Managing financial resources and decisions

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MANAGING FINANCIAL

RESOURCES & DECISIONS

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Table of ContentsINTRODUCTION......................................................................................................................1

TASK 1.......................................................................................................................................1

AC 1.1 Sources available to the business organizations....................................................... 1

AC 1.2 Implication of internal and external finance sources................................................ 2

AC 1.3 Most appropriate source of finance for Sweet Menu Restaurant..............................3

TASK 2.......................................................................................................................................4

AC 2.1 Cost of identified appropriate finance source for Sweet Menu Restaurant.............. 4

AC 2.2 Importance of financial planning for the Sweet Menu Restaurant for their new......4

business plan..........................................................................................................................4

AC 2.3 Information needs of different decision makers in Sweet Menu Restaurant business5

AC 2.4 Impact of finance sources in the business financial statements................................ 6

TASK 3.......................................................................................................................................7

AC 3.1 Analysis of budgets and take appropriate decision...................................................7

AC 3.2 Calculation of unit costs (meal cost) and take pricing decisions.............................. 8

AC 3.3 Using investment appraisal techniques to know the project viability.......................9

TASK 4.....................................................................................................................................10

AC 4.1 Main financial statements produced by the organization........................................10

AC 4.2 Appropriate formats of financial statements for different type of businesses........ 11

AC 4.3 Interpretation of financial statement using ratio analysis method.......................... 15

CONCLUSION........................................................................................................................ 16

REFERENCES.........................................................................................................................17



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INTRODUCTIONSuccess of business depends greatly upon the availability of finance. The amount of

cash available for spending in business is termed as finance. There are number of sources

available to the business organizations to mitigate their financial need. It can be fulfilled from

the sources that are available internally in the organization. Moreover, outside sources also

can be used for such purpose. In this report, financial sources are identified for a reputable

Restaurant company named Sweet Menu Restaurant. The Restaurant is operating in Gants

Hill in East London founded before 10 years ago. This Restaurant has a good corporate

image and well known position in the market as it serves various types of inter-continental

foods at fair prices. Now, company’s owner desires to expand their business by opening its

branches in Central London and Croydon. Therefore, the present report helps in determining

the available financial sources, their implication as well as advantage and disadvantage for

the company. Furthermore, the report will explain that how managers can take efficient and

strategic decisions to manage these sources.

TASK 11.1 Sources available to the business organizations

Financial sources are categorised into two that are internal and external. Internal

financial sources comprise the sources that are available in the business whereas external

finance sources include the sources that can be taken from the outsiders.

Type of Internal sources Description

Angel investors

Under this type of source, business can take loans

from their friends and relatives. Business owner can

get funds from their friends and relatives for different

time period at cheaper interest rate that helps to

eliminate or minimize the financial needs.

Retained earnings and profits of other Balance of business profit which is not distributed as



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business dividend is called retained earnings (Broadbent and

Cullen, 2012). All the corporations can use this

source for fulfilling their financial need. Along with

the retained earnings, owner also can use profit of

their other businesses.

Owners personal savings

Personal savings of the owner can also be used as a

financial source for the expansion of business. It is

mostly used in case of newly business organization

when outside sources are available in very less

amount.

External sources Description

Issuing shares

There are two types of shares that are

ordinary and preference share capital.

Business can issue these shares in the market

in order to get funds easily.

Borrowed funds

Bank loan is the most common source of

borrowed funds (Thomas, 2001). Bank gives

loans to the corporate sectors for a specified

time period at an implied interest rate.

Lease

Under the lease financing, business can attain

rights for using assets without having

ownership (Brayley and McLean, 2001). It is

a contract between the asset’s owner and user

that provides rights for the use of assets at a

rental charges.



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Venture capital

Venture capital can be acquired in the highly

potential growth earning businesses. Venture

capitalists are much interested to invest in

such businesses that can provide higher

returns to them and fulfil long term business

requirements.

1.2 Implication of internal and external finance sources

Internal sources Implications External sources implications

Angel Investors: Borrowing loans from

friends and relatives, business needs to pay

interest to them. It will be paid on timely

basis.

Issuing shares: On the amount of equity

share capital, dividend rate is not fixed.

However, preference share capital requires

regular dividend payments at fixed rate.

Another implication is that ordinary

shareholders have voting rights. It gives

controlling rights to the shareholders in order

to take part in operating functions. Thus, it is

clear that diversification of control is also

existed in this source.

