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Sample on Managing Financial Resources & Decision Making

Know How to manage Financial Resources in Companies

INTRODUCTION

In the present era, resources available to businesses play a significant role in carrying out the activities in the best possible manner. In particular, financial resources have become the most crucial aspect and it is the duty of senior authority of business enterprise to make sure that they would use the funds or money in a feasible manner so that they can generate the desired results and outcomes (Cox and Fardon, 2003).

Similarly, present report consists of financial analysis of Sweet Menu Restaurant Ltd which is a reputable restaurant that is based in Gants Hills in East London. Looking at the present success of restaurant, owners are planning to open two new branches in Central London and Croydon with an aim of expanding business and attracting more number of customers with their hygienic and delicious inter-continental offerings. In this context, financial feasibility of the expansion has been accessed in the report. Further, different sources of finance have been analysed to raise the capital between 300000 and 500000. Thereafter, study focuses on illustrating different costs that are associated with the selected sources and significance of financial planning in expanding business operations. Along with this, different decision makers have been analysed to identify different stakeholders and their needs. Furthermore, to evaluate the financial feasibility of project, different appraisal techniques have been used which will assist in evaluating the feasibility and reliability of the investment project. Lastly, through the help of ratio analysis, economic position of Sweet Menu Restaurant has been compared with Blue Island Restaurant.

1.1 Different sources of finance for Sweet Menu Restaurant

According to the present given scenario, Sweet Menu Restaurant is planning to expand its business operations to two different locations in London. However, owners of the restaurant require huge amount of capital so that they can carry out expansion process in the best possible manner (Kunc and Bhandari, 2011). There are different sources of funds available to the management that can play a significant role in opening of two new branches. Following are some sources that are available to the top level management of Sweet Menu Restaurant:

Bank Loan: In UK, there are several financial institutions present that offer money in terms of corporate loan so that entrepreneur and small business like Sweet Menu Restaurant can raise the fund and expand their business operations to a large level. However, in terms of debt financing, bank borrowings are considered as the most feasible source. Main advantage of this source is that firm can raise large funds by completing mere formalities (Cunningham, 2006). Along with this, repayment of loan is based on monthly instalments which are feasible for the restaurant to repay. In contrary to this, interest is charged on the raised funds which are necessary for company to pay even if they are not in source economic position. Similar to this, cited company has to deposit collateral security for the bankruptcy situation.

Retained earnings: In general, retained earnings can be defined as the amount which is kept as reserved after paying off all the profits to different stakeholders. Main purpose behind retained earnings is that they are kept reserved for the use of future contingency like expansion or paying off debt. The major benefit of using this source of fund is that it does not raise any liability for company (Flynn, Uliana and Wormald, 2012). But, through the means of this source, cited firm will be unable to raise a large amount. Furthermore, it is the responsibility of senior managers to make appropriate use of funds in order to avoid the situation of losses.

Hire purchase and leasing: Both these sources can be categorized under two sections such as short and medium term financing. By the means of these sources, cited restaurant can easily acquire any machinery or equipments in against of down payment and feasible monthly instalments. Main benefits of these sources are that they are available at easy instalment credit like rental and interest is being paid. Furthermore, with the help of these sources, restaurant can easily carry out their operations and make the payment of acquired resources within defined period of time.

Venture capitalist: It is the duty of all three owners of Sweet Menu Restaurant to influence venture capitalist to invest in the functioning of business. The major advantage of raising funds through this source is that these investors have less interest in the operations of business as compared to the shareholders (Wildavsky, 2006). However, they have interest in knowing accurate and reliable information about the current position of restaurant so that they would make decisions accordingly for the future investments or contingency.

1.2 Appropriate source of finance

According to the present given case, Owners of Sweet Menu Restaurant are planning to expand business operations b y opening the two new branches within the popular places of London. In this context, different sources of money has been evaluated and analysed in the above study. Therefore, according to the future plans of restaurant the best suitable sources will be use of Bank borrowings and retained earnings. However, rationale behind both sources is that, through the help of bank loan owners will be able to raise large amount of money which will easily satisfy their need of 300000 and 500000 respectively for the different branches. Furthermore, repayment of borrowings is based on monthly instalments thus, it will be feasible for the Sweet Menu Restaurant to establish the inter-continental restaurant and start generating higher demand and business volume. On the other hand, retained earnings are suggested because it will not raise the liability for the cited firm and as it is the part of surplus and reserves financial obligations are not affected by the course of it. Henceforth, both these sources of funds are feasible for the Sweet Menu Restaurant to expand its business operations and enhance its market share within such competitive hospitality sector.

