Financial Decisions and Resources for Sweet Menu Restaurant Expansion

This report provides a comprehensive financial analysis for Sweet Menu Restaurant, focusing on its expansion plans. It identifies and evaluates both internal (retained earnings, personal savings) and external (issuing shares, borrowed funds, lease, venture capital) financial sources, assessing their implications and suitability. The report recommends a combination of retained earnings and loan capital as the most appropriate funding sources for the restaurant's expansion, considering factors such as cost, control, and market position. It also delves into the cost of finance, the importance of financial planning, information needs of different decision-makers, and the impact of finance sources on financial statements. Furthermore, the report examines budgeting, unit cost calculations, pricing decisions, and investment appraisal techniques to assess project viability. Finally, it addresses the production and interpretation of financial statements using ratio analysis.

MANAGING
FINANCIAL
RESOURCES AND
DECISIONS

Table of Contents
INTRODUCTION......................................................................................................................1
TASK 1......................................................................................................................................1
AC 1.1 Sources available to the business organizations.......................................................1
AC 1.2 Implication of internal and external finance sources................................................2
AC 1.3 Most appropriate source of finance for Sweet Menu Restaurant..............................3
TASK 2......................................................................................................................................4
AC 2.1 Cost of identified appropriate finance source for Sweet Menu Restaurant..............4
AC 2.2 Importance of financial planning for the Sweet Menu Restaurant for their new......4
business plan..........................................................................................................................4
AC 2.3 Information needs of different decision makers in Sweet Menu Restaurant business
...............................................................................................................................................5
AC 2.4 Impact of finance sources in the business financial statements................................6
TASK 3......................................................................................................................................7
AC 3.1 Analysis of budgets and take appropriate decision...................................................7
AC 3.2 Calculation of unit costs (meal cost) and take pricing decisions..............................8
AC 3.3 Using investment appraisal techniques to know the project viability.......................9
TASK 4....................................................................................................................................10
AC 4.1 Main financial statements produced by the organization........................................10
AC 4.2 Appropriate formats of financial statements for different type of businesses........11
AC 4.3 Interpretation of financial statement using ratio analysis method..........................15
CONCLUSION........................................................................................................................16
REFERENCES.........................................................................................................................17

INTRODUCTION
Success of business depends greatly upon the availability of finance. The amount of
cash available for spending in business is termed as finance. There are number of sources
available to the business organizations to mitigate their financial need. It can be fulfilled from
the sources that are available internally in the organization. Moreover, outside sources also
can be used for such purpose. In this report, financial sources are identified for a reputable
Restaurant company named Sweet Menu Restaurant. The Restaurant is operating in Gants
Hill in East London founded before 10 years ago. This Restaurant has a good corporate
image and well known position in the market as it serves various types of inter-continental
foods at fair prices. Now, company’s owner desires to expand their business by opening its
branches in Central London and Croydon. Therefore, the present report helps in determining
the available financial sources, their implication as well as advantage and disadvantage for
the company. Furthermore, the report will explain that how managers can take efficient and
strategic decisions to manage these sources.
TASK 1
AC 1.1 Sources available to the business organizations
Financial sources are categorised into two that are internal and external. Internal
financial sources comprise the sources that are available in the business whereas external
finance sources include the sources that can be taken from the outsiders.
Type of Internal sources Description
Angel investors
Under this type of source, business can take loans
from their friends and relatives. Business owner can
get funds from their friends and relatives for different
time period at cheaper interest rate that helps to
eliminate or minimize the financial needs.
Retained earnings and profits of other
business
Balance of business profit which is not distributed as
dividend is called retained earnings (Broadbent and
Cullen, 2012). All the corporations can use this
source for fulfilling their financial need. Along with
the retained earnings, owner also can use profit of
their other businesses.
Owners personal savings Personal savings of the owner can also be used as a

financial source for the expansion of business. It is
mostly used in case of newly business organization
when outside sources are available in very less
amount.
External sources Description
Issuing shares
There are two types of shares that are
ordinary and preference share capital.
Business can issue these shares in the market
in order to get funds easily.
Borrowed funds
Bank loan is the most common source of
borrowed funds (Thomas, 2001). Bank gives
loans to the corporate sectors for a specified
time period at an implied interest rate.
Lease
Under the lease financing, business can attain
rights for using assets without having
ownership (Brayley and McLean, 2001). It is
a contract between the asset’s owner and user
that provides rights for the use of assets at a
rental charges.
Venture capital
Venture capital can be acquired in the highly
potential growth earning businesses. Venture
capitalists are much interested to invest in
such businesses that can provide higher
returns to them and fulfil long term business
requirements.
AC 1.2 Implication of internal and external finance sources
Internal sources Implications External sources implications
Angel Investors: Borrowing loans from Issuing shares: On the amount of equity

