Financial Analysis of Sweet Menu Restaurant and Blue Island Restaurant

This report provides a comprehensive financial analysis, focusing on the Sweet Menu and Blue Island restaurants. It begins by identifying various sources of finance, both internal and external, and discusses their implications and suitability for Sweet Menu. The report then delves into the costs associated with different financing options and emphasizes the importance of financial planning for the restaurant's success. It explores the types of information needed by decision-makers, analyzes a cash budget, and evaluates investment proposals using relevant techniques. Furthermore, the report examines main financial statements and calculates various financial ratios to compare the financial positions of both restaurants, offering valuable insights into their performance and financial health.

MFRD

Table of Contents
INTRODUCTION ..........................................................................................................................1
Task 1...............................................................................................................................................1
1.1 Different types of sources of finance....................................................................................1
1.2 Implication of sources of finance..........................................................................................2
1.3 Most appropriate sources of finance for Sweet Menu restaurant.........................................3
Task 2...............................................................................................................................................4
2.1 Cost of different sources of finance......................................................................................4
2.2 Importance of financial planning to Sweet Menu restaurant...............................................5
2.3 Information needed by decision maker of Sweet Menu restaurant......................................6
2.4 Impact of sources of finance on financial statements...........................................................6
Task 3 ..............................................................................................................................................7
3.1 Analyze of Blue Island restaurant cash budget.....................................................................7
3.2 Calculation of Unit cost and its relevant decisions related to pricing...................................8
3.3 Viability of the proposal by using investment techniques....................................................8
Task 4...............................................................................................................................................9
4.1 Main financial statements....................................................................................................9
4.2 Financial statements need to be prepare by different types of organization......................10
4.3 Calculation of various ratios to find out the best company................................................11
Conclusion.....................................................................................................................................13
References......................................................................................................................................13

INTRODUCTION
Finance is the branch of economics that is concerned with the allocation of resources in
each and every department and organization as well as with the management, acquisition and
investment (Barnes and Pancost, 2010). Finance deals with all the matters that are related to the
money as well as market. In simply words, it could be said that finance includes the process of
providing money for different projects.
The following report is going to depict about the various sources of finance through
which an organization can raise its funds in order to meet its various needs. In addition to this,
costs which need to be bearded by company through using various sources of finance are also
mentioned. In this report, some of the best sources of finance through which Sweet Menu
restaurant can raise its finance in order to expand its business are also discussed. In this,
importance of financial planning is also mentioned. Along with this, various types of information
needed by the decision maker of company are also interpreted.
In the following report, budget of Blue Island restaurant is analyzed in order to find out
its current market position. In addition to this, two proposals are analyzed by using various
investment techniques in order to found out the best one. In this report, different types of
financial statements are also mentioned. At last, various ratios are calculated by taking into
consideration the profit and loss account as well as balance sheet with an aim to compare the
financial position of Sweet Menu restaurant and Blue Island restaurant.
Task 1
1.1 Different types of sources of finance
There are different types of sources of finance through which company can raise its
funds. Some sources through which company can raise the availability of finance are present in
the internal environment of it while some of them are present in the external environmental.
Internal sources of finance
Sale of assets This is one of the best methods through which company can raise finance.
By selling its old or obsolescent asset, company can raise the level of its
funds. Simply, keeping the useless asset will increase the cost of company
(Bhowmik and Saha, 2013). So, this method can be used by company in

order to meet its both the short term and long term requirements of funds.
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Retained profit Retained profit is the part of profit which is kept by company as a reserve.
By using this method, Sweet Menu restaurant will be able to raise its finance
in order to expand its business.
Friends and
families
Sweet Menu restaurant can also raise its finance by taking funds from
friends or family members. Normally, company needs to pay less interest to
its friends and family members.
External sources of finance
Issue of shares In order to meet its long term requirement of funds, company can raise its
funds by issuing equity shares to the general public (Brigham and Daves,
2012).
Bank loan It is the method through which company can borrow funds from the bank by
paying interest to them. This method can be used by company to meet its
short-term and Long-term requirement of finance.