Retained earnings and other business profits:

Retained earnings involve opportunity cost. It

refers to the loss of return that businesses can

get through using retained earnings in any

investment proposal.

Borrowed funds: On the amount of borrowed

loans, business has to pay timely interest

charges to the loan provider. Thus, regular

interest payment brings financial risk to the

business. Another implication is that they

have to keep the business assets as a



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collateral security to the banks (Managing

financial resource and decisions, n.d.). In

case of any default in payment, banks have

legal rights to discharge business assets at the

market place. Further, it will greatly impact

the corporate image of company in an

adverse manner.

Personal savings: This is a cheaper source of

finance as it does not involve any cost to the

business. Moreover, by investing personal

savings, fixed financial burden can be

reduced to a great extent. Main reason for this

is that businesses have to take lower funds

from the outsiders.

Lease: Business does not need to purchase

assets for the purpose of using. In this source,

ownership will not be transferred but

business can lease assets from others. For

that, business has to pay rental charges on the

periodical basis. However, benefit of using

this source is that rental charges are

allowable expenditures for the tax purpose.

1.3 Most appropriate source of finance for Sweet Menu Restaurant

The given scenario stated that Sweet Menu Restaurant needs finance amounted to

300000£ and 500000£ for the business expansion. On the basis of above identified

implications, it can be said that under the internal sources, retained earnings and profits from

other businesses will be the best among them. The reason for such decision is that it does not

involve higher cost to the company. Further, these are the regular finance sources and

eliminate the immediate finance requirements also. However, if company receives funds from

the angel investors, then business will need to pay interest to them. On contrary, through

ploughing back of profits, firm can generate funds without any cost.

Moreover, Restaurant has a good market position and well known in the market. Loan

capital will be the most appropriate finance source under the external sources. The reason for



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such decision is that banks and other financial institutions provide loans on the basis of their

credit worthiness. Therefore, loans will be available easily to the Sweet Menu Restaurant.

Moreover, it fulfils the short term, medium term and long term finance requirements of

business. In addition to it, business has good reputation in the market thus, company is able to

bear fixed financial burden. Other benefits will be that control diversification can be

eliminated through using this finance source. Thus, it has become clear that both types of

sources are appropriate for Sweet Menu Restaurant for their expansion plans.

TASK 22.1 Cost of identified appropriate finance source for Sweet Menu Restaurant

The cost of retained earnings and other business profits for Sweet Menu Restaurant

business is opportunity cost. It concerns with the loss of possible returns that the business can

receive by investing the profits in other businesses or in other available alternative investment

proposal. Moreover, higher rate of ploughing back of profits may create negative impacts to

the shareholders.

Furthermore, the amount of borrowed funds imposes cost of regular payment of

interest. The interest rate may be fixed or volatile also called fluctuating. Fixed rate imposed

fixed amount of financial burden to the company (Managing financial resource and decisions,

n.d.). However, in case of fluctuates interest rates, the financial liability cannot be assessed in

a correct manner. Another, the need of giving business assets as a collateral security will be

included in the cost. Further, in case of having business loss it will affects the business

operations in a negative direction. In addition to it, at the time of maturity, Sweet Menu

Restaurant has to repay the loan amount.

2.2 Importance of financial planning for the Sweet Menu Restaurant for their new

Business plan

Financial planning plays a vital a significant role in the organization success. It

mainly concerns with the process of setting business goals, targets and objectives and making

plans for go ahead (Dunn and Liang, 2015). Financial manager is greatly responsible for



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making financial plans for the business. According to the scenario, Sweet Menu Restaurant

business is making plans for expanding their business operations. Therefore, the need of

making strategic financial plans will be arise for the business. It helps to acquire sufficient

amount of funds and manage it in a proper way so as to achieve financial goals.

Initially, the business financial planner has to determine the current available finance

sources that can be used for opening branches in Central London and Croydon. He has to

make strategic business plans to met their financial need at lower the cost factor. After that,

the financial manager has to forecast the future incomes and expenditures that can be occur

from the operational activities (Snider, 2015). It will be estimate for all the projects,

departments and the business divisions. The managers also identify the cash need and make

plans for raising the cash funds in business. Finance managers can prepare budget for that

purpose that combines all the probable incomes and expenditures for the future period. It

aims at running business operations successfully through controlling business cost and

maximize its incomes. This in turn, company will be able to generate higher the profits.

Furthermore, financial policy helps to manage the business funds in an effective and efficient

manner. Overall, the financial planning helps to achieve the predetermined financial targets

of business.