friends and relatives, business needs to pay
interest to them. It will be paid on timely
basis.
share capital, dividend rate is not fixed.
However, preference share capital requires
regular dividend payments at fixed rate.
Another implication is that ordinary
shareholders have voting rights. It gives
controlling rights to the shareholders in order
to take part in operating functions. Thus, it is
clear that diversification of control is also
existed in this source.
Retained earnings and other business profits:
Retained earnings involve opportunity cost. It
refers to the loss of return that businesses can
get through using retained earnings in any
investment proposal.
Borrowed funds: On the amount of borrowed
loans, business has to pay timely interest
charges to the loan provider. Thus, regular
interest payment brings financial risk to the
business. Another implication is that they
have to keep the business assets as a
collateral security to the banks (Managing
financial resource and decisions, n.d.). In
case of any default in payment, banks have
legal rights to discharge business assets at the
market place. Further, it will greatly impact
the corporate image of company in an
adverse manner.
Personal savings: This is a cheaper source of
finance as it does not involve any cost to the
business. Moreover, by investing personal
savings, fixed financial burden can be
reduced to a great extent. Main reason for this
is that businesses have to take lower funds
from the outsiders.
Lease: Business does not need to purchase
assets for the purpose of using. In this source,
ownership will not be transferred but
business can lease assets from others. For
that, business has to pay rental charges on the
periodical basis. However, benefit of using
this source is that rental charges are
allowable expenditures for the tax purpose.

AC 1.3 Most appropriate source of finance for Sweet Menu Restaurant
The given scenario stated that Sweet Menu Restaurant needs finance amounted to
300000£ and 500000£ for the business expansion. On the basis of above identified
implications, it can be said that under the internal sources, retained earnings and profits from
other businesses will be the best among them. The reason for such decision is that it does not
involve higher cost to the company. Further, these are the regular finance sources and
eliminate the immediate finance requirements also. However, if company receives funds from
the angel investors, then business will need to pay interest to them. On contrary, through
ploughing back of profits, firm can generate funds without any cost.
Moreover, Restaurant has a good market position and well known in the market. Loan
capital will be the most appropriate finance source under the external sources. The reason for
such decision is that banks and other financial institutions provide loans on the basis of their
credit worthiness. Therefore, loans will be available easily to the Sweet Menu Restaurant.
Moreover, it fulfils the short term, medium term and long term finance requirements of
business. In addition to it, business has good reputation in the market thus, company is able to
bear fixed financial burden. Other benefits will be that control diversification can be
eliminated through using this finance source. Thus, it has become clear that both types of
sources are appropriate for Sweet Menu Restaurant for their expansion plans.
TASK 2
AC 2.1 Cost of identified appropriate finance source for Sweet Menu Restaurant
The cost of retained earnings and other business profits for Sweet Menu Restaurant
business is opportunity cost. It concerns with the loss of possible returns that the business can
receive by investing the profits in other businesses or in other available alternative investment
proposal. Moreover, higher rate of ploughing back of profits may create negative impacts to
the shareholders.
Furthermore, the amount of borrowed funds imposes cost of regular payment of
interest. The interest rate may be fixed or volatile also called fluctuating. Fixed rate imposed
fixed amount of financial burden to the company (Managing financial resource and
decisions, n.d.). However, in case of fluctuates interest rates, the financial liability cannot be
assessed in a correct manner. Another, the need of giving business assets as a collateral
security will be included in the cost. Further, in case of having business loss it will affects the
business operations in a negative direction. In addition to it, at the time of maturity, Sweet
Menu Restaurant has to repay the loan amount.

