Report: Financial Planning for Sweet Menu Restaurant Expansion Project

This report analyzes the financial strategies for Sweet Menu Restaurant's expansion, focusing on the opening of new business units. It explores various sources of finance, including internal and external options like bank loans, retained earnings, and issuing shares, evaluating their implications and suitability. The report assesses the cost of different financing methods, emphasizing the importance of financial planning for the restaurant's growth. It delves into cash budget analysis, unit cost calculations, and the application of investment appraisal techniques to evaluate expansion proposals. Furthermore, the report examines the main financial statements and employs ratio analysis to interpret the financial positions of Sweet Menu Restaurant and a competitor, Blue Island restaurant, providing insights into their financial health and performance. The report recommends a bank loan as the most appropriate source of finance.

MFRD

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Sources of finance that can be used by Sweet Menu restaurant............................................1
1.2 Implication of various sources of finance..............................................................................2
1.3 Most appropriate sources of finance for Sweet Menu restaurant..........................................4
TASK 2............................................................................................................................................5
2.1 Cost of different sources of finance.......................................................................................5
2.2 Importance of financial planning to Sweet menu restaurant.................................................5
2.3 Impact of sources of finance on financial statements............................................................6
2.4 Impact of sources of finance on financial statements............................................................7
TASK 3............................................................................................................................................7
3.1 Analyse of cash budget and various decisions based upon it................................................7
3.2 calculation of Unit cost..........................................................................................................8
3.3 Viability of two proposal by using investment appraisal techniques..................................10
TASK 4..........................................................................................................................................13
4.1 Main financial statements....................................................................................................13
4.2 Comparing the financial statements format of different types of organisation...................14
4.3 Interpreting the financial statements of Sweet menu restaurant and Blue Island restaurant
using ratio analysis....................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Finance is the resource that is available with the company in order to achieve its desired
organisational goals and objectives (Lee and et.al. 2015). In other words it can be said that
finance resource is the money that is available with the company for investing in order to
generate profit out of it. In managing financial resources manager of the company play a vital
role. Manager various strategies with an aim to utilize the available resources to the full extend
and to achieve the organizational desired objectives. In the following report Sweet Menu
restaurant which is the reputed restaurant situated in Gants Hill in East London. The restaurant
wants to expand its business by opening to new business units in Central London and Croydon.
In this report various sources of finance are discussed that are available with Sweet menu
restaurant along with its implications. In additional to this important of financial planning to
Sweet menu restaurant in context of expansion of its business is also mentioned. Along with this
investment techniques are used by the company in order to analyse which proposal will prove to
be best? At last in this report various ratios of both the companies are calculated in order to
analyse which company financial position is good.
TASK 1
1.1 Sources of finance that can be used by Sweet Menu restaurant
There are different types of internal and external sources of finance present with Sweet
Menu restaurant in order to raise its capital for the purpose of starting its two new business unit.
Some of the sources of finance that can be used by the company are listed below:-
Sources of finance features
Internal sources of finance
Angle investors By using this method Sweet Menu restaurant can raise its
capital by borrowing from its friends and family members in
order to fulfil their objectives (Murphy and Yetmar, 2010). For
using this method Sweet Menu restaurant is required to give
their friends shareholding in the company.
Retained earning Each and every organisation keep fixed amount of profit earned
by them with it in order to meet up its urgent requirements. This
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is one of the cost effective method that can be used by Sweet
Menu restaurant in order to expand its business units.
Bank overdraft
External sources of finance
Issue of shares It is also one of the best methods that can be used by the Sweet
Menu restaurant in order to raise its capital (Orens and et. al.,
2009). By using equity shares and debentures to the general
public company can raise its capital. By using this method
company will be easily be able to open its two new business
units.
Leasing It is one of the best external sources of finance that can be used
by Sweet Menu restaurant in order to use the asset without
purchasing it. By using this method company can protect
themselves in context of obsoletation of technology.
Bank loan It is the method by using which Sweet Menu restaurant can
borrow money from the bank against the collateral security. By
using this method company will be able to meet its urgent
requirement of finance (Overton, 2007). By using this method
company can also avail various tax benefits.
1.2 Implication of various sources of finance
Sources Legal aspects Suitability Cost
Angles investors Sweet Menu restaurant
is required to issue
shares to the Angles
investors in order to
give them
shareholding in the
company.
By using this method
Sweet Menu restaurant
can easily be able to
meet its financial
requirement of funds
without following any
official formalities
Angles investors are
also the shareholders
of the company. Sweet
Menu restaurant is
required to pay
dividend to them. This
in turn increases the
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(Rasid, 2014). financial cost of the
company.
Retained profit According to law
every company is
required to keep
certain fixed
percentage of profit as
a reserve with itself.
Therefore, by using
this method Sweet
Menu restaurant will
be able to meet its
uncertain situations.
This is one of the best
methods that can be
used by the Sweet
Menu restaurant if
they want to bind the
entry of shareholder in
decision making
process.
By using this method
Sweet Menu restaurant
can be able to meet its
financial requirement
of finance at that
particular time. But
afterwards they will
not be left in the
position to face any
uncertainty that can
arise in future.
Issue of shares and
debentures
In case of issue of
shares Sweet Menu
restaurant is required
to give voting rights to
the shareholders while
no such rights are