2.3 Information needs of different decision makers in Sweet Menu Restaurant business

Different users need distinct information to take better decisions. In Context to Sweet

Menu Restaurant business, the information need of different decision makers are explained

below:

Decision makers Information need

Business managers

In the present era, running business successfully is the

responsibility of managers. Therefore, they require

information regarding all the incomes and expenditures

from the financial statements. The managers analyse and



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evaluate the business expenses with the objectives of

making effective control (Slack, Chambers and Johnston,

2010). Further, budgeting is also an important tool that used

by managers to manage the cash sources and its

applications to ensure adequate cash availability. Through

managing the funds appropriately, financial position and

operational performance can be improved in a great

manner.

Creditors

They provide credit to the Sweet Menu Restaurant business,

therefore they analyse the business creditworthiness. They

analyse the financial statements and cash flow statements to

identify the liquid availability and cash earning capacity

(Zager and Zager, 2006.). Further, they analyse the

profitability statement to know the Restaurant business

profits.

Government

Government have the objectives to increase their incomes

sources. Tax is the most important source of government

incomes that is calculated on earned business profits.

Therefore, government need information regarding business

profits to identify the tax obligations and in case of any

default, they impose penalties and other lawsuits.

2.4 Impact of finance sources in the business financial statements

All the business transactions show in the business financial statements. It includes

financial and operating transactions. Therefore, the type of financial sources that have been



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used by Sweet Menu Restaurant business will impact the financial position statements.

However, the cost of financial statements impacts the profitability statement.

As stated earlier, most appropriate finance source for Sweet menu Restaurant are

retained earnings and borrowed funds. The cost of retained earnings that is opportunity cost

will not show in the profit and loss account. However, the amount of retained earnings used

will be shows in the statement of changes in retained earnings.

On contrary, cost of borrowed funds that is interest will be show in expenditure sides

of profit and loss account. Further, it will be deducted from the cash in the company's current

assets head. According to the given scenario, the cost will be show in profit and loss account

as interest charges however, under the current assets group; it will be subtracted from cash

and banks (Managing financial resource and decisions, n.d.). Another, the taken amount of

borrowed funds will be show in balance sheet. In context to Sweet Menu Restaurant business,

the amount will be show in liability side as long term loan under the noncurrent liabilities

head. Further, the amount will raise the business cash hence; it will be show in assets side

under the current assets group through increasing the cash and bank balance.

TASK 33.1 Analysis of budgets and take appropriate decision

The present scenario stated the cash and inventory budget of Blue Island Restaurant

for the upcoming four months. The company is a great competitor of Sweet Menu Restaurant

business. Under the cash budget, the Restaurant directors summarize the all estimated cash

receipts and payments together.

The cash budget can be analysing with identifying the changes in cash incomes and

expenses (Whited, 2014). In context to Blue Island Restaurant business, the percentage

changes are calculated as under:



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Percentage

changes in cash

sales

Changes in cash

sales/Previous month

sales*100 3.3333333333 16.1290322581

11.11111111

11

Percentage

changes in cash

expenses

Changes in cash

expenses/Previous

month expenses*100 -71.5299877601 13.7575236457

83.52229780

8

The prepared budgeted figures indicate that sales only a single factor which

contributes the towards the cash incomes. According to the budget it can be reported that the

cash sales are increasing in all the four subsequent months. The sales are 15000£, 15500£,

18000£ and 20000£ respectively. However, the percentage changes are 3.33%, 16.129% and

11.11% indicate that in the month of November, sales are increasing at higher rate

comparatively than other periods. However, in the month of October, sales increases by only

3% while in the month of December, the percentage changes get declined from 16.129% to

11.11%. It indicates that in this month, sales are increasing at lower rate. Therefore, the

managers should make planning to increase business sales (Cox, 2014).

On contrary, various components are existed that contributes towards the business

expenditures. It includes capital expenditures for buying assets such as Van and Furniture and

Fittings. However, operational expenses includes expenses for paying salaries and wages,

petrol charges, lighting and energy charges, insurance charges and purchase inventory

(Whited, 2014). The total cash expenses for the business are 40850£, 11630£, 13230£ and

24280£ respectively. The expenditures tend to decline in the month of October and increase

in both the following months. However, the percentage changes indicate that in the month of

October, the cash expenses declined by 71.53% due to eliminate the capital expenses. This in

turn, the net cash balance get converts from adverse balance to positive balance amounted to

3870£. After this month, it tends to increase by 13.75% due to increase salary and wages,

purchase and lighting and energy expenses while the available cash at the ending period is

positive amounted to 1290£. The reason behind that is the net cash balance for the month is



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comparatively higher than cash availability at the ending month of October. Once again,

expenditures increases by 83.52% due to acquiring the fixed assets amounted to 10000£.