AC 2.2 Importance of financial planning for the Sweet Menu Restaurant for their new
Business plan
Financial planning plays a vital a significant role in the organization success. It
mainly concerns with the process of setting business goals, targets and objectives and making
plans for go ahead (Dunn and Liang, 2015). Financial manager is greatly responsible for
making financial plans for the business. According to the scenario, Sweet Menu Restaurant
business is making plans for expanding their business operations. Therefore, the need of
making strategic financial plans will be arise for the business. It helps to acquire sufficient
amount of funds and manage it in a proper way so as to achieve financial goals.
Initially, the business financial planner has to determine the current available finance
sources that can be used for opening branches in Central London and Croydon. He has to
make strategic business plans to met their financial need at lower the cost factor. After that,
the financial manager has to forecast the future incomes and expenditures that can be occur
from the operational activities (Snider, 2015). It will be estimate for all the projects,
departments and the business divisions. The managers also identify the cash need and make
plans for raising the cash funds in business. Finance managers can prepare budget for that
purpose that combines all the probable incomes and expenditures for the future period. It
aims at running business operations successfully through controlling business cost and
maximize its incomes. This in turn, company will be able to generate higher the profits.
Furthermore, financial policy helps to manage the business funds in an effective and efficient
manner. Overall, the financial planning helps to achieve the predetermined financial targets
of business.
AC 2.3 Information needs of different decision makers in Sweet Menu Restaurant business
Different users need distinct information to take better decisions. In Context to Sweet
Menu Restaurant business, the information need of different decision makers are explained
below:
Decision makers Information need
Business managers In the present era, running business successfully is the
responsibility of all level of managers. It includes higher
level managers, middle level and lower level managers.
Higher level managers includes directors, CEO and CFO
take strategic business decisions for business development,

expansion, acquisition and introducing new product in the
market. Thus, both the financial as well as non financial
information are required by the mangers. Therefore, they
require information regarding all the incomes and
expenditures from the financial statements. Middle level
managers include regional managers, division managers and
store managers take medium term decisions. They take
decisions about strategic business unit, motivation,
performance improvement and enforcement of business
policies. The managers analyse and evaluate the business
expenses with the objectives of making effective control
(Slack, Chambers and Johnston, 2010). Further, budgeting
is also an important tool that used by managers to manage
the cash sources and its applications to ensure adequate cash
availability. Through managing the funds appropriately,
financial position and operational performance can be
improved in a great manner. Lower level managers includes
team leaders and supervisors take short term business
decisions such as day to day planning, production, ordering
goods and mitigate customer queries helps to improve
business performance
Creditors
They provide credit to the Sweet Menu Restaurant business,
therefore they analyse the business creditworthiness. They
analyse the financial statements and cash flow statements to
identify the liquid availability and cash earning capacity
(Zager and Zager, 2006.). Further, they analyse the
profitability statement to know the Restaurant business
profits.
Government Government have the objectives to increase their incomes
sources. Tax is the most important source of government
incomes that is calculated on earned business profits.
Therefore, government need information regarding business

profits to identify the tax obligations and in case of any
default, they impose penalties and other lawsuits.
Shareholders
Shareholders are the connect stakeholders of the business.
They influence business operation greatly need information
about share prices, earning per share, dividend incomes,
business performance in terms of business profits, ethical
awareness and fulfilling corporate social responsibility.
AC 2.4 Impact of finance sources in the business financial statements
All the business transactions show in the business financial statements. It includes
financial and operating transactions. Therefore, the type of financial sources that have been
used by Sweet Menu Restaurant business will impact the financial position statements.
However, the cost of financial statements impacts the profitability statement.
As stated earlier, most appropriate finance source for Sweet menu Restaurant are
retained earnings and borrowed funds. The cost of retained earnings that is opportunity cost
will not show in the profit and loss account. However, the amount of retained earnings used
will be shows in the statement of changes in retained earnings.
On contrary, cost of borrowed funds that is interest will be show in expenditure sides
of profit and loss account. Further, it will be deducted from the cash in the company's current
assets head. According to the given scenario, the cost will be show in profit and loss account
as interest charges however, under the current assets group; it will be subtracted from cash
and banks (Managing financial resource and decisions, n.d.). Another, the taken amount of
borrowed funds will be show in balance sheet. In context to Sweet Menu Restaurant business,
the amount will be show in liability side as long term loan under the noncurrent liabilities
head. Further, the amount will raise the business cash hence; it will be show in assets side
under the current assets group through increasing the cash and bank balance.
TASK 3
AC 3.1 Analysis of budgets and take appropriate decision
The present scenario stated the cash and inventory budget of Blue Island Restaurant
for the upcoming four months. The company is a great competitor of Sweet Menu Restaurant