2.1 Costs associated with different sources of finance

In order acquire the funds from different sources, there are certain costs that company or entrepreneur has to bear. In this context, it is important for the finance manager of Sweet Menu Restaurant to carry out cost benefit analysis of available sources and assist top level management in making smart and suitable decision regarding future contingency (Benedict and Elliott, 2008). However, use of bank loan company can generate large amount of money for the expansion but has to bear the costs of interest every month. Along with this, repayment of principle amount on yearly basis can have major impact on the financial position of the cited restaurant. However, it includes the costs of interest as company has to pay interest to the bank and in long run have to make repayment of loan. Further, bank borrowings will raise the debt position in comparison to equity financing. On the other hand, in case of retained earnings cited restaurant has to bear the opportunity cost (Subramaniam, 2010). However, it is because top level management can use this funding for other purpose as well which can be more opportunistic in terms of generating better financial results and outcomes. However, being the part of reserve and surplus, use of retained earnings may decrease the amount of profit generated by the restaurant. Thus, these are costs associated with recommended sources of funds for the Sweet Menu Restaurant and it is important for all three owners to analyse these aspects and then make smart and effective decision regarding use of funds (Ismail and et. al, 2005).

2.2 Significance of Financial Planning

Looking at the present condition of corporate market it is important for the management to make appropriate planning and strategies so that available resources can be used in the best possible manner and desired results can be generated. According to the present given scenario, Sweet Menu restaurant is planning to expand it business by opening two new branches thus, it is of great importance that managerial level people pay great attention to the financial forecasting (Kawai, Mayes and Morgan, 2012). However, it is because economic planning will assist senior authority of restaurant in identifying different sources available to the business as well as helps in evaluating the implications associated with sources so that managers can make smart and suitable decisions regarding selection of sources. Thereafter, operating in such a competitive environment it is important to expand thus, financial planning helps in preparing appropriate budgets so that future risks and uncertainties associated with both Central London and Croydon locations can be identified and accordingly potential measures can be imposed (Coleman, 2007). Furthermore, it will help top level management Sweet Menu Restaurant in managing the income and expenditure of business so that inflow and outflow position can be balanced suitably.

2.3 Information needs of different decision makers in Sweet Menu Restaurant

There are different stakeholders associated with the functioning of Restaurant. However, it is the responsibility of senior level managers to satisfy each and every need of the stakeholders so that they can continue their professional relationship with firm and help Sweet Menu Restaurant in carrying out different activities or operations. Following are the different decision makers for the cited restaurant and the information required by them to make effective decisions.

Management: Senior authority is the one who is responsible for carrying out each aspects or functioning of the Sweet Menu Restaurant. Thus, it is important for them to acquire wide range of accurate information such as position of working capital, debt to equity position; assets available etc. so that they can make tactics accordingly and generate desired results for the Restaurant (Gallén, 2006).

Suppliers and Trade creditors: Operating in restaurant industry, it is essential for Sweet Menu Restaurant to maintain relationship with its suppliers so that they can acquire quality of fresh raw materials and serve inter-continental the food to the people. In this context, supplier requires information to understand the ability of firm in making the credit payment on time.

Employees: They require the information regarding actual financial position of business so that they can make decisions regarding their personal growth. Along with this, about retention, salaries and other monetary benefits (Peirson and et. al, 2014).

Lenders: Financial institution critically evaluate the financial position of restaurant in order to understand the ability of firm in repaying the borrowings in defined period or not. Furthermore, they evaluate the all the major financial statements and make decision regarding all the inflows and outflows of the Restaurant.