Hire purchase This is the method through which company can use the asset or property
without purchasing it at that particular time.
1.2 Implication of sources of finance
Sources Legal aspects dilution bankruptcy
Sale of assets At the time of selling
assets, Sweet Menu
restaurant is required
to follow the legal
procedure (Brigham
and Ehrhardt, 2013).
Once, the legal
procedure for selling
assets is completed
then, at the particular
time, ownership
changes.
If situation of
bankruptcy arises, then
creditors can sell out
the assets of company
in order to recover
their money.
Retained profit No legal procedure is
needs to be followed
by company at the
Ownership does not
change. It remains
with the company
If retained profit is
available, then in that
case, condition of
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time of using retained
profit.
only. bankruptcy cannot
arise.
Friends and family Legal procedure
needs to be followed
if they demand interest
or share in the
company.
Ownership of the
borrowed funds
changes.
In case of bankruptcy,
friends can recover
their money by selling
out the company’s
assets.
Issue of shares Proper legal procedure
needs to be followed
by company at the
time of issuing shares.
Ownership changes,
when shares are issued
to the general public
(Brigham and
Houston, 2011).
In case of bankruptcy,
company will not pay
dividend to the
shareholders.
Bank loan Company is simply
required to fill an
application form
and along with this,
they need to submit
collateral security
to the bank.
Ownership of
borrowed funds
changes.
In case of bankruptcy,
bank can seize
collateral security
provided by the
company.
Hire purchase Simple legal procedure
needs to be followed
by company in order
to hire assets.
Ownership of the asset
changes, when all the
installments are paid
by the company.
In case of bankruptcy,
the asset of company
on hire cannot be
seized by the
government.
1.3 Most appropriate sources of finance for Sweet Menu restaurant
Sources Advantages Disadvantages Suitability
Bank loan Sweet Menu restaurant
can be able to borrow
large amount of
Sweet Menu restaurant
is required to pay high
interest rate to the
This method is
suitable for expanding
business or for
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money in order to
meet its short or long
term requirement.
bank (Chandra, 2011).
Along with this, they
are also required to
submit collateral
security.
purchasing any asset.
Issue of share By using this method,
company is able to
raise large amount of
money within a short
period of time
(Elsevier, 2011). In
addition to this,
company is not
required to repay fund
collected from the
public.
Dividend needs to be
paid to the
shareholders out of the
profit earned by
company. This in turn
will reduce the profit
margin of company.
This is the most
suitable method for
expanding business.
Sale of asset It is one of the best
methods of raising
fund from the asset
that is no longer
required.
Company is required
the particular limit in
order to dispose its
assets. This method
can also prove to be
one of the slowest
methods for raising
fund.
This method is
suitable for meeting
short term requirement
of fund or to purchase
any asset.
Task 2
2.1 Cost of different sources of finance
Bank loan: - Through bank loan Sweet Menu Restaurant can be able to meet its urgent
requirement of the funds within a short period of time (Fund, 2013). But at the same time it will
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increase the cost of the company. Sweet Menu restaurant is required to pay high rate of interest
which in turn reduces the profit margin of the company.
Issue of shares: - By issuing shares company can be able to meet its long term
requirement of funds within the short period of time. This is one of the safest methods of raising
finance. But at the same time it increases the cost of the company. Company need to bear
various expenses at the time of issuing the shares. In addition to this company is also required
to pay dividend to the shareholders out of the profit earned.
Sale of asset: - By using this method company will be able to expand its business by
selling out the old and obsolescent assets that are of no use (Healy and Palepu, 2012). But at the
same it will increase the cost of the company. Assets of the company will reduce as compared to
its liability. Sweet Menu restaurant can also suffer loss if they are not able to sale out the assets
at its deprecated value.
2.2 Importance of financial planning to Sweet Menu restaurant
Maintain the balance between inflow and outflow of cash: - Through final planning Sweet
Menu restaurant will be able to maintain the balance between inflow and outflow of the cash that
take place within and outside the organization.
