Sweet Menu Restaurant: Sources of Finance and Financial Planning

This report provides a comprehensive financial analysis of Sweet Menu Restaurant, focusing on its expansion plans. It explores various sources of finance, including internal sources like retained earnings and external sources such as long-term bank loans and the issue of shares, evaluating their implications and suitability for the restaurant's expansion. The report delves into the costs associated with different financing options, emphasizing the importance of financial planning for effective resource utilization, cash management, and investment decisions. It also examines the information needs of different decision-makers, including investors, suppliers, and the government, and assesses the impact of financing choices on financial statements, including profit and loss accounts and balance sheets. Furthermore, the report analyzes budgeting, unit cost calculations, project viability, and the interpretation of financial statements, offering a detailed understanding of the restaurant's financial operations and strategic decision-making processes.

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TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance available to business................................................................................3
1.2 Implications of the sources of finance...................................................................................4
1.3 Most appropriate sources of finance for Sweet Menu Restaurant expansion plans..............4
TASK 2............................................................................................................................................5
2.1 Costs of different sources of finance.....................................................................................5
2.2 Importance of financial planning for Sweet Menu Restaurant..............................................6
2.3 Information needs of different decision makers in Sweet Menu Restaurant.........................7
2.4 Impact of sources of finance on financial statements............................................................7
TASK 3............................................................................................................................................8
3.1 Analysis of budget and appropriate decision making............................................................8
3.2 Calculation of unit costs and making pricing decisions.........................................................9
3.3 Assessing the viability of projects.........................................................................................9
TASK 4..........................................................................................................................................11
4.1 Main financial statements....................................................................................................11
4.2 Comparing formats of financial statements for different types of business........................11
4.3 Interpretation of financial statements of two restaurant using ratios...................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14
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INTRODUCTION
Management of finances is referred to as planning, organizing, directing as well as
controlling financial activities that relates with the procurement and utilization of funds of the
business. It can be meant as application of general management principles to financial resources
of the organization (The financial plan, 2014). In the present study, management of financial
resources has been discussed in context of Sweet Menu Restaurant. The organization is reputed
restaurant that is located in Gants Hill of East London. The present report entails to understand
the financial sources available with the business. Further, it involves implications of finance as
resources within the corporation.
TASK 1
1.1 Sources of finance available to business
In accordance with case, Sweet Menu Restaurant is a reputed business firm that is
engaged in offering inter-continental menus at economical rates. A plan has been developed by
the enterprise regarding opening of two branches in Central London and in Croydon. It has been
determined that outlet needs £300,000 and £500,000 to start up new restaurant at different
locations. For this, the organization needs to acquire funds from financial sources which have
been stated as under:
Internal sources
Retained earning It is considered as a part of profit that is saved
for the purpose of meeting contingencies for
future (Avlonitis and Indounas, 2005). Such
source can be used by Sweet Menu Restaurant
with an aim to fulfill its financial needs to a
significant level.
External sources
Long term bank loan Financial institutions are considered as most
suitable source that offers funds to the
businesses for particular duration time. With
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the assistance of this, long term needs of new
concern can be accomplished (Bennouna and
et.al, 2010). The usage of funds can be done
for the purpose of carrying out business
operations.
Issue of shares It is regarded as an external financial source in
which firm acquires long term financial
resources from the public (Drury, 2009). The
funds that are obtained by restaurant can be
used as start-up capital by the new business.
1.2 Implications of the sources of finance
There are certain implications of the financial sources that are possessed by the newly
formed organization. In situation, when the organization makes use of amount from personal
saving then implication to such relates with dilution of control. This denotes that control over the
funds is lost by the individual which could have been used for the purpose of accomplishing
organizational requirements for future term.
Along with this there is an existence of certain implications that can result in situation
when funds are acquired by new concern from external sources. With the aim to start up new
concern, loan can be taken by Sweet Menu Restaurant. This requires company to keep some
assets for security (Eccles and Holt, 2005). In case, when payment of interest is not done within
specified duration of time then financial institution can take legal actions against the firm. Along
with this, bank can mortgage assets of the corporation with an aim to recover the amount
borrowed as loan. In case, if the recovery of the loan amount is not done from assets then
company is declared to be bankrupt. Such has huge impact on the credit rating of the firm.
