Contents

Task 1.........................................................................................................................................................2
1.1 Available Sources of Finance:..........................................................................................................2
Financial Resource definition:..................................................................................................................2
Sources of finance identification:............................................................................................................2
Internal Sources:.......................................................................................................................................2
External Sources:.....................................................................................................................................3
1.2 Sources of Finance implications::...............................................................................................4
1.3: Choice of relevant financial sources:..............................................................................................6
a. Factors explanation..........................................................................................................................6
Appropriate sources of finance: (sweet menu restaurant)..................................................................7
Task 2:........................................................................................................................................................8
2.1 Financial costs:.............................................................................................................................8
2.2 Financial Planning importance...........................................................................................................9
b. Usefulness of financial planning:.....................................................................................................9
2.3 Need of information for decision makers”.................................................................................10
2.4 Impact on financial statements of different sources of finance:......................................................10
Task 3.......................................................................................................................................................12
3.1 Analyze the budgets and make appropriate decisions....................................................................12
3.2 calculation of the unit costs (meal cost) and make pricing decisions using relevant information
given above...........................................................................................................................................13
3.3: Viability of Projects using investment appraisal techniques...........................................................13
TASK 4:....................................................................................................................................................16
4.1. Purpose and structure of Main Financial statement of a company................................................16
4.2. Comparison of appropriate formats of financial statements of Unincorporated and Incorporated
business.................................................................................................................................................17
4.3: Interpretation of Financial statements of Sweet Menu Restaurant and Blue Island Restaurant....18
Bibliography.............................................................................................................................................22
Task 1

1.1 Available Sources of Finance:

Financial Resource definition:
The effective operation of the Sweet Menu Restaurant need best suitable sources of
finance. The management of the company requires having in order to run the company.
Company has different number of sources of finance available. (QFinance, n.d.)

Sources of finance identification:

Sources of finance accessibility varied as per the organization level. Larger companies
have more options to raise finance for operating activities of the company in contrast to
smaller organizations.

Following are the some sources of finance available for the Sweet Menu Restaurant
company.

Internal Sources:
Retained Earnings: Retained earnings is that part of the profit of the company which
the management of the Sweet Menu Restaurant do not distribute to the shareholders of
the company. The management retains it in order to raise finance in needy conditions.

Sale of Stock: Those assets of the company which can be sold by the company,
whenever the management of the company needs finance.

Sale of Fixed Assets: The Sweet Menu Restaurant company’s management can also
raise cash by the sale of its fixed assets and fixed assets are non-current assets which
acquired by the company to use more than one year and their sale take some time.

Owner’s Investment / Personal Savings: It is the investment which is invested by the

owner of the smaller business. The owners of this type of business save some amount
of money in order to help them in unfavourable condition.
Debt Collection: The other important source to raise finance is the collection of the
receivable of the company and the management of the company can give the options to
pay their due by giving them attractive discounts. (Arbuckle, n.d.)

External Sources:
Following are some of the external sources available to Sweet Menu Restaurant to raise
finance.

Bank Loan or Overdraft: The management of the company can take the option of loan
and overdraft from the bank to raise finance. Loan is given by the bank for a decided
time period at a decided interest. Overdraft is a type of loan by the bank over the limit
regarding the accounts of the company.

Share Issue: the long term sources of finance by raising finance wit issue of new
shares.

Leasing: Leasing of assets can also raise finance for the company in which the
company can lease the assets and pay rents on instalments.

Mortgage: The option to raise the finance for the company by keeping the property of
the company as a security to take loan from loan provider.

Government Grants: The Company also has the option to raise the finance by taking
the grants from the government. (BBC, n.d.)
1.2 Sources of Finance implications::
Sources Financial Legal Control Gearing &
Dilution RIsk
Owner’s It do not require The owner of There is no There is very
investment to pay, there is the sole dilution of the low level of risk
no interest on business is not control and the which shows
retained legally bound expenditure lower gearing
earnings, the but in case of planning is not
equity of the partnership the exposed to the
company partners require outside party.
increased. to set profit
sharing ratio.
Retain profits Do not require There are legal As there is no Opportunity can
paying back, it requirements introduction of be missed.
is free from for the business new owners so
interest to save profits this is the
reason that the
control of the
ownership is
not diluted.
Sales of The ability of The parties are Any information Less risky
assets the company’s legally bound to will not be gearing
production can make given to third
be reduced agreement on person outside
because of sale the sale of the the company
of asset. asset. If the and there is no
management of dilution of the
the company control
sale that asset
 which is under
any agreement
then company
can have to
bear some
legal issues.

Bank loan Create If the loan is not Mechanism will Extremely gear.
amortization in given back then not be
order to pay company can weakened
back the loan lose the asset
Shares The payment of Voting power Control will be Lower level of
the dividend to by the diluted risk and
the shareholders of gearing
shareholders of the company
the company is
not obligatory.