given to the debenture
holders (Tracy, 2012).
Company is only
liable to pay dividend
interest to the them as
per the legal rules and
regulations.
It is one of the best
cost effective ways
that can be used by
Sweet Menu restaurant
in order to meet its
financial requirement
of capital to start two
new branches.
Company is required
to pay dividend to its
equity shareholders if
they generate profit.
But they need to
provide interest to the
debentures holders
annually whether they
generate profit or not.
Leasing As per the law,
company is required to
pay back the asset to
This is one of the best
sources that can be
used by Sweet menu
By using this method
financial cost of the
company will increase
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the real owner after the
completion of the
specific time period.
restaurant in order to
protect themselves
from the condition of
salvation.
because company is
required to pay rent to
the lessor periodical.
Bank loan If company is not able
to repay the loan than
in that case bank has
the right to cease the
property of the Sweet
menu restaurant.
By using this source
Sweet menu restaurant
can be able to avail
various tax benefits.
Financial cost of the
Sweet menu restaurant
will increase if they
prefer this source.
Because company is
required to pay high
rate of interest to the
bank.
1.3 Most appropriate sources of finance for Sweet Menu restaurant
On the basis of above implication of various sources of finance it can be concluded that
bank loan is one of the best source that can be used by Sweet Menu restaurant in order to expand
its business. By using this source Sweet Menu restaurant can easily be able to meet the
requirement of finance. Bank is always ready to provide loan to the companies in order to meet
there financial needs in lieu of collateral security.
In addition to this Sweet Menu restaurant is not at all required to repay the whole amount
of money at a time. They can repay the amount borrowed in the form of instalments. Instalment
payment system reduces the financial burden of the company. Along with this Sweet Menu
restaurant can also be able to avail various tax benefits (Valle and Gomes, 2014). In addition to
this rate of interest paid by the company to bank is less as compared to that of other financial
institution. Thus, on the basis of above features it is suggested that Sweet Menu restaurant should
go with bank loan in order to start up its two new business unit.
TASK 2
2.1 Cost of different sources of finance
Sweet Menu restaurant have undertaken the two sources of finance in order to meet its
requirement of finance for the expansion of its business. The two sources are retained profit and
bank loan. But different sources of finance present indicates different cost to the company in
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terms of financial and opportunity cost. These costs have the high consequence on the growth
and profitability of the restaurant.
Financial cost: - Bank and various financial institutions impose high financial cost in
front of the company. Bank charges high rate of interest in order to collect financial assistance.
This in turn increases the financial cost of the Sweet Menu restaurant. Along with this Sweet
Menu restaurant is also required to repay the amount of money borrowed by them. This in turn
affects the liquidity and profitability of the company (Al-Bakri, Matar and Nour, 2014.).
Opportunities cost: - Opportunity cost is the cost that is beard by the company due to the
selection of another alternative. Suppose if company uses retained profit than in that case they
will not be able to pay dividend to shareholders in case of loss. This in turn will create negative
impression in the mind of shareholders against the company (Batta, Ganguly and Rosett, 2014).
In addition to this, company will not be able to meet up with any uncertain situation in effective
manner. These two features represent the opportunity cost that Sweet Menu restaurant need to
bear.
2.2 Importance of financial planning to Sweet menu restaurant
Financial planning is the process which helps an organisation to make various necessary
financial decisions in order generate more profit. By planning all its financial activities in
advance Sweet Menu restaurant will be able to move the restaurant towards the growth rate.
Importance of financial planning to Sweet Menu restaurant:-
 Financial planning in advance will aid the company to coordinate all the activities of
various departments present within the organisation. This in turn will also assist the
Sweet Menu restaurant to collect the deeper knowledge about the funds that are required
by each and every department.
 In addition to this Sweet Menu restaurant will also be able to utilise its financial
resources to the full extent by reducing its wastage. This in turn aids the company to
overcome the condition of deficit and surplus (Baum and Crosby, 2014).
 Financial planning will also provide assistance to the Sweet Menu restaurant in
abstraction of the funds that need to be raised by the company by using various sources.
 Along with this Sweet Menu restaurant will also be able to analyses the financial needs
that can arise in future. Sweet menu restaurant is also able to anticipate its sales and
growth by planning its financial activities.
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Thus, planning of the financial activities lead the company towards the success in the
competitive business world.
2.3 Impact of sources of finance on financial statements
Different types of stakeholder present in the corporate world require different types of
information in order to take various necessary decisions:- Stakeholders: - Shareholder is the one who invest their personal saving in the company in
order to earn high return on investment on them. They prefer the financial statements of
the company in order to find out the liquidity, profitability and solvency of the company.
They use these statements in order to decide whether they should invest in the company
or not. Employees: - Employees are the one who works for the betterment of the company.
These employees are interested in the income statements of the company (Broadbent and
Cullen, 2012). They prefer these statements in order to find out whether they are paid fair
salary or not. Manager: - Manager is the one who prepare various strategies in order to achieve the
organisational desired objectives. They prefer the income statement and cash flow
statements in order find out the liquidity position of the company (Chang and et.al, 2014).
In addition to this they also prefer balance sheet in order to collect the deeper information
about the financial performance of the company. Suppliers: - Suppliers are the one who supply raw material to the company. They prefer
income statements and balance sheet of the company in order to find out whether the
company is in a position to pay them for the goods supplied by them on time or not.
 Government: - Government is the one who works for the betterment of the society. They
want that every organisation should grow and generate more employment opportunities.
In order to find out the actual position of the company and to calculate the amount of tax;
government prefer financial statements and audit report of the company (Guerrero, Maas
and Hogland, 2013).
2.4 Impact of sources of finance on financial statements
Different sources of finance of have different impact on the financial statements. Each
and every sources of finance affects the financial statements of the company. Therefore,
company should take care at the time of selecting the sources of finance (Guerrero, L. A., Maas
6

