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Managing Financial

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

Menu This is suitable method

aspects of law every restaurant

prefer

to for the company when

organisation

with

the they want to reduce

is move

on

required to keep with retained earning than the interference of the


them

fixed in that case they will shareholders

in

percentage of profit not be in a position to decision


earned by them during face any uncertainty process
a

financial

making
of

the

year that can arise in the organisation.

(Murphy and Yetmar, future.


2010). This in turn will
assist the company to
easily meet up the
contingencies that can
arise in future.
Sale of fixed assets

Sweet Menu restaurant If

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Sweet

Menu This method is suitable

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is required to follow a restaurant choose this when large amount of


legal procedure at the source of finance to old and obsolescent
time of selling the raise its capital than in assets is available with
assets.

that case assets and the the company will is of


company will reduce. no use longer.
In addition to this
Sweet Menu restaurant
is also required to
follow

particular

limit that is set up by


board of director.
Issue of shares

Sweet Menu restaurant Sweet Menu restaurant This is one of the


is required to follow a is

required

legal procedure at the dividend

to

pay suitable

to

method

the through which Sweet

time of issuing shares shareholders out of the Menu restaurant can


because

they

required
voting

to

provide company (Orens and term requirement of

rights

dividend

are profit earned by the be able to meet its long

to

and et. al., 2009). This in capital like expanding


the turn reduces the profit its business and so on.

shareholder.

margin

of

the

company.
Leasing

As per legal aspects of Sweet Menu restaurant


law

Sweet

This source protects

Menu is required to pay rent the

company

from

restaurant is required to the actual owner of absolution which can


to return back the asset the assets on a regular occur due to frequent
used by them to its basis. Generally lessor change in the business
real owner after the charges high financial environment.
completion

of

its cost from the company

specific time period.

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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

company, if they are company which in turn that

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

taken by them along

through

bank

with interest.

(Overton, 2007).

loan

1.3 Appropriate sources of finance for Sweet Menu restaurant


In accordance to implication of different sources of finance listed above, bank loan is the
most appropriate sources of finance that can be used by Sweet Menu restaurant in order to
expand its business. Bank are always are ready to provide loan to the companies on the basis of
collateral security. In addition to this bank also provide facility to company to repay their amount
loan in descriptor of monthly or annually instalments (Rasid, 2014). Payment of loan through
instalment will reduce the financial burden of the Sweet Menu restaurant.
Along with this bank loan also cater various tax benefits to an organisation. In addition to
this, rate of interest charged by the bank is comparatively less as compared to other financial
institution and private money lenders. Therefore, it is suggested that bank loan is one of the best
source of finance that can be used by Sweet Menu restaurant in order to expand its business by
opening two new business units.

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

on the working and growth of the organisation.


2.2 Importance of financial planning
Financial planning can be outline as a process that helps an organisation to make various
sensible and profitable decisions. By planning all its financial activities Sweet Menu restaurant
will be able to effectively distribute finance in each and every department. This in turn will lead
the company towards the growth and development. Some of the importance of financial planning
to Sweet Menu restaurant is as follows:

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.

2.3 Information needed by decision maker


Different types of information are required by different decision maker/ stakeholders in
order to take various necessary decisions. Therefore, some of the information needed by different
stakeholder is as follows:

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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2.4 Impact of sources of finance on Sweet Menu restaurant


Different sources of finance have different impact on financial statements of the
company. Each and every source used by the company affects the financial statements of the
company. Hence, in lieu of which company is required to select the source of finance keeping in
mind the impact of these sources on financial statements. Sweet Menu restaurant prefer the
retained profit and bank loan in order to raise their capital. For instance: - Sweet Menu restaurant
has assumed to take bank loan of 400000 @ 10% p.a. In this case bank loan have impact on both
the income statements and balance sheet.
PROFIT AND LOSS A/C
Particulars

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

revenue of the company is

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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3.2 Calculation of Unit cost


Unit cost is the cost that is incurred by the company at the time of producing and
manufacturing the products and services (Tracy, 2012).
Calculation of unit cost is as follows: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)

Vegetables and other ingredients(direct)

1.5

labour(direct)

3.5

Overheads (indirect)

Total Costs

10

Mark Up (40%)

VAT (20%)

2.8

Price to charge customer

16.8

Currently changing
VAT

16

Price exclusive VAT (Net) = 100%


VAT = 20%
Selling price inclusive (gross) =120%
Food cost percentage= Total costs of ingredients/sales price
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Food cost percentage = Total costs of ingredients/Sale prices


Food cost percentage = 10/16.8 *100
Food cost percentage = 59.52%
Loss percentage on sales = Loss/sales prices*100
Loss percentage on sales = 6.8/16.8*100
Loss percentage on sales =40.47%
As per the above calculation it can be concluded that total cost of the product consider VAT and
Mark up value is 16.8 while Blue Island restaurant charges only 16. This in turn indicates that
Blue Island restaurant is facing loss of 0.8 per customer. The loss percentage is 40.47% whereas
percentage of cost on sales is 59.52%.
3.3 Viability of proposal by using investment appraisal techniques
Investment appraisal technique is the tool that is used by the organisation in order to
assess the viability and reliability of the proposal and projects (Tulsian, 2002). Some of the
techniques that are used by the Blue Island restaurant are payback period method and Net present
value method.
Calculation of Net Present Value:
Proposal 1:
Year

Cash Inflow

PV Factor @10% Discounted cash flow

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

Net present value


Proposal 2:

491.00

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Year

Inflow

PV Factor @10% Discounted cash flow

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

Net present value


529.00
On the basis of above calculation it is interpreted that Blue Island restaurant should
choose proposal 2 against proposal 1. Because proposal 2 proves to be more beneficial in terms
of investment. If Blue Island restaurant select proposal 2 than in that case they will be able to
earn better rate of return in terms of 529.00 as compared to proposal 1 which is 491 at the end
of five years.
Payback Period:
Proposal 1:
Year

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.

4.2 Appropriate financial statements for different organisation

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.

4.3 Interpretation of financial statements by calculating appropriate ratios


Ratio analysis is done by the company in order to assess its financial position in terms of
liquidity and solvency. In addition to this it also said the organisation in evaluating the
effectiveness of the strategies that are prepared by the company.
Sweet
Ratios

Formula

Menu Blue

Restaurant

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
Current Ratio

assets/

current liabilities

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1.78

0.63

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Current

assets

Inventory/
Quick Ratio

current

liabilities

0.63

0.15

EFFICIENCY RATIO
Asset Turnover

Net sales / net assets

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: -

On the basis of above calculation in can be concluded that Solvency

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
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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).
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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
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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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Tulsian, C. P., 2002. Financial Accounting. Pearson Education India.


Valle, A., G., R., M. and Gomes, R., C., 2014. Analyzing the importance of financial resources
for educational effectiveness: The case of Brazil", International Journal of Productivity
and Performance Management. 63 (1). pp. 4 21.
Wahlen, J., Baginski, S. and Bradshaw, M. 2014. Financial reporting, financial statement
analysis and valuation. Cengage Learning.
Online
Managing

financial

resources

and

decision,

2015[Online].

Available

through:<http://www.scribd.com/doc/47891768/Assignment-for-Managing-financialresources-and-decisions-22490#scribd>.[Accessed on 29th January 2016].


Vitez,

O., 2014.

Sources

of Finance

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Term

Borrowing[Online]. Available

through:<http://www.ehow.com/facts_5652982_sources-finance-medium-termborrowing.html>. [Accessed on 29th January 2016] .

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