Another reason for such increases is increasing the operating expenses of salary and wages,

lighting and energy and purchasing inventory. This in turn, resulted in negative cash balance

and adverse cash availability at the month ending. On the basis of above identification, it can

be reported that the months in which capital expenditures will be occur lead to highly

increase in the cash expenses results in adverse availability of cash. Through implementing

an effective control tool, expenditures can be minimised (Amoako and et. al., 2013). Apart

from it, inventory budget indicate that Restaurant is paying 60% of purchase obligations in

same month and 40% in the next month.

3.2 Calculation of unit costs (meal cost) and take pricing decisions

Blue Island Restaurant cost sheet indicate costs for purchasing steak, vegetables and

other ingredients, making payment to labour and all the other overheads. The overheads are

absorbed using absorption costing technique. The cost is the basis for setting price for the

offered meal. The scenario depicts that prices are decided by adding mark up cost of 40%.

Along with it, the rate of value added tax (VAT) is 20%. Thus, prices can be determined as

under:

Item name Cost (In £)

Steak 3

Vegetables and other ingredients 1.5

Labour 3.5

Overheads (using absorption costing technique) 2

Meal cost 10

Add: mark up percentage @40% 4

VAT @20% 2



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Set meal prices 16

Food cost percentage: It can be calculated by dividing total costs with the decided

sale prices. The food cost percentage for Blue Island Restaurant business is computed below:

Food cost percentage = Total Ingredients costs/Sale price

= 10£/16£*100

= 62.50%

Thus, it can be reported that deciding the meal prices at 16£, company is earning

37.50% profit on total sales. It indicates that company is earning good profitability.

3.3 Using investment appraisal techniques to know the project viability

The scenario stated that Blue Island Company have available space for open its

branches for expansion purpose. Two investment proposal are available that can be go ahead

to utilize the available space.

Investment appraisal techniques: Two techniques require to be applied with both the

proposals that are net present value and payback period. The time period taken by the

proposal to get back its initial outflow called payback period (Baum and Crosby, 2014).

However, the difference between the discounted cash inflows and initial outlay called net

present value.

Calculation of payback period

Year Proposal 1 Cumulative Proposal 2 Cumulative

0 -1200 -1200 -1200 -1200

1 800 -400 300 -900

2 600 200 400 -500

3 400 600 500 0

4 200 800 600 600



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5 50 850 500 1100

Residual value 0 850 50 1150

Payback period of proposal 1st = 1 year + (400£/600£)

= 1.667 year

Payback period of proposal 2nd = 3 year

Calculation of net present value

Year Proposal 1stDiscount

factor@10% Discounted cash flow

0 -1200 1 -1200

1 800 0.909 727.2

2 600 0.826 495.6

3 400 0.751 300.4

4 200 0.683 136.6

5 50 0.621 31.05

Net present value 490.85

Year Proposal 2ndDiscount

factor@10% Discounted value

0 -1200 1 -1200

1 300 0.909 272.7

2 400 0.826 330.4

3 500 0.751 375.5

4 600 0.683 409.8

5 500 0.621 310.5

Residual value 50 0.621 31.05

NPV 529.95



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On the basis of above computation, it can be suggested that Blue Island Restaurant

has to adopt 2nd investment proposal due to higher the net present value of 529.95£. However,

the payback period of this proposal is higher to 3 years but decision cannot be taken on the

basis of this method. The reason behind that is the method does not identify the overall

viability of the investment proposal (Götze, Northcott and Schuster, 2015).

TASK 44.1 Main financial statements produced by the organization

Every business organization desire to know their performance after the end of the

financial year. Therefore it prepares financial statements includes income statement and

financial position statements.

Particular Description

Income statement This statement summarizes data regarding business incomes and

expenditures. All the operating transactions are combined in this

statement (Miller-Nobles, Mattison and Matsumura, 2015). The

excess of incomes over expenditures indicate business profits.

However, in case where expenditures are higher than business

incomes indicate worst business performance due to loss available.