business. Under the cash budget, the Restaurant directors summarize the all estimated cash
receipts and payments together.
The cash budget can be analysing with identifying the changes in cash incomes and
expenses (Whited, 2014). In context to Blue Island Restaurant business, the percentage
changes are calculated as under:
Percentage
changes in cash
sales
Changes in cash
sales/Previous month
sales*100 3.3333333333 16.1290322581
11.11111111
11
Percentage
changes in cash
expenses
Changes in cash
expenses/Previous
month expenses*100 -71.5299877601 13.7575236457
83.52229780
8
The prepared budgeted figures indicate that sales only a single factor which
contributes the towards the cash incomes. According to the budget it can be reported that the
cash sales are increasing in all the four subsequent months. The sales are 15000£, 15500£,
18000£ and 20000£ respectively. However, the percentage changes are 3.33%, 16.129% and
11.11% indicate that in the month of November, sales are increasing at higher rate
comparatively than other periods. However, in the month of October, sales increases by only
3% while in the month of December, the percentage changes get declined from 16.129% to
11.11%. It indicates that in this month, sales are increasing at lower rate. Therefore, the
managers should make planning to increase business sales (Cox, 2014).
On contrary, various components are existed that contributes towards the business
expenditures. It includes capital expenditures for buying assets such as Van and Furniture and
Fittings. However, operational expenses includes expenses for paying salaries and wages,
petrol charges, lighting and energy charges, insurance charges and purchase inventory
(Whited, 2014). The total cash expenses for the business are 40850£, 11630£, 13230£ and
24280£ respectively. The expenditures tend to decline in the month of October and increase
in both the following months. However, the percentage changes indicate that in the month of
October, the cash expenses declined by 71.53% due to eliminate the capital expenses. This in
turn, the net cash balance get converts from adverse balance to positive balance amounted to
3870£. After this month, it tends to increase by 13.75% due to increase salary and wages,
purchase and lighting and energy expenses while the available cash at the ending period is
positive amounted to 1290£. The reason behind that is the net cash balance for the month is

comparatively higher than cash availability at the ending month of October. Once again,
expenditures increases by 83.52% due to acquiring the fixed assets amounted to 10000£.
Another reason for such increases is increasing the operating expenses of salary and wages,
lighting and energy and purchasing inventory. This in turn, resulted in negative cash balance
and adverse cash availability at the month ending. On the basis of above identification, it can
be reported that the months in which capital expenditures will be occur lead to highly
increase in the cash expenses results in adverse availability of cash. Through implementing
an effective control tool, expenditures can be minimised (Amoako and et. al., 2013). Apart
from it, inventory budget indicate that Restaurant is paying 60% of purchase obligations in
same month and 40% in the next month.
AC 3.2 Calculation of unit costs (meal cost) and take pricing decisions
Blue Island Restaurant cost sheet indicate costs for purchasing steak, vegetables and
other ingredients, making payment to labour and all the other overheads. The overheads are
absorbed using absorption costing technique. The cost is the basis for setting price for the
offered meal. The scenario depicts that prices are decided by adding mark up cost of 40%.
Along with it, the rate of value added tax (VAT) is 20%. Thus, prices can be determined as
under:
Item name Cost (In £)
Steak 3
Vegetables and other ingredients 1.5
Labour 3.5
Overheads (using absorption costing technique) 2
Meal cost 10
Add: mark up percentage @40% 4
VAT @20% 2
Set meal prices 16
Food cost percentage: It can be calculated by dividing total costs with the decided
sale prices. The food cost percentage for Blue Island Restaurant business is computed below:
Food cost percentage = Total Ingredients costs/Sale price

= 10£/16£*100
= 62.50%
Thus, it can be reported that deciding the meal prices at 16£, company is earning
37.50% profit on total sales. It indicates that company is earning good profitability.
AC 3.3 Using investment appraisal techniques to know the project viability
The scenario stated that Blue Island Company have available space for open its
branches for expansion purpose. Two investment proposal are available that can be go ahead
to utilize the available space.
Investment appraisal techniques: Two techniques require to be applied with both the
proposals that are net present value and payback period. The time period taken by the
proposal to get back its initial outflow called payback period (Baum and Crosby, 2014).
However, the difference between the discounted cash inflows and initial outlay called net
present value.
Calculation of payback period
Year Proposal 1 Cumulative Proposal 2 Cumulative
0 (1200) (1200) (1200) (1200)
1 800 (400) 300 (900)
2 600 200 400 (500)
3 400 600 500 0
4 200 800 600 600
5 50 850 500 1100
Residual value 0 850 50 1150
Payback period of proposal 1st = 1 year + (400£/600£)*12 months
= 1year 8 months
Payback period of proposal 2nd = 3 year
Calculation of net present value
Year Proposal 1st
Discount
factor@10% Discounted cash flow
0 (1200) 1 (1200)
1 800 0.909 727.2
2 600 0.826 495.6