Present report focuses on illustrating the significance of making accurate decisions regarding the functioning of business enterprise. Managers play significant role in carrying out business activities by taking correct and smart decisions. Further, report illustrates about source of finance available for firm and implications associated with it. Along with this researcher focuses on proposing the significance of financial planning and the information required by stakeholders to make decisions. Lastly, financial statements will be discussed and accordingly ratios will be calculated to evaluate and analyse the actual position of business enterprise.
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1.1 Source of finance
For the expansion of hotel chain, there are several sources available to the top level management of The Ritz London. These sources will play significant role in conducting operational activity of business enterprise. There are two types of sources available through which management can generate funds such as internal and external. Internal sources can be defined as the method in whihc funds are generated within the business. While, external sources refers to the methods in which funds are generated from outside market. For the same purpose, funds or money can be generated through different sources which are as follows:
External sources: Bank loan is the most feasible source of finance available to the cited firm as they operates at large level and for them borrowing money from financial institution not be so difficult. The main advantage of using this means is that, it helps in generating large amount with mere formalities but in against to it management has to keep collateral security (Kont, 2012). Furthermore, repayment of loan is based on monthly instalment as well as company is obliged to pay interest money charged at regular intervals. While venture capital can be defined as the form of term loan in which financial obligations are paid in accordance with profit of firm. However, the main advantage of this source is that, during the initial stage business is required to pay financial charge at lower rate. Further, when company is able to generate higher profit then they are obliged to pay higher economic cost.
Internal sources: Retained earnings is the most appropriate means of raising funds. It is because this does not create liability for the firm. It is the part of profit that is kept reserved after distributing share of profits to each investor (Gibson, 2008).
1.2 Implications of source of finance
Acquiring funds is not an easy task for the manager. There are certain implications that might act as an obstacle for the management while raising the funds. Financial sources play significant role in expansion of chain of The Ritz hotel in London because it directly affects its profitability and cost structure (Melo, 2012). However, it is the responsibility of senior finance manager to ensure that company selects best possible source of funds so that entire course of expansion can be carried out effectively. Further, internal and external sources of funds have their own pros and cons which have different affect on the selection decision. Because, they are directly linked with economic burden and leverage of the company.
Looking at the present economic condition it can be stated that, management of hotel should raise funds from both debt and equity financing. In case of equity financing, company has to pay a part of profit to its investors. As well as power of controlling will be transferred to the investors. Through this, investors have all the rights to interfere within the operations of The Ritz London. Furthermore, it can transfer the control of business operations with new shareholders, while bank financing comes with fixed obligation of interest payment.
On the other aspect, debt financing will increase the liability of firm in terms of paying interest charge at regular intervals. Along with this, it is essential for firm to pay the principle amount once the term of contract is expired (Brooks and et. Al, 2012). Furthermore, using retained earnings would be an appropriate option for the hotel because operating at such large level company maintains better retained earnings. But contrary to this, using this fund for expansion may affect the overall financial stability of The Ritz London. Retained earnings are free from financial cost but are available to limited extent. Lastly it can be stated that, equity and debt financing will raise the financial obligation for firm as well as there are certain rules and regulations that needs to be kept in mind while carrying out business activities.
1.3 Evaluation of the appropriate source of finance for the business project
According to the above given scenario, it can be evaluated that selecting the source of finance is one of the major decision that senior manager of the firm needs to undertake. However, management is planning to expand their business operations in order to enhance the share in target market and generate higher revenues by attracting large audience. However, in regards to reduce the financial cost it is important for senior manager of hotel to prepare portfolio of the above defined sources. At the initial stage, debt financing would be appropriate because large amount can be generated by it for capital expenditure. Further for the revenue expenditure funds can be acquired through internal sources such as retained earnings. Therefore, undertaking this approach will reduce paying off higher financial cots and manage the operational activities in effective and efficient manner.
2.1 Cost of financial resource
In order to generate funds from external and internal sources there are certain cost that hotel has to bear. In case of internal sources of funds: Management of The Ritz London is required to opportunity cost as they are free from economic obligations. Along with this if management focuses on using retained earnings of hotel then they might face issue in resolving financial issues in future contingency (Roxas and Chadee, 2012). Whereas, senior authority raise funds by selling fixed assets then it might affect overall productivity of Hotel.
On the other hand, as stated above there are several external sources by the means of which management of hotel can generate funds and expand business activities of Hotel. However, generating funds through equity financing might create liabilities for the company as they have make payment of share of profit to its investors (Banerjee, 2006). But hotel does not have to make payment of principle amount. Other than this, debt financing may lead in increasing liabilities for the firm because hotel has to pay interest on monthly basis and after the completion of term of contract, management of The Ritz have to make payment of principle amount.
Cost of internal sources of finance: Usually there is not direct cost linked with internal financing. Because firm does not have to pay any amount in terms of cost. However, there is opportunity loss in using these funds. Internal sources used than company might face emergency situation in which management is unable to generate in order to overcome financial obligations.
Cost of external sources of finance: In order to raise funds externally there is certain cost that company has to bear. By the means of which profitability of business can be impacted as well as financial burden can be increased. However, the major cost that company has to bear in the case of external source is interest. Bankruptcy situation can occurred if repayment is not made.
Therefore, before making any decision regarding selection of source of finance it is important for top level management of The Ritz to consider above defined aspects so that they can make best and smart decision for the future contingency of Hotel.
