Professional Documents
Culture Documents
Resources and
Decisions
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Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Sources of finance.................................................................................................................1
1.2 Implication of various sources of finance.............................................................................2
1.3 Appropriate sources of finance for Sweet Menu restaurant..................................................4
TASK 2............................................................................................................................................4
2.1 Cost of various sources of finance........................................................................................4
2.2 Importance of financial planning .........................................................................................5
2.3 Information needed by decision maker.................................................................................5
2.4 Impact of sources of finance on Sweet Menu restaurant......................................................6
TASK 3............................................................................................................................................7
3.1 Analyse of cash budget and appropriate decision................................................................7
3.2 Calculation of Unit cost........................................................................................................7
3.3 Viability of proposal by using investment appraisal techniques...........................................9
TASK 4...........................................................................................................................................11
4.1 Main financial statements....................................................................................................11
4.2 Appropriate financial statements for different organisation................................................11
4.3 Interpretation of financial statements by calculating appropriate ratios.............................12
CONCLUSION..............................................................................................................................13
REFERENCES .............................................................................................................................13
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INTRODUCTION
Finance is the branch of economic that is highly concern with the allocation of resources
in each and every department present within the organization. In simple words it can be said that
finance is the management of all the activities related to cash (Dada, Azim and Ullah, 2014). In
this report two restaurants has been taken, one is Sweet Menu restaurant and another is Blue
Island restaurant. In this report various sources of finance that are suitable for the Sweet Menu
restaurant are interpreted along with its implications. In addition to this cost that is incurred by
the company at the time of using various sources of finance are also mentioned. In addition to
this importance of financial planning to Sweet Menu restaurant is also interpreted. Along with
this information required by various decision makers are also listed below.
In this report cash budget of Blue Island restaurant is analysed in order to take
appropriate decisions. In addition to this viability of a both the proposal are find out by using
investment appraisal techniques. In addition to this different types of financial statements are
also discussed. At last, various ratios are calculated in order to analyses which company financial
position is good in terms of profitability, solvency and liquidity.
TASK 1
1.1 Sources of finance
There are different types of sources of finance available with the company through which they
can raise their capital. Some of the sources are present in internal environment while some of
them in external environment. Some of the sources are listed below:Internal Sources of Finance
Retained Earning:- Retained earnings is the part of fixed percentage of profit which is
required to be kept with each and every organisation in order to meet up the contingencies that
can occur in future (Kwak and et.al., 2015). This is one of the cost effective sources of finance
that can be used by Sweet menu restaurant in order to meet up its requirement of capital.
Sale of fixed assets:- this is the method through which Sweet Menu restaurant is raise its
capital by selling out the old and obsolescent assets that are of no use to the company. This is one
of the simplest methods of raising finance through internal sources.
External Sources of Finance
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Issue of Shares:-This is one of the easiest method through which Sweet Menu restaurant
can raise its finance. In this method company issues equity shares to the general public or
potential investors (Lee and et.al, 2015). Thus, by using this source Sweet Menu restaurant will
be able to open up new branches without facing any financial crisis.
Hire Purchase and Leasing: - It is another suitable external sources of finance through
which Sweet Menu restaurant can be able to use the asset and property for some time period
without purchasing it. This source acts as a safeguard for the Sweet Menu restaurant in case of
obsoletation of the technology.
Bank Loans: - It is another source of finance through which Sweet Menu restaurant can
be able to meet up its financial requirement of the cash by approaching top bank. Through this
method company can borrows funds from the bank by paying the high rate of interest. In
addition to this company will also be able to avail various tax benefits if they prefer this source.
1.2 Implication of various sources of finance
Sources
Legal aspects
Retained earning
As
per
the
Cost
legal If
Suitability
Sweet
prefer
organisation
with
is move
on
in
financial
making
of
the
Sweet
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particular
required
to
pay suitable
to
method
they
required
voting
to
rights
dividend
to
shareholder.
margin
of
the
company.
Leasing
Sweet
company
from
of
against
the
asset
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provided by them.
