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MFRD (Managing Financial Resources and Decisions)

How to Manage Financial Resources and Decisions?

Introduction Financial Resources

Financial Resources may be defined as money which is available in business organization for spending in the most profitable investments. It refers to input for the production process and thereby helps in fulfilling the organizational goals and objectives (Managing Financial Resources and Decisions, 2013). In this, finance manager of an organization plays a vital role in making optimum utilization of resources to the large extent by framing sound strategies and policies. This project report is based upon Sweet Menu Restaurant Ltd which is the most reputable restaurant and situated in Gants Hill in East London. The restaurant is planning to open its new branches in Central London and Croydon. This report will discuss the sources which are available to restaurant along with their implications. It also depicts the importance of financial planning for restaurant in relation to their expansion project. Besides this, it also develops understanding about the investment appraisal techniques which help in making suitable investment decisions.

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Identifying the sources of finance which are available to a business

There are several internal and external sources of finance that are available for Sweet Menu Restaurant. It includes retained earnings, issuance of shares and debenture, bank loan, leasing as well as friends and family members. By undertaking such sources of finance, company is able to meet their financial needs and expand their business operations as well as functions.

Evaluating the most appropriate sources of finance for the organization

On the basis of implication of different sources of finance, bank loan is the most suitable sources for the expansion plan. Through this, Sweet Menu Restaurant can easily meet their financial needs. Usually, banks are always ready to give loan on the basis of collateral security. In addition to this, for bank loan, Sweet Menu Restaurant requires to repay the amount of loan in the form of installments. Easy installment payment system reduces financial burden from the company (Orens and et. al., 2009). Besides this, bank loan also provides tax benefit to an organization. In addition to this, interest rate which is charged by bank for financial assistance is lower than the other commercial institutions and private money lenders. On the basis of all these aspects, restaurant needs to undertake bank loan to expand their business activities and operations to the large extent.

Analyzing the cost of different sources of finance

Sweet Menu restaurant have undertaken retained earnings and bank loan to meet their financial needs or requirements for the expansion of restaurant. Thus, different sources of finance impose different cost upon Sweet Menu restaurant in terms of financial and opportunity cost. Both cost having high level of impact upon the growth and profitability aspects of restaurant which are as follows:

Financial cost: Financial institution or bank imposes high financial cost in front of Sweet Menu restaurant. For the financial assistance bank charges high interest rate which reflect financial cost in front of an organization (Overton, 2007). In addition to this, restaurant also requires repay the loan in terms of installment. This aspect also affects the profitability or liquidity aspect of an organization.

Opportunity cost: It refers the loss which organization has to bear due to the selection of another alternative. If Sweet Menu Restaurant undertakes bank loan to fulfill their financial needs then liability side of an organization increases. This aspect places negative impact upon their shareholders that company does not enough funds to meet their financial needs or requirements.

Thus, financial and opportunity cost have high level of influence upon the organizational growth and development.

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Stating the importance of financial planning for Sweet Menu Restaurant

Financial planning may be defined as a process which enables organization to make sensible and profitable financial decisions. By preparing effective financial plan Sweet Menu Restaurant is able to make contribution in the organizational growth and development.

Importance of financial planning:

  • Financial planning plays a vital role in coordinating the activities of different department within an organization. In addition to this, it also provides deeper insight to Sweet menu about the fund which is available within the business organization (Rasid, 2014).  
  • It provides assistance to restaurant in relation to the funds which they are required to raise from the other sources of finance.  
  • Along with it, financial planning also facilitates optimum utilization of financial resources to the large extent.

Further, financial planning helps sweet Menu Restaurant coping up with the future needs or contingencies by anticipating the sales and growth aspect (The Importance of Personal Financial Planning, 2015). Thus, financial planning is more important with the aim to achieve success in the competitive business area.

Stating the impact of sources of finance upon financial statements of an organization

Different sources of finance impact differently the financial statements of an organization. Each and every source of finance having impact upon the financial statements of an organization. Thus, restaurant needs to take care while selecting the sources of finance for the business. Sweet Menu restaurant have undertaken bank loan and retained earnings to meet their financial (Valle and Gomes, 2014). For instance: Sweet Menu Restaurant has undertaken the bank loan 300000 @ 15% per annum.

Analysis of budget and decisions based upon it

Budget may be defined as tool which reflects the income which organization will generate over the period of time. In addition to this, it also contains the expenses which company will incur during the predetermined time period (Wahlen, 2011).

On the basis the cited cash budget it has been assessed that sales revenue of an organization shows fluctuating trend in their performance. Which is may cause behind the deficit arouse in cash balance. Nevertheless, in the month of December sales revenue of Blue Island Restaurant is improved as compared to previous months.  In addition to this, expenses of an organization are also increasing. Thus, during September to December outflow of an organization is higher than its inflow. Thus, organization needs to frame competent strategies and policies to maximize the sales revenue. Whereas, in December inflow of organization is increasing that is the positive sign for an organization. This reflects that policies and strategies which are reformed by Blue Island are very effective. By following effective strategies Blue Island restaurant is able to attain success in the strategic business arena.