Profit and loss account is known as income statement indicates

gross as well as net profits. Gross profit is the difference between

the total sales and cost of goods sold. However, the difference

between gross profit and total indirect expenses indicate net profit or

loss.

Balance sheet It combines all the assets and liability of business. Under the assets

side, all the current, noncurrent and intangible assets will be shown.



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However, liabilities include shareholders fund, current liability and

long term liability. Financial performance can be determined from

this statement. Investors and creditors use this statement to analyse

the solvency position and make risk and reward analysis.

4.2 Appropriate formats of financial statements for different type of businesses

Every business organization prepares financial statements in the prescribed formats by

Generally Accepted Accounting Practices (GAAP) and International Financial reporting

Standards (IFRS) (Picker, 2016).

Sole proprietorship: In this form of organization, business owner have not legally

obliged to prepare financial statements. They prepare profitability statement and balance

sheet for their own purpose. The sole proprietors follow simple accounting procedures and

prepare financial statements so as to ascertain business profitability.

Partnership: Under this form of organization, association of two or more person

establish the organization. They make agreements for deciding the terms about their profit

sharing ratio in which partners can share the business profits. In case of partnership firms, the

business units need to prepare capital accounts for each of the partners.

Company: It is a legal body that came into existence by incorporating with the

company law. The owners are the ordinary shareholders who make investment in the

company with the objective of getting larger the return. The publically listed company

prepares financial statements as per international and domestic accounting standards. Many

of the organizations need to follow International Financial Reporting Standards (IFRS) so as

to report financial statements. Moreover, they need to publish financial statements so as to

meet information need of stakeholders.



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4.3 Interpretation of financial statement using ratio analysis method

After preparing the financial statement, business needs to analyse their performance

by adopting various analytical techniques. Ratio analysis is the most significant among them.

It calculates different kind of ratios that represent relationship between two components of

the statements (Chan, 2015). It makes analysis of business profitability, solvency, liquidity

and efficiency.

Ratios Formula

Sweet Menu

Restaurant

Blue 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 Ratio

Current assets/

current liabilities 1.78 0.63

Quick Ratio

Current assets –

Inventory/ 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



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Profitability ratio: The gross profit of Blue Island and Sweet Menu Restaurant

businesses are 0.66 and 0.63. However, net margin ratio is 0.13 and 0.01 respectively. Both

the ratios are higher in case of Blue Island indicate that business have better operational

performance comparatively than Sweet Menu Restaurant business.

Liquidity ratio: The current ratio indicates proportion of current assets and current

liability. Blue Island Restaurant has current ratio of 0.63 while in case of Sweet Menu

Restaurant the ratio is 1.78. Another measurement of the liability is quick ratio. The ratio of

Blue Island and Sweet Menu Restaurant are 0.15 and 0.63. Both the ratios are higher in

Sweet Menu Restaurant business implied that this business has greater liquid availability.

This in turn, it can be said that Sweet Menu Restaurant business is highly able to meet its

short term obligations effectively.

Efficiency ratio: Assets turnover ratio of Blue Island and Sweet Menu Restaurant

Business are 2.4 and 1.79. It indicates that Blue Island Business Company is using business

assets efficiently due to higher the turnover ratio (Henry and Robinson, 2015).

Solvency ratio: Blue island Restaurant has debt equity ratio of 0.58 while in case of

Sweet Menu Restaurant business the ratio is 0.41. Higher the debt to equity ratio indicates

higher the risk and vice versa. Thus, it can be said that Blue Island Restaurant is using higher

level of debts as compared to the business equity.



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CONCLUSIONThe present report concluded that financial sources and making effective financial

decisions are crucial for the business. Financial planning is plays a significant role in carrying

out business successfully. It helps all the business organizations to acquire finance sources

that imposed minimum the cost to the company. This in turn, business can yield higher the

profitability. In addition to it, the report concluded that investment appraisal techniques are

most important tool through which business can invest the funds in most profitable

investment proposal. On contrary, ratio analysis is the tool that analyse the financial

statement in every aspect.

REFERENCES● Amoako, K.O. And et. al., 2013. Cash Budgetan Imperative Element of Effective

Financial Management. Canadian Social Science.

● Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.

● Broadbent, M. and Cullen, J., 2012. Managing financial resources. Routledge.

● Chan, J.L., 2015. New development: China promotes government financial accountingand management accounting. Public Money & Management.

● Cox, P., 2014. Master Budget Project: Miscellaneous Cash Flow. Strategic Finance.



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