Bank loan
Bank has the right to Bank charges high rate Tax benefits are one of
cease the assets of the of interest from the main
characteristics
attract
the
not at all able to make increases the financial company to meet its
payment of the loan cost of the company.
financial
requirement
through
bank
with interest.
(Overton, 2007).
loan
TASK 2
2.1 Cost of various sources of finance
Sweet Menu restaurant uses bank loan and retained profit in order to fulfil their
requirement of cash in order to expand its business by opening two new business units.
Therefore, different sources of finance used by the company impose financial and opportunity
cost on Sweet Menu restaurant. Both these cost have great impact on the growth and profitability
characteristics of the company.
Financial cost: - Different type of financial institution and bank imposes high financial
cost in frontal of the Sweet menu restaurant. Bank and various financial institution
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charges high rate of interest against the loan provided by them. This in turn increases the
financial cost of the company (Robinson and et. al., 2015). Along with this company is
also required to repay the amount of loan in terms of instalments. In lieu of which
profitability and liquidity aspects of the company get affected.
Opportunity cost: - Opportunity cost is the loss that is suffered by the company at the
selecting any other alternative. If Sweet menu restaurant uses the retained profit than in
that case they will not be able to pay dividend to the shareholder or will not be able to
grab various opportunities that can occur in future. This in turn will create an unhealthy
image in the mind of the shareholders. Along with this, company will not be able to cope
up with the sudden contingencies that can occur in future.
Therefore, it can be said that financial and opportunity cost has broad level of influence
Financial planning plays an important role in coordinating all the activities that take place
within an organisation. In addition to this Sweet Menu restaurant will also be able to get
the deeper knowledge about the finance that is available with the company in order to
meet up its daily requirement (Schroeder, Clark and Cathey, 2011).
Financial planning also assists the company to utilize the available resources to the full
extent. In lieu of which Sweet Menu restaurant will be able to reduce the wastage of the
resources.
Financial planning also provides assistance to the Sweet Menu restaurant in context to the
fund that can be raised by the company against sources of finance.
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Planning of all the financial activities in advance also assist the Sweet Menu restaurant to
easily meet up with the future needs. In addition to this company will also be able
overcome the various contingencies that can arise at the time of anticipating sales.
Manager: - Manger prefers to look out at the income statements and cash flow
statements of the company in order to find out the liquidity position of the company. In
addition to this manager also prefer the balance sheet in order to get the broader insights
about the financial performance of the company during a financial year (Sun and et. al,
2009).
Investors:- Investors mainly prefers income statements and balance sheet of the company
in order to decide whether company is in a position to pay them high rate of return or
not. In addition to this they also prefer these statements in order to analyse the financial
position of the company with an aim to decide whether they should invest in the
company or not.
Employees: - Employees are the one who work for the betterment of the company. They
want that company should provide them fair salary along with bonus and incentives. In
lieu of which employees want to see the income statements of the company. These
employees also prefer these statements in order to find out the profitability aspects of the
company.
Suppliers: - They are the one who supply raw material to the company in order to
manufacture finished goods. These decision maker are interest in the income statements
and cash flow statements in order to decide whether company is in a position to pay
them on time for the goods supplied by them or not.
Government: - Government works fir the welfare of the society. They want that every
organisation should grow and at the same time generate more and more employment
opportunities (Thomas, 2008). Along with this they also want that company should pay
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taxes on time. Therefore, in lieu of which government prefers the income statements and
balance sheet of the restaurant.
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Amount (In )
Particulars
Amount (In )
To Interest a/c
40000
This shows that Sweet Menu restaurant is required to pay 40000 as an interest to the
bank against the loan taken by them. This in turn affects the profitability aspects of the company.
BALANCE SHEET
Liabilities
Amount (In )
Assets
Amount (In )
Bank loan
400000
Bank
400000
This shows that liabilities of the company will increase by 400000 because bank loan is
the debt for the company. In addition to this assets of Sweet Menu restaurant will also increase
by 400000
TASK 3
3.1 Analyse of cash budget and appropriate decision
On the basis of the above cash budget it is seen that sales revenue of Blue Island
Restaurant keeps on changing. This can be one of the reasons for deficit that arouse in cash
balance. However, in the month of December sales
better as
compared to any other month. Along with these expenses of the company is also increasing.\
Therefore, in the September and December outflow of the fund was more than its inflow.