Moreover, it results in affecting the goodwill of the business to a significant level (Helliar and
et.al, 2005). The funds can be obtained through issue of shares. For this, organization needs to
make timely payment of dividend to shareholders from part of profit. In case of non-fulfillment
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of this, legal actions can be taken by shareholders against new concern that can affect its survival
in the market for longer term.
1.3 Most appropriate sources of finance for Sweet Menu Restaurant expansion plans
In order to start up new business the most suitable sources of finance for Sweet Menu
Restaurant expansion plan have been enumerated in the manner below: Issue of shares: Through issuance of shares new concern can obtain long term funds from
public. It is regarded as permanent source of capital for corporation. Sweet Menu
Restaurant is required to make payment of dividend from profitability amount for the
funds invested by public (Ismail and et.al. 2005). This would result in decreasing the
profitability of the business to a greater extent. However, it assists in fulfilling the
financials requirements of the firm in an effective manner.
 Bank loan: With the aim to conduct business operation, it is essential for a firm to acquire
financial resources from the bank. The amount that is borrowed as loan is for fixed
duration of time. However, with an aim to obtain the funds, organization needs to pay
interest on the loan amount. With this, corporation can fulfill its needs to meet future
contingencies in an appropriate manner. Along with this, it is regarded as a suitable
source that can assist Sweet Menu Restaurant in accomplishing its short, medium as well
as long term requirements.
TASK 2
2.1 Costs of different sources of finance
There is presence of several costs that are attached with different sources. These have
been presented below:
Opportunity cost It is considered as the cost of sacrificing which
is being incurred by the business when it let go
another best alternative (Shahwan, 2008). The
amount of retained earnings could have been
utilized by new concern towards
accomplishment of its future needs. This is
regarded as loss to the firm as the amount can
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be used for financing crucial activities of the
business.
Interest With an aim to start up new business,
organization can take long term loans from
financial institutions. Interest is the cost
attached with such sources. It is essential for
Sweet Menu Restaurant to make timely
payment of interest to bank as a cost of
obtaining loan amount.
Dividends Through issuance of shares to the public,
organization can acquire funds for fulfillment
of long term needs. It is significant for Sweet
Menu Restaurant to pay certain amount as
dividend from part of profit in return of amount
borrowed from shareholders (Shim, 2008).
However it can result in decreasing the
profitability of Sweet Menu Restaurant to a
greater extent.
2.2 Importance of financial planning for Sweet Menu Restaurant
There is presence of greater importance of financial planning for the firm like Sweet
Menu Restaurant that has been discussed under: Effective utilization of financial resources: There is greater role of financial planning in
relation with effective as well as efficient utilization of resources. With the assistance of
this financial manager can take suitable decisions towards allocation of resources in
various activities of new business. Through budget planning organization can attain
success for longer run. Ensures management of cash: There has been huge significance of financial planning in
relation cash management. With this, Sweet Menu Restaurant can manage its outflow of
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cash. In contrast to this, it also assists in managing the inflow of cash within firm. Thus,
growth and expansion of business operations can be ensured with the assistance financial
planning.
 Assist in making selection of right investment option: It is important for Sweet Menu
Restaurant to choose right investment proposal. This can be carried out through
effectively through financial planning (Gaskell and Ashton, 2008). This is due to reason
that it acts as an aid in making evaluation of the investment based upon risk, objectives
etc. Such has major role in providing direction to the firm in relation to selection of most
appropriate option for investment that assist in accomplishment pre-defined targets.
2.3 Information needs of different decision makers in Sweet Menu Restaurant
In order to take decisions the users of information requires several information with
respect to business. Decision makers with their information needs have been enumerated in the
manner below: Investor: They need information regarding the profitability as well as efficiency position
of the business. Through this investor can make decision regarding the corporation where
investment can be made. It is essential that valuable return is provided to the investor in
return of the amount invested by them. Because of such profitability information plays
significant role for investor as it assist them in process of decision making. Supplier: It includes decision makers who provide inputs in raw material form to the
business. They require information regarding the credit rating of the organization (Prieto,
2006). Moreover with this information they can design tactical plan that are related with
deciding on whether input can be offered or not. Because of such reason business is
required to make timely payment of supplier's invoices.