Able to properly distribute the fund in each and every department as per the requirement: -
Planning of all the financial activity in advance will assist the Sweet Menu restaurant to properly
distribute the finance in each and every department as per the requirement (Income and Sheet,
2012). This in turn will also aid the company to overcome the problem of surplus or deficit in
terms of money.
Reduce the condition of uncertainty: - Financial planning will help the company to avoid or
reduce the condition of uncertainty. The condition of uncertainty can arise due to sudden
change in business environment.
Utilization of available resources to the full extent: - Planning of all the financial activities
in advance will aid the Sweet Menu restaurant to properly allocate the resources available to the
full extent. Proper allocation will also aid the company to reduce the wastage of resources.
To manage income available with the company more effectively:- Through final planning
Sweet Menu restaurant will be able to manage the income available with them in proper and
effective manner in order to achieve the desired target (Kaplan and Atkinson, 2015).
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Avoid the condition of shocks and surprises: - Planning of all the final activities in advance
will assist the company to avoid the condition of shocks and surprises that can occur due to
sudden change in internal and external environmental condition.
2.3 Information needed by decision maker of Sweet Menu restaurant
There are many types of information which are needed by decision maker of the
company. Thus, in order to collect all the required information stakeholders/decision maker
prefers financial statements and audit report of the company.
Investors: - Investors are the one who invest their personal saving into the company.
They want that company should generate more profitability. This in turn will aid them to gain
more return on investment. These investors want the financial statements of the company in
order to find out the profit earned by the company at the end of every financial year (McKinney,
2015).
Employees: - They are the one who works for the betterment of the company. These
employees simply want to see the income statement in order to find out whether the company is
in a position to pay them salary. In addition to this they want see that company is paying them
fair salary or not.
Manager: - Managers are the one who prepare various strategies in order to achieve the
desire objectives (Sabău, 2013). They want financial statement and audit report of the company
to form the various strategies with an aim to beat the competitor and to achieve the desired
objective.
Government: - Government is the one which works for the welfare of the society. They
prefer to see the financial statements and audit report of the company in order to conclude
whether the company financial position is good or not (Shahrokhi, 2008). In addition to this they
also prefer these statements in order to calculate the amount of tax need to be paid by the
company.
Customer: - Customers are the one who want value for their money. They do not require
any type of financial statements. They simply want high quality product at an affordable price.
2.4 Impact of sources of finance on financial statements
Sale of assets: - Entry of sale of assets will be made on the asset side of the balance sheet.
It will be deducted from the fixed assets. Amount of cash will increase due to sale of the assets.
7

Bank loan: - Entry of bank loan will be made on the liability side of the balance sheet
under the head of non-current liability. In addition to this entry of interest paid on the loan will
be made on debit side of the profit and loss account.
Issue of shares: - Entry of issuing shares will be made on the liability side of the balance
sheet under the head of share capital (Ormiston and Fraser, 2013). In addition to this entry of
dividend paid will be made on the debit side of the profit and loss account.
Profit and loss account for the year ended 31st December…
Operating profit
Less: Interest paid to bank
Profit before tax
Tax
Profit after tax
Dividend paid to shareholders
Retained profit for the year
….
…..
….
….
…..
….
…...
Balance sheet as at 31st December,
NON-CURRENT ASSETS
Furniture
less:- sale of asset
…...
…...... …....
CURRENT ASSETS
Cash(+)[due to sale of fixed asset]
Bank(+)[due to bank loan taken from bank]
….....
SHARE CAPITAL
45,000 ordinary share capital @ £10 per share
Revenue reserves(Retained profit) ….....
NON-CURRENT LIABILITY
Loan …....
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Task 3
3.1 Analyze of Blue Island restaurant cash budget
From the following analyzes it can be interpreted that financial position of Blue Island
Restaurant is not relatively good. Its inflow and outflow of cash is constantly changing. In the
month of September and December its outflow of the cash is more as compared to its inflows. In
addition to this it is also found out that the inflow of the cash in the month of October and
November was more as compared to outflow.
Thus, the reason behind this could be that Blue Island Restaurant is not planning all its
financial activities in advance. Along with this it can concluded that company is not focusing
more on the formation of the strategies.