Calculation of unit cost and making suitable pricing decisions

Unit cost refers to the expenses which are made by an organization in order to produce the product or services.

Pricing decisions: Price refers to the summation of cost and fixed percentage of profit. Through this, Blue Island restaurant is able to cover their expenditures and thereby able to make profit (Al-Bakri, Matar and Nour, 2014).

On the basis of the above aspect the total cost of the product is £10 whereas restaurant charges £16 for the meal. This aspect reflects that Sweet Menu earned £6 from per customer. The percentage of cost on sales is 62.50% whereas profit percentage is 37.5%

Assessing the viability of two projects by undertaking investment appraisal techniques

Investment appraisal technique may be defined as a tool or technique which helps organization in assessing the reliability or viability of project (Batta, Ganguly and Rosett, 2014). It includes payback period and net present value method which provides assistance to Blue Island restaurant in making suitable investment decisions.

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Discussing the main financial statements

Financial statement refers to the record of financial activities which are performed by an organization during accounting year. It includes income statement, cash flow statement and balance sheet which provide deeper insight to an organization about their financial health and performance. Main financial statement which each and every organization prepares is enumerated below:

Income statement: This statement provides information about the income which generated by an organization during their course of business. In addition to this, it also contains information about the expenses which are made by an organization during the financial year (Kwak and et.al, 2015). Income statement has two sides such as Income and expenditure. Income side includes interest received, dividend receive etc. Whereas expenditure side contains salaries, electricity expenses as well as office and other miscellaneous expenditures etc. Through this, company is able to frame effective strategies in relation to the raising income and decreasing expenses.

Cash flow statement: It refers to the statement which provides insight about the inflow and outflow of cash. It is also knows statement of cash flow who helps firm in making further investment decisions. Cash flow statement is divided into three parts such as operating, investing and financing activities. Such activities provides information about the following aspects:

  • Operating activities: Depreciation, office expenses etc.
  • Investing activities: Purchase and sale of assets etc.
  • Financing activities: Issuance of share, redemption of debentures etc.

Balance sheet: It may be defined as summary statement of an organization which helps organization in assessing their financial health and performance. Balance has two parts such as assets and liabilities. Assets side includes currents assets and fixed assets such as furniture and fixtures, machinery, cash, debtors, bills receivable etc. Whereas liabilities side refers to share capital, reserves, creditors, bills payable etc.

Comparing the formats of financial statements of different types of business

There is the significant difference between the formats of financial statements which are prepared by the different type of business organization. Preparation and publication of financial statements are highly dependent upon the type and nature of the business organization. Some organization prepares their financial statement as per their requirement whereas some firms prepare financial statements to meet the legal requirements.

Profitability ratio: On the basis of the above ratio analysis it has been identifying that profitability aspect of Blue Island Restaurant is sound as compared to Sweet Menu. Net profitability aspect of Sweet Menu is .01 whereas NP of Blue Island is .13. In addition to this, gross profitability of Blue Island is higher than the Sweet Menu. Thus, Sweet Menu is required to undertake promotional strategies and campaign to improve its profitability aspect as compared to its competitor.

Liquidity ratio: Liquidity position of Sweet Menu is sound as compared to Blue Island restaurant. Current and quick ratio of Sweet Menu is very close to the ideal ratio which shows that sweet Menu is able to meet their current obligations from current assets. Whereas liquidity position of Sweet Menu is poor thus they needs to frame strategies to make improvement in their liquidity aspects.

Efficiency ratio: this ratio shows that Blue Island have made optimum utilization of their current assets in order to generate sales as compared to Sweet Menu. Thus, efficiency ratio of Blue Island is higher than Sweet Menu.

Solvency ratio: Debt equity ratio of both the restaurants is very far from the ideal ratio which is 2:1. Thus, they need to raise their finance from equity shares rather than debt sources.

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Conclusion

From this project report it has been concluded that Sweet Menu Restaurant needs to undertake bank loan and retained earnings for the expansion project. Besides this, it can be inferred that financial planning plays a vital role in achieving success in the competitive business arena. Further, it can be concluded that Blue Island Restaurant needs to select proposal 2 which gives higher return to them in near future. It can be seen in the report that Blue Island Restaurant is more profitable and solvent as compared to Sweet Menu. Thus, Sweet Menu is required to frame sound strategies and policies in order to build distinct image in the mind of stakeholders.

References

  • Batta, G., Ganguly, A. and Rosett, J., 2014. Financial statement recasting and credit risk assessment. Accounting & Finance.Orens, R. and et. Al., 2009. Intellectual capital disclosure, cost of finance and firm value. Management Decision.
  • Booker, J., 2006. Financial Planning Fundamentals. CCH Canadian Limited.
  • Copeland, T. and Dolgoff, A., 2011. Outperform with Expectations-Based Management: A State-of-the-Art Approach to Creating and Enhancing Shareholder Value. John Wiley & Sons.
  • 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.
 
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