2.4 Impact of finance on financial statements

According to the present given case, Sweet Menu Restaurant is planning to open two new branches within the popular locations of London. In this regard, two sources of funds has been recommended to the top level management of the restaurant so that they can easily carry out the expansion process and attain the future growth (Dada, Azim and Ullah, 2014). These sources of finance are: bank loan and retained earnings. However, the amount raised through bank loan will increase the liability side under non-current liability heading of the balance sheet as restaurant is liable to repay the amount within defined period. Along with this, interest amount in Profit and Loss account will be increased which will decrease the profit before tax and ultimately they have adverse effect on retained profit of the year (Newell and Seabrook, 2006). On the other hand, the amount raised from retained profit will decrease the revenue reserves under the equities of balance sheet. Therefore, these are impact that both the sources have on the financial statements of the Sweet Menu Restaurant Company.

3.1 Analyse budget

Budget is one of the most significant tools through the help of which managers can easily understand the financial position of business as well as evaluate the risk and uncertainties associated with the functioning of business in the future (Hofstede, 2013). In the present study, researcher focuses on evaluating the budget of Blue Island Restaurant so that financial implications for engaged end of the year can be identified and accordingly addressed. Looking at the cash budget of the cited restaurant it can be analysed that, offerings of the Blue Island Restaurant is generating reasonable demand as the cash sales are showing fluctuating outcomes. However, considering the outflows in the month of September Blue Island Restaurant is unable to meet expenditure through cash sales because of expenses like Van and Furniture and Fittings which led them to negative net balance. But in the month of October, management of Blue Island Restaurant managed the expenditure and generating positive net balance of 3870. Further, in the month of November, due to increasing demand for food and managing the expenditure top level management of Blue Island Restaurant is able to maintain the positive balance of 4770 which is reasonably good in such competitive environment. In the last month, spending on furniture and fitting raised the outflow of business which despite of increasing revenue led the restaurant to generate negative net balance (Enz, 2008).

3.2 Unit costs calculation

Items

Costs £

Steak

3

Vegetables and other ingredients

1.5

labour

3.5

Overheads

2

Total Costs

10

Mark Up (40%)

4

VAT

2

Selling Price

16

Food Cost Percentage = Total Costs of Ingredients/ Selling Price * 100
Food Cost Percentage = 10/16*100
Food Cost Percentage = 62.50%

On the basis of above computation it has been observed that, 62.50% Blue Island Restaurant has to bear the costs and on the basis of selling price of £16/meal restaurant is generating £6 as a profit. However, company is expecting 40% profit on Mark Up cost and 20% of VAT which is imposed by third party (Government) to charge from the customers.

3.3 Investment Appraisal Techniques

Investment appraisal techniques are the most valuable approaches in order to evaluate the financial viability and reliability of the project. There are several appraisal techniques which assist manager in identifying the reliability of investment proposals on different aspects (Jakhotiya, 2002). In the present study, Payback period and Net Present Value method has been undertaken for evaluating the validity and reliability of two different proposals available to the management of Blue Island Restaurant for future expansion.

Initial Investment:
Proposal 1: £1200
Proposal 2: £1200
Net Present Value:

Proposal 1:

Year

Inflow

PV Factor @10%

Inflow by considering pv factor

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 inflow

 

 

£1,691.00

Less: Initial investment

 

 

£1,200

Net present value

 

 

£491.00

Proposal 2:

Year

Inflow

PV Factor @10%

Inflow by considering pv factor

1

£300

0.909

£273

2

£400

0.826

£330

3

£500

0.751

£376

4

£600

0.683

£410

5

£500

0.62

£310

Residual value

£50

0.62

£31

Total inflow

 

 

£1,729.00

Less: Initial investment

 

 

£1,200

Net present value

 

 

£529.00

Payback Period:

Proposal 1:

Year

Inflow

Cumulative inflow

0

-£1,200

-£1,200

1

£800

-£400

2

£600

£200

3

£400

£600

4

£200

£800

5

£50

£850

Residual Value

£0

£850

Payback Period

1.5 Years

 

Proposal 2:

Year

Inflow

Cumulative inflow

0

-£1,200

-£1,200

1

£300

-£900

2

£400

-£500

3

£500

£0

4

£600

£600

5

£500

£1,100

Residual Value

£50

£1,150

Payback Period

3 Years

 

Interpretation:

On the basis of above computation of investment appraisal techniques, management of Blue Island Restaurant has evaluated the financial validity of both proposals. However, the help of net present value it has been identified that; Proposal 2 is more feasible for the cited restaurant because it is showing higher NPV as compared to the Proposal 1. On the other hand, through the help of Payback period, Proposal 1 is taking 1.5 years to regain the initial investment and Proposal 2 is taking 3 years.