and Hogland, 2013). For example: - Restaurant has undertaken the bank loan of 500000 @
10%p.a. In this condition income statement and balance sheet both will have an impact.
Profit and loss a/c
Particulars Amount (In £) Particulars Amount (In £)
To Interest a/c 50000
Therefore, in case of bank loan company is required to pay £50000 as an interest.
Balance Sheet
Liabilities Amount (In £) Assets Amount (In £)
Bank loan 500000 Bank 500000
In balance sheet liability side will increase by 500000 because bank loan is the liabilities for the
organisation.
TASK 3
3.1 Analyse of cash budget and various decisions based upon it
Budget is the tool that is used by the company in order to reflect the income generated
and expenses made by the company over a specific period of time. Budgets are prepared by the
company in order to compare the actual cost with that of estimated cost (Herman, 2011).
After analysing the cash budget of the Blue Island restaurant it is seen that cash sales of
the company is continuously fluctuating. This may be the reason behind the arouse of deficit in
the cash balance. It is also seen that sales revenue of Blue Island restaurant is better as compared
to other months. Along with this it is also seen that expenses of Blue Island restaurant is
increasing every month. In addition to this it is also concluded that in the month of September
and December outflow of the Blue Island restaurant was more than its inflow. Therefore, in
order to overcome this problem company should make n effects to develop various strategies and
policies in order to increase the sales of the company.
In addition to this it is also seen that inflow of cash within the organisation is increasing
which is the good sign for the growth of the company. This shows that the efforts made by the
company to prepare various strategies have proved beneficial for the company. Therefore, by
using various strategies Blue Island restaurant can be able to move towards the success in the
business environment.
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3.2 Calculation of Unit cost
Unit cost: - Unit cost is the expense that is incurred by the company at the time of
manufacture of the products.
Pricing decisions: - Price refers to the sum up of the fixed percentage of profit and the
cost incurred by the company (Koziol, 2014). By using this Blue Island restaurant will be able to
recover their expenses and will be able to generate more profit.
Unit cost = Direct cost per unit +Indirect cost per unit
Direct costs or variable cost=
Streak = 3
Vegetables (v) = 1.5
Labour (l) = 3.5
(S+V+L = 8)
Indirect cost or fix cost=2 (overhead)
Mark-up =40%
Cost = 100%
Mark up = 40%
Selling price = 140%
Name of Items Costs (In £)
Steak(direct) 3
Vegetables and other ingredients(direct) 1.5
labour(direct) 3.5
Overheads (indirect) 2
Total Costs 10
Mark Up (40%) 4
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VAT (20%) 2.8
Price to charge customer 16.8
Currently changing 16
VAT
Price exclusive VAT (Net) = 100%
VAT = 20%
Selling price inclusive (gross) =120%
Food cost percentage= Total costs of ingredients/sales price
Food cost percentage = Total costs of ingredients/Sale prices
Food cost percentage = 10£/16.8 £*100
Food cost percentage = 59.52%
Profit percentage on sales = Profit/sales prices*100
Profit percentage on sales = 6.8£/16.8£*100
Profit percentage on sales =40.47%
On the basis of the above calculation it can be concluded that total cost of the product
including VAT and mark up value is £16.8 whereas company charges only £16. This reflects that
Blue Island restaurant is facing £0.8 loss from per customer. The percentage of cost on sales is
59.52% whereas profit percentage is 40.47%.
3.3 Viability of two proposal by using investment appraisal techniques
Investment appraisal technique is the tool that is used by the company in order to assess
the reliability and viability of the projects. This technique involves Payback period and Net
9

present value method which aid the Blue Island restaurant in making suitable investment
decisions.
Calculation of Net Present Value:
Proposal 1:
Year Cash Inflow
PV Factor
@10% Discounted cash flow
1 £800 0.909 £727
2 £600 0.826 £496
3 £400 0.751 £300
4 £200 0.683 £137
5 £50 0.62 £31
Residual value £0.00 0.62 £0.00
Total Discounted
cash flow £1,691.00
Less: Initial
investment £1,200
Net present value £491.00
Proposal 2:
Year Inflow
PV Factor
@10% Discounted cash flow
1 £300 0.909 £273
2 £400 0.826 £330
3 £500 0.751 £376
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