3.2 Calculation of Unit cost and its relevant decisions related to pricing
Particular Cost
Cost of meal £10
Mark up pricing 40.00%
VAT 20.00%
Cost of meal £10
Mark up pricing £4
VAT £2
Final price £16
Unit price = 16-4-2= £10
From the following calculation it can be interpreted that per unit cost price of every day
meal is £10. Unit cost is calculated by deducting the VAT and Mark up price from the final
price.
3.3 Viability of the proposal by using investment techniques
Payback period
Year Proposal 1
Cash inflows
Proposal 2
Cash inflows
0 (£1,200) (£1,200)
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1 £800 (£400) £300 (£900)
2 £600 £200 £400 (£500)
3 £400 £600 £500 £0
4 £200 £800 £600 £600
5 £50 £850 £500 £1,100
Residual Value £0 £850 £50 £1,150
Payback period: - After calculating the Payback period it can be concluded that Blue
Island Restaurant should move on with proposal 1. Because PBP of proposal 2 is more as
compared to proposal 1. This method is used by the company in order to calculate the number of
year after which they are able to recover back the money invested by them (Ryan, 2005).
Net present value
Proposal 1
Discounted
Factor
@10%
Present
value Proposal 2
Discounted
Factor@10
%
Initial
investment (£1200)
1 £800 0.909 £727.2 £300 0.909
2 £600 0.826 £495.6 £400 0.826
3 £400 0.751 £300.4 £500 0.751
4 £200 0.683 £136.6 £600 0.683
5 £50 0.621 £31.1 £500 0.621
Residual Value £0 0.621 £0 £50 0.621
Net Present
Value £491
Net present value: - After the calculation of NPV it is concluded that Blue Island
restaurant should go on with proposal 2 as compared to proposal 1. Because proposal 2 will give
higher return to the company on the money invested by them. This method is used by the
company in order to calculate the flow of cash by considering the rate of discounted factors
(Persons, 2011).
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Task 4
4.1 Main financial statements
There are three types of financial statements which are normally prepared by each and
every organization whose company size is big. The preparation of financial statements normally
depends on the size and the types of business. Thus, some of the financial statements which are
prepared by every organization are as follows:-
Income statements/ Profit and loss account: - Income statement is prepared by the
organization in order to calculate the income generated and expenses made by the company at
the end of every financial year. On the basis of this statement company calculate the amount of
net loss or net profit earned by the company after paying interest to the creditors (Schroeder,
Clark and Cathey, 2011). After the preparation of this statement profit and loss appropriation
account is prepared by the company in order to calculate the amount of dividend need to be paid
by them.
This statement is normally prepared by each and every organization respective of its size.
Normally all the stakeholder/decision maker of the company require the income statement in
order to take various decisions.
Balance sheet: - Balance sheet is prepared by the company in order to find out the assets
and liabilities available with the company at the end of the financial year. On the basis of this
statement company calculates the amount of liquid cash available with the company. In addition
to this the following statement is prepared by the company in order to analyze the financial
position of the company at the end of every year.
This statement is prepared by only big size enterprise and the limited companies. This
statement is normally preferred by the managers, shareholders and government. This is the mode
which indicates how business holds its wealth and how much of this wealth is pledged to the
outsiders.
Cash-flow statement: - This statement is prepared by the company in order to find out the
flow of funds in various activities (Tribunella and Tribunella, 2010). This statement is divided
into three different types of activities (i.e. operating, investment and financial activities). This
statement includes all types of cash transaction made by the company at the end of every year.
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4.2 Financial statements need to be prepare by different types of organization
Private organization: - Private organization is the organization whose all functions and
operations are controlled and managed by the private investors. In this type of organization there
is no government interference. These companies are required to prepare all type of final
statements along with the company audit report if it is listed on stock exchange (Zietlow, Hankin
and Seidner, 2011). They need to prepare all these statements in order to calculate the amount of
profit earned by the company. In addition company is also required to prepare these statements in
order to calculate the amount of tax and dividend needs to be paid by them.
Public organization: - Public organization is the organization whose all functions and
operations are controlled and managed by the government. These organizations are also required
to prepare all type financial statements along with company audit report.