But considering the time value for money, top level management of Blue Island Restaurant is recommended to invest in Proposal 2. However, NPV is the most often used method in evaluating the reliability of project. Furthermore, it considers the time value of money factor influences the decisions of managers. Thus, it is suggested that senior authority of Blue Island Restaurant should invest in Proposal 2 as it will help them in generating desired results and carry out expansion process in effective and efficient manner.

4.1 Discuss the main financial statements

In the present era, companies operating in corporate world have to prepare different financial statements in order to record the activities carried out by them during the course of accounting period. The main purpose behind preparing all the major financial statements is that they provide adequate and reliable information to different stakeholders associated with the Blue Island Restaurant. Following are the financial statements of the cited company:

Balance Sheet: It is the most important statement of the company which assist in evaluating and analysing the actual financial position of business enterprise. However, it is represented with the equation of Assets = Liabilities + Equities (Hill, 2007). Further, through the help of balance sheet stakeholders can easily analyse the information of assets owned and liabilities made by the company during the accounting period. In addition to it, assets can be classed as either current assets or fixed assets. On the other hand, liabilities are classed in short term and long term liabilities.

Income statement: The main purpose behind preparing income statement is that it assists in presenting the results of company's operations during a period of time such as one year. However, this statement consists of all the income generated by the company and all the expenditure made by the company during the accounting period (Thomas, 2009). It is important for the firm to manage expenditure according to its income so that economic position of business can be managed and controlled in effective manner.

Cash flow statement: By the means of this statement, mangers of the Blue Island Restaurant can easily evaluate the position of cash and cash equivalents within the company. However, cash flow statement assist in evaluating the inflow and outflow of cash during the reporting period. Furthermore, this statement is categorized under three sub categories such as: Cash flow under operating activities, financing activities and investing activities (Format of a Financial Statement, 2013).

4.2 Difference between major financial statements

There are several businesses within UK which are operating at different level and require preparing various financial statements for the purpose of recording information correctly and smartly. These organisations are categorized in three different segments: sole traders, partnership and limited companies.

Sole Proprietorship: This is the business which is owned and managed by an individual. However, there is no compulsion for such business to prepare all the major financial statements (Enz, 2008). However, entrepreneur prepares only profit & loss account and record all the information to make smart and effective decisions.

Partnership: In this type of firm, there are two or more than two owners who manage and control the functioning of business. However, it is important for the managers to prepare all the major financial statements in order to record the information (Management accounting. 2014). Further, partner's capital account is prepared in order to record and analyse the actual performance of each partner in context to company's overall performance.

Limited companies: These are the companies that operates at large level and in order to satisfy needs and wants of different stakeholders, finance managers have to prepare all the major financial statement such as cash flow, income statement, balance sheet and equity shareholder's account so that wide range of information can be recorded in appropriate manner and needs of stakeholders can be satisfied (Wildavsky, 2006).

Conclusion

In conclusion to the above report it has been observed that managing financial resources is of the most significant aspect for the firm. However, it is the duty of senior managers to make sure that they make optimum utilisation of available resources so that risks and uncertainties can be avoided or minimized. In the present report, financial performance two different organisations has been evaluated and through the help of ratio analysis it has been identified that, despite of relatively low profitability, current position of Sweet Menu Restaurant is better than Blue Island Restaurant.

References

Journals and Books

  • Atrill, P. and McLaney, E., 2009. Management Accounting for Decision Makers. 6th ed. Harlow: FT Prentice Hall
  • Benedict, A. and Elliott, B., 2008. Financial Accounting: An Introduction. Harlow: FT Prentice Hall
  • Coleman, L., 2007. Risk and decision making by finance executives: a survey study. International Journal of Managerial Finance.
  • Cox, D. and Fardon, M., 2003. Management of Finance. Osborne Books.
  • Cunningham,D.H.,2006. Financial Statements Demystified. Allen & Unwin.
  • Curry, C., 2013. Operations and Finance: Keeping a Pulse on the Backbone of your Organization. Advances in Educational Administration.
 
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