................5
TASK 2 Implications of finance as a resource ..................................................................6
2.1 Costs associated with the sources ..........................................................................6
2.2 Significance of Financial Planning ..........................................................................7
2.3 Information needs of different decision makers ......................................................8
2.4 Impact of finance on financial statements ...............................................................9
TASK 3 financial decisions based on financial information.............................................10
3.1 Analyse Budget .....................................................................................................10
3.2 Calculation of unit costs ........................................................................................11
3.3 Capital Appraisal Methods ....................................................................................12
TASK 4.............................................................................................................................14
4.1 Major financial statements ....................................................................................14
4.2 Difference between the statements ......................................................................15
4.3 Ratio Analysis ........................................................................................................15
Conclusion ......................................................................................................................16
References ......................................................................................................................18

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.
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)
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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)
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.
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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).
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
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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
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.
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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. This planning will help in managing the cash inflow and cash outflow
within the operations by offering an appropriate structure for the company. Further, 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). Moreover, Financial planning also offers strong capital foundation,
hence in this manner it becomes easy to allocate all the financial resources in effective
manner. Along with it, The future and scope for two new branches can also be decided
through this function (Financial Management and Control, 2014)
Furthermore, 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. Moreover, 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). At last, 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.
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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 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.
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 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
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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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