2.2 Importance of financial planning
In general financial planning can be defined as the process by the means of which organisations can make appropriate decisions regarding use of available financial resource (Khamees, Al-Fayoumi and Al-Thuneibat, 2010). According to the present case, financial planning will play significant role for senior manager of The Ritz in framing various policies related to investments, procurement and administration for achieving the goals and objectives in effective and adequate manner.
Importance of planning: Significance of undertaking financial planning is that it assists management in making appropriate use of available financial resource so that risks and uncertainties can be minimized. Having appropriate planning leads in generating higher profits. Further by the means of this management of The Ritz will be able to make accurate and authentic estimation of financial requirement to carry out expansion project (Grieve, 2013). Financial planning assists in managing and controlling the flow of cash so that liquidity and leverage position of business can be maintained. Therefore, it can be stated that with the suitable and appropriate economic forecasting, management of The Ritz can easily measure the performance of business and if required potential measures can be indulged.
2.3 Assessment of the needs of the different decision makers
There are several people associated with the business which required financial information to make feasible and viable decision regarding future contingency of business. These individuals can be defined as the stakeholders for the firm. In context to this, there are two types of stakeholders: internal and external stakeholders. Firstly, internal stakeholders are directly related to business operations. Therefore, internal decision maker for The Ritz hotel are management, shareholders and employees. In this, management analyse and evaluate financial statements of firm to assess the growth and future sustainability. On the other hand, information required by owner is to assess the growth opportunities in the existing market (Elearn, 2013).
External stakeholders for The Ritz are: customers, government, bank and suppliers. In particular, customers of Ritz require information for comparing the price of services. Whereas, government with the help of financial statements makes decision regarding policies and procedures as well as make sure that company is following regulatory framework or not in order to carry business activities. Lastly, bank and suppliers analyse the financial information to understand company’s liquidity and profitability position so that they can make smart decision regarding credit facilities.
2.4 Impact of finance on financial statement
In case of income statement: Profitability of firm will be decreased as it has to pay higher financial cost for the debt and equity financing. Furthermore, it management uses sales of fixed assets to raise funds than profit and loss on transaction will be recorded in the same. Furthermore, interest paid on bank borrowings will affect the expenditure side of income statement. While, income generated through earnings per share will be shown under the incomer side of the statement.
In case of Position statement: Raising funds through debt and equity financing will helps in generating adequate cash as well as increase the financial obligations (Viviers and Cohen, 2011). However, the expenditure incurred by the management in acquiring these sources will be recorded as a capital expenditure in position statement. Acquiring fund from bank will increase the liability side of balance sheet as well as increase the bank balance in assets side with same amount.
Cash flow statement: All the transaction related to financial source during the reporting period will be recorded in the financial activities of cash flow statement. Raising funds will be treated as cash inflow for the firm. In case of bank loan, money generate will be treated as the cash inflow will be shown under the financing activity. Moreover, monthly instalment of interest will treated as cash outflow in operating activity.
3.1 Main financial statements
Income statement: This statement assist in determining the profit and loss occurred in reporting period considering the revenues and expenditure.
Position statement: Balance sheet is consist of accounting equation (Assets = liabilities + Equity). In this statement, assets and liabilities are shown at the end of financial year (Introduction to capital Budgeting, 2013).
Cash flow statement: The main aim of this statement it is to represent cash inflow and cash outflow. However, this statement is segregated in three different subheads: operational, financing and investing activities.
3.2 Comparison of financial statements of various businesses
Sole proprietorship: This type of organisation can be defined as the firm which is owned and managed by individual. However, it is compulsory to prepare all the financial statements. Furthermore, owner prepares income statement to determine the profit and loss position of business and makes decision accordingly.
Limited company: Companies under this segment has to prepare all the major financial statement by following principles and standards of GAAP and IFRS (Brooks and et. Al, 2012).
Partnership: This type of businesses are owned and managed by two or more than two partners. It is important for firm to prepare all the major financial statements along with this partners capital account is prepared to record transaction of each partner separately.
Current ratio: The main aim of computing this ratio is to define the liquidity position of business by considering the current assets and current liabilities. Looking at the current ratio of ABC Ltd it can be stated that, management is making optimum utilisation of available assets in overcoming short term financial needs.
Acid test ratio: This ratio assists in determining the liquidity position of business enterprise. ABC Ltd have generate appropriate quick ratio which clearly indicates that firm have sufficient assets to overcome short term financial obligations.
Return on capital employed (ROCE): This ratio assist in evaluating the return generated by company on their equity. ROCE of ABC Ltd is showing positive outcome which means company is generating higher returns on the invested equity.
Gross profit margin: By the means of this ratio, trading efficiency of business is determined. Looking at the GPR of ABC Ltd it can be stated that it is comparatively high from the other firm operating in same sector.
Net profit margin: The major purpose of calculating this ratio is to define the profitability of the firm. Shareholders and management of firm analyse this ratio to determine efficiency of business operations. According to the present given scenario, NPR of ABC Ltd is showing poor results as compared to industry average and companies operating in same sector.
Current and Quick Ratio: Current ratio assist in evaluating the capability of firm in overcoming short term financial obligations through its current liabilities. While on the other hand, quick ratio illustrates the ability of company in using cash or cash equivalents to mitigate or fulfil short term financial obligations.
Gross vs Net profit ratio: GP ratio assist in defining the sales and the money invested by company to generate the sales. However, higher gross profit means with low cost of sales company has generated higher revenues. Other than this, net profit helps in evaluating the growth and successful run of business e