Likewise in the month of October and November inflow was more than outflow which is the
positive sign for the company. Thus in order to overcome this problem Blue Island Restaurant is
required to frame various strategies and policies in order to achieve what they want.
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Costs (In )
Steak(direct)
1.5
labour(direct)
3.5
Overheads (indirect)
Total Costs
10
Mark Up (40%)
VAT (20%)
2.8
16.8
Currently changing
VAT
16
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Cash Inflow
800
0.909
727
600
0.826
496
400
0.751
300
200
0.683
137
50
0.62
31
Residual value
0.00
0.62
0.00
Total
Discounted
cash flow
Less:
1,691.00
Initial
investment
1,200
491.00
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Year
Inflow
300
0.909
273
400
0.826
330
500
0.751
376
600
0.683
410
500
0.62
310
Residual value
50
0.62
31
Total inflow
Less:
1,729.00
Initial
investment
1,200
Inflow
Cumulative inflow
-1,200
-1,200
800
-400
600
200
400
600
200
800
50
850
Residual Value
850
Payback Period
Proposal 2:
1.5 Years
Year
Inflow
Cumulative inflow
-1,200
-1,200
300
-900
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400
-500
500
600
600
500
1,100
Residual Value
50
1,150
Payback Period
3 Years
On the basis of above calculation it can be concluded that Blue Island restaurant is able to
recover the amount invested by him within 1year and 5 months if they select proposal 1 against
proposal 2. On the other hand if Blue Island restaurant select proposal 2 than in that case
company will be able to recover its money invested in 3 years. Thus, it is recommended that Blue
Island restaurant should go on with proposal 1 rather than proposal 2 in order to recover the
amount invested by them within a short period of time.
Thus, according to the above calculation it can be concluded that Blue Island restaurant
should choose proposal 1 on the basis of net present value in order to recover its money within a
short period of time. Because net present value is more practical method and proceeds with
discounting factors.
TASK 4
4.1 Main financial statements
Financial statements are prepared by the company in order to keep the record of all the
financial activities that are performed by the organisation during a financial year. Main financial
statements prepared by the company are as follows:
Income statements: - these statements are prepared by the organisation in order to find out
the income generated and expenses made by them during a financial year. Income
statement has two sides, one show all the expenses made by the company like salaries,
electricity expenses and so on. Whereas another side shows income generated by the
company like interest received etc (Valle and Gomes, 2014).
Cash flow statements: - these statements are prepared by the company to find the inflow
and outflow of the cash. This statement is divided into three sub sections (i.e. operating,
investing and financial activities).
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Balance sheet: - This statement is prepared by the company in order to assess the
financial performance and growth (Wahlen, Baginski and Bradshaw, 2014). These
statement is divided in two parts; one is assets side which include furniture, cash, debtors
etc. and other side is liabilities side which include share capital, reserves creditors etc.
Sole proprietorship firm: - Sole traders are those who run their business individually.
These traders simply aim at generating more profitability (Vitez, 2014). Therefore, these
organisations are required to prepare income statements in order to analyse the income
and expenses made by them.
Partnership firm: - These organisations prepare all types of financial statements in order
to assess their financial performance and growth. In addition to this they are also required
to prepare the capital account which provides information about the activities of the
partner.
Limited organisation: - Public and private limited company are also required to prepare
all the financial statements in order to evaluate the financial performance and status of the
company (Managing financial resources and decision, 2015). Along with this public
limited company are also required to issue these statements to the stakeholders.