 Government: The information needed by regulatory authority is in relation with
profitability. Through this government can determine the tax amount that Sweet Menu
Restaurant is required to pay. Further investigation is done on whether the tax amount is
deposited or not. Through this government can conduct strategic operations that include
development of plan for next move of organization.
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2.4 Impact of sources of finance on financial statements
Financial statements involve the transactions that are being carried out by the business. It
includes financial and operating transactions. Sweet Menu Restaurant makes use of different
financial sources that affects the balance sheet of the organization. Moreover the cost attached
with the financial sources influence the profit and loss statement to a significant level. As stated
above the most suitable financial sources involves issue of shares, retained earnings and loan
from bank. The cost associated with internal sources is opportunity cost which is not
demonstrated in profit and loss account. However it is demonstrated in statement of changes
under retained earnings.
Along with this bank loan includes the cost of interest which is regarded as expense of
organization. It is represented on the expenditure side of profitability statement. Further in
balance sheet it is deducted from cash under the head of current asset. In accordance with the
provided scenario, profit and loss account involves cost. Moreover the interest will be subtracted
from the cash amount whereas funds acquired are demonstrated on the liability side in balance
sheet (Rasid and et.al, 2011). For Sweet Menu Restaurant loan amount will be reflected under
head of noncurrent liabilities as long term loan. This amount enhances the cash with the firm
which is presented on asset side. In situation of issuance of shares dividend paid to shareholders
will be presented in profit and loss account. Moreover the amount borrowed from public is
considered liability and is shown in balance sheet. The analysis carried above presents that for
Sweet Menu Restaurant loan from bank and retained earnings are suitable sources of finance. As
such can assist in opening of new branches by business.
TASK 3
3.1 Analysis of budget and appropriate decision making
The cash as well as inventory budget of Blue Island Restaurant has been presented for the
next four months. The company offers huge competition to Sweet Menu Restaurant. Cash budget
analysis can be conducted through determination of changes in the cash incomes as well as
expenses. It has been determined that estimated figure demonstrates the sales contributed
towards the cash incomes of business (Tektas, Gunay and Gunay, 2005). As per the budget it can
be stated that there is increase in cash sales in every month. In the month of November the sales
are increasing to a significant level as compared to other two that is 16.12%. Sales in December
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have declined to a greater extent. Thus there is need for the manager to design plan that result in
increasing sales. On the contrary there are various components that make contribution towards
expenditure of firm. It includes capital expenditure for purchasing assets such as furniture and
Vans. However it involves operational expenses that are consist of expenses relating with
salaries, petrol charges, lightning, energy charges etc. In October the expenses of firm decline
that has increased in other two months. On the other hand, alteration in percentage depicts that
there is decline in cash expenses by 71.53% in the month of October. This is resulted from
elimination in cash expenses. On the basis of analysis it has been gained that capital expenditure
would lead to increase in expenses that affect the availability of cash. Through implementation
of suitable control tool reduction in expenses can be ensured.
By execution of suitable control tool, expenses can be reduced.
3.2 Calculation of unit costs and making pricing decisions
Blue Island Restaurant's cost sheet involves expenses such as purchasing of steak,
vegetables and other ingredients. Moreover it includes payment of labor as well as other
overheads. The overhead absorption is done with the technique that is referred to as absorption
costing. The sales price of the meal that is being offered is gained based upon the cost incurred
while the production process is being carried out. In accordance with the scenario prices are
determined by adding mark up 40% on cost. Moreover 20% is defined as the rate of value added
tax. Price determination of Blue Island Restaurant is as follows:
Item name Cost (In £)
Steak 3
Vegetables and other ingredients 1.5
Labor 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 % = Total ingredients cost/ sales prices
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= £/10/£16*100
= 62.50%
Therefore it has been gained that meal price is £16. On this business is making 37.50% as
profit on cost. Thus this implies financial position of the business is sound.