Non-profit organization: - These are the organization who works for the welfare of the
society. These are a type of charitable institutions (Rose and Hudgins, 2014). These
organizations simply prepare the income statements in order to calculate the amount of net loss
or net profit earned by the company at the end of every financial year. Main aim of this type of
organization is not profit maximization.
Partnership firm: - Partnership firm are established by making a contract between two or
more parties in order to start up a new business or to expand it. This type of firms is required to
prepare the all type of financial statements (Ryan, 2005). In addition to this these firms are also
required to prepare the partners capital account which shows the amount earned by each and
every partner at the end of the year.
Some traders: - Sole traders/proprietor is the firm which is controlled and managed by the
single individual person. The size of this type of firm is relatively small. These organizations
simple prepare the ledger account or trial balance in order to record each and every day
transaction. Many sole traders organization also prepare the income statements in order to
calculate the amount of profit earned by them at the end of every financial year.
4.3 Calculation of various ratios to find out the best company
Ratios Sweet Menu
Restaurant
Blue Island
Restaurant
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PROFITABILITY RATIO
Gross profit £222,500 £198,000
Net sales £350,000 £299,000
Gross profit ratio
Gross profit
ratio=Gross
profit/Net sales*100
63.57% 66.22%
Net profit £85,000 £94,800
Net sales £350,000 £299,000
Net profit ratio Net profit Ratio=Net
profit/Net sales/100 24.28% 31.70%
SOLVENCY RATIO
Sales £350,000 £299,000
Stock £44,000 £31,000
Stock turnover ratio
Stock turnover
ratio=COGS/Avg
inventory*100
0.12 0.10
Debt £31,000 £5,000
Equity £164,000 £118,000
Debt equity ratio Debt equity
ratio=Debt/Equity 0.19 0.04
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LIQUIDITY RATIO
Current assets £68,000 £41,000
Current liability £195,000 £123,000
Current ratio
Current
ratio=Current
assets/Current
liability
0.35 0.33
Liquid assets £24,000 £10,000
Current liability £195,000 £123,000
Quick ratio
Quick ratio=Current
assets-Stock/Current
liability
0.12 0.081
After calculating the various ratios it can be concluded.
Profitability ratio: - After calculating the Profitability ratio of both the companies (i.e.
Sweet Menu Restaurant and Sweet Menu Restaurant) it could be concluded that financial
position of Blue Island Restaurant is more favorable as compared to Sweet Menu restaurant.
The reason behind this could be that Blue Island Restaurant is focusing more on reducing its cost
of production.
Liquidity ratio: - Liquidity ratio indicates the amount of liquid cash available with the
company in order to meet any sudden requirement of funds. Thus, after calculating the Liquidity
ratio it could be concluded that more amount of liquid cash is available with the company. This
in turn also indicates that financial position of Blue Island Restaurant is better as compared to
Sweet Menu restaurant.
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Solvency ratio: - After calculating the Solvency ratio of both the company it can be
concluded that financial position of the Blue Island Restaurant is better. Because lower solvency
ratio indicates that company financial position is good.
Thus, at last it can be concluded that out of both the company the financial position of the
Blue Island Restaurant is much more favorable as compared to Sweet Menu Restaurant in term
of Profitability, Liquidity and Solvency.
Conclusion
From the following report it can be concluded that financial position of Blue Island
restaurant is better as compared as Sweet Menu restaurant. From this report it is also concluded
that there are various types of sources available with the company in order to raise its capital. But
as per the report there are three main sources of finance through which Sweet Menu restaurant
can raise its capital in order to start up two new business unit. In addition to this cost that can be
incurred by the Sweet Menu restaurant at the time of rising through various sources are also
concluded. In this importance of planning financial activities to the Sweet Menu restaurant is
also mentioned.
By using various investment techniques one best proposal is selected which Blue Island
restaurant can move on with. In this report cash budget of Blue Island restaurant is also analyzed
in order to find out the financial position of the company. In this report per day unit cost on every
meal is also calculated. At last, profitability, solvency and liquidity ratio of both the companies
are calculated in order to find out which company financial position is good.
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