Formula
Menu Blue
Restaurant
Island
Restaurant
PROFITABILITY RATIO
Net Profit margin
Net profit/sales
0.01
0.13
Gross profit/sales
0.63
0.66
LIQUIDITY RATIO
Current
Current Ratio
assets/
current liabilities
1.78
0.63
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Current
assets
Inventory/
Quick Ratio
current
liabilities
0.63
0.15
EFFICIENCY RATIO
Asset Turnover
1.79
2.4
SOLVENCY RATIO
Debt/equity ratio
Debt/Equity
0.41
0.58
Profitability ratio: - According to the above calculation in can be concluded that gross
profit and net profit ratio of Blue Island restaurant is much more favourable as compared to
Sweet Menu restaurant. Gross profit ratio of Blue Island restaurant is higher i.e. 0.66% as
compared to Sweet Menu restaurant which is only 0.63%. Similarly, net profit ratio of Blue
Island restaurant is more I.e. 0.13% as compared to Sweet Menu restaurant which is only 0.01%.
Liquidity ratio:- As per the above calculation in can be concluded that current and quick
ratio of Blue Island restaurant is much more indulgent as compared to Sweet Menu restaurant.
Current ratio of Blue Island restaurant is less i.e. 0.63% as compared to Sweet Menu restaurant
which is 1.78%. Likewise, quick ratio of Blue Island restaurant is less i.e. 0.15% as compared to
Sweet Menu restaurant which is 0.63%. Because lower liquidity position indicates that large
amount of liquid cash is available with the company which is a good sign.
Solvency ratio: -
ratio of Blue Island restaurant is much more pleasing as compared to Sweet Menu restaurant.
Solvency ratio of Blue Island restaurant is higher i.e. 0.58% as compared to Sweet Menu
restaurant which is only 0.41%.
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CONCLUSION
From the following report it can be concluded that Sweet Menu restaurant should move
on with bank loan and retained profit in order to expand its business. In addition to this it can be
inferred that planning of all the financial activities assist the company in achieving the success in
the competitive world. Furthermore it is suggested that Blue Island restaurant should move on
with proposal 2 in order to earn higher return. It is also seen that Blue Island restaurant is more
profitable and solvent as compared to Sweet Menu restaurant.
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REFERENCES
Books and journals
Dada, A. O., Azim, M. S. and Ullah, M. S., 2014. The Imperatives of Innovative Sources of
Development Finance: Evidence from Nigeria. Research Journal of Finance and
Accounting. 5(14). pp. 62-66.
Kwak, H. S. and et.al., 2015. Prediction of fetal lung maturity using the lecithin/sphingomyelin
(L/S) ratio analysis with a simplified sample preparation, using a commercial microtipcolumn combined with mass spectrometric analysis. Journal of Chromatography B. 993.
pp. 81-85.
Lee, J. D. and et.al., 2015. Detailed budget analysis of HONO in central London reveals a
missing daytime source. Atmospheric Chemistry and Physics Discussions. 15(16). pp.
22097-22139.
Murphy, D., S. and Yetmar, S., 2010. Personal financial planning attitudes: a preliminary study of
graduate students. Management Research Review. 33(8). pp. 811817.
Orens, R. and et. al., 2009. Intellectual capital disclosure, cost of finance and firm value.
Management Decision. 47(10). pp. 1536-1554.
Overton, R. H., 2007. An Empirical Study of Financial Planning Theory and Practice. ProQues.
Rasid, A. J. S., 2014. Management accounting systems, enterprise risk management and
organizational performance in financial institutions. Asian Review of Accounting. 22(2).
pp. 128144.
Robinson, T. R. and et. al., 2015. International financial statement analysis. John Wiley & Sons.
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2011. Financial accounting theory and
analysis: text and cases. John Wiley and Sons.
Sun,W. and et. al, 2009, Evolution and performance of Chinese technology policy: An empirical
study based on market in exchange for technology strategy . Journal of technology
management in China . 4(3). pp.195 216.
Thomas, H.G., 2008, Managing Financial Resources. Open University Press .
Tracy, A., 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to
Analyse Any Business on the Planet. Ratio Analysis .net.
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financial
resources
and
decision,
2015[Online].
Available
O., 2014.
Sources
of Finance
Medium
Term
Borrowing[Online]. Available
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