3.3 Assessing the viability of projects
The technique investment appraisal is as under:
Payback period
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
Net present value
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
3 400 0.751 300.4
4 200 0.683 136.6
5 50 0.621 31.1
Net present value 490.9 (491 Approx)
Year Proposal 2nd
Discount
factor@10% Discounted value
0 (1200) 1 (1200)
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1 300 0.909 272.7
2 400 0.826 330.4
3 500 0.751 375.5
4 600 0.683 409.8
5 500 0.621 310.5
Residual value 50 0.621 31.05
NPV 529.95 (530 Approx)
Interpretation: On the basis of above calculation it has been gained that decision regarding
selection of 2nd proposal needs to be made by Blue Island Restaurant. This is because it possesses
higher NPV that is £530. On the contrary payback period of this project is 3 years which is
longer as compared to other project. Based upon resultants obtained through net present value
decision would be made as it assess the entire viability of the investment project.
TASK 4
4.1 Main financial statements
The main statement of finance is as under: Balance sheet: It is the statement that is sued by investors in making analysis of liquidity,
profitability and solvency position of business. Balance sheet involves asset and liabilities
of new organization. The former includes elements that act as an aid for business in
earning funds (Vice, 2013). It includes current as fixed assets. However liability includes
current liability, shareholder's funds and long term debt. Cash flow statement: It includes inflow and outflow of cash from operating, investing and
financing activities.
 Income statement: It is consist of direct and indirect expenses and income of the
organization. Through this statement, new business can gain insight to net profit and net
loss incurred during the financial year (Lee and Parker, 2013). The income includes
interest as well as commission received. On the other hand, expenses involve cost of
administration, depreciation as well as interest paid.
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4.2 Comparing formats of financial statements for different types of business
Every organization develops statement of finances in the format which is stated by
Generally Accepted Accounting Practices (GAAP) and International Financial reporting
Standards (IFRS). In this regard several business types are as under: Sole trader: This business is owned by an individual. Further such business only prepares
simple statement of profit and loss. Partnership: Such business type develops financial statements such as balance sheet,
income statement as well as cash flow account (Rogers, 2014). Further it also prepares
partners capital account that demonstrates amount contributed by each partners and their
ratio of profit distribution.
 Public limited company: This business type develops financial statements such as balance
sheet, income statement as well as cash flow account (Keller, 2013). In addition to this it
also develop financial statement as per international standards of accounting.
4.3 Interpretation of financial statements of two restaurant using ratios
Ratios Formula
Sweet Menu
Restaurant
Blue Island
Restaurant
Profitability ratio
Net Profit margin Net profit/sales 0.01 0.13
Gross Profit margin Gross profit/sales 0.63 0.66
Liquidity ratio
Current Ratio
Current assets/ current
liabilities 1.78 0.63
Quick Ratio
Current assets –
Inventory/ current
liabilities 0.63 0.15
Efficiency ratio
Asset Turnover Net sales / net assets 1.79 2.4
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Solvency ratio
Debt/equity ratio Debt/Equity 0.41 0.58
Interpretation: It has been gained that profitability ratio of Blue Island Restaurant is higher in
comparison with Sweet Menu Restaurant. Further from the analysis of quick ratio as well as
current ratio it has been determined that liquidity position of Sweet Menu Restaurant is higher.
This presents that firm possess greater ability to fulfill its short term obligations in an effective
manner. From the efficiency ratio that is asset turnover ratio nit has been examined that Blue
Island Restaurant makes appropriate utilization of its assets. This in turn assists the business in
attaining its desired set of outcomes. Blue Island Restaurant possess higher debt equity ratio that
denotes greater risk.
CONCLUSION
It can be concluded from the study that there is existence of several sources of finance
that are available with the business in order to carry out expansion plan. Along with this there are
greater implications of such sources in case of non compliance of the set guidelines. Further
there is huge importance of financial planning towards management of cash and making
selection of right option for investment.
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REFERENCES
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Online
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