Bank overdraft Extra amount The company No dilution of It is very risky

can be paid by need to fill all control because
the company if the required payment is not
the loan is nor documents in done on time
paid back on eth loan then loss have
time. process. to bear by the
company.
Trade credits If payment Legal action No dilution of Higher level of
becomes late can be taken by control risk
then the the creditors
company has to
pay extra
amount and if
 the payment is
made before
the time then
the company
can gain
discount.

Hire Tax deducted Requirements No dilution of Lower gearing

purchases depreciation of contract control ratio and risk of
can be claimed deduction of tax
by the
customers
(Jennings, n.d.).

1.3: Choice of relevant financial sources:

a. Factors explanation
The selection of the sources of finance for the operation of the company is a critical
process for the management of the company. The management of the Sweet Menu
Restaurant company assesses different available sources by keeping the following
factors in consideration.

The amount of money needed: It is the most important factor in the selection of the
sources of finance so the management of the company require to analyses the need of
money require. The management of the company can select most favourable source
which meet the requirement of the company

The urgency of funds: The time period during the management of the company have
to raise the finance is an important factor in the selection of the sources of the finance
because of the management have more time then more accurate source can be search
out.
The cost of the source of finance: The management of the company prefer most cost
effective available source for raising the finance for the company’s operation.

The risk involved: The management of the company selects the source by keeping in
mind the associated risk of failure of the project for which the management is raising the
finance.

The duration of finance: It is also important that management of the company have to
assess the duration for which the finance is require.

The gearing ratio of the business: The loan provider has a great interest in the
gearing ratio of the company because banks do not prefer the company to give loan
which have high geared ratio. (Ingram, n.d.)

Appropriate sources of finance: (sweet menu restaurant)

Due to the reason of the rapid growth the management of the Sweet Menu Restaurant
raise the finance of the company from different sources of the finance. Finance is raised
by the company from both internal and external sources. This is the reason that the
management of the company have noticed an increase the assets of the company in
contrast to the previous time. Bank overdraft is also given preference by the
management of the company. The banks have the confidence about the repayment of
the loan because the company has good record of repayment of the loan. Other
important source of raising finance is taking long term loans from the financial
institutions. There are some sources from which the management of the Sweet Menu
Restaurant can raise finance and these are leasing of assets, issue of new shares and
debenture is also the source of raising finance.
Task 2:
2.1 Financial costs:
Personal saving – low interest is charged by the loan provider from personal saving.
As for as the sweet menu restaurant is concern then this option is unavailable.

Retained profits – in retaining the profits of the company the company have to bear
opportunity cost in the way that company can invest this retained amount to earn
profitability.

Sale of assets – this source of finance is consider as more expensive because by

selling the assets the company’s profit can be reduced due to less productivity.

Ordinary and Preference shares – dividend is the return which the shareholders
expect from the management of the company. This is the reason that if company issue
new shares Then Company has to bear some cost. This type of cost includes
advertising cost, cost of registration and distribution cost.

Debentures – fixed and floating interest rate is paid by the management of the sweet
menu restaurant.

Bank overdraft – the taking of finance by overdraft option create more cost in
comparison to normal loan.

Loans – the raising of the finance by borrowing the loan from the banks have the cost in
the shape of the interest paid by the company.

Hire-purchase – the sweet menu restaurant has to pay more than market value.

Lease – the lessee have to paid interest according to the lease term.

Grants – government charge interest on the provision of the grants to the company.
(EFinance Management, n.d.)
2.2 Financial Planning importance

The management of the sweet menu restaurant formulates a plan in order to raise the
finance for the company. the question arise in this section is that how the management
of the sweet menu restaurant is efficient to select the suitable source of finance for the
company, what are those factors which the management of the company keep in mind
before the selection of the sources of the finance. The efficient and effective financial
planning is very important for the company because the productivity of the company
depend on the capability of the management to raise the finance for the company. (Hill,
n.d.)

The importance of the appropriate financial planning for the sweet menu restaurant is
explained as:

 To keep the stable financial environment in the company, the financial planning
can help the management to keep control on inflow and outflow of the company.
 Well established financial plan ensure that company have the availability of the
finance.
 Financial planning ensures that the management of the company is efficient in
the use of the investment by the shareholders of the company.

b. Usefulness of financial planning:

The financial planning of the company is helpful factor in the success of the company.
Financial plan establish the sources of the finance for the operation of the company.

Following are the different ways by which the financial plan helps the company.

 Ratio analysis The basic balance sheets

 Analysis of breakeven point.
 . Most suitable option can be selected from.
 Budgets.
 Formulation of the policies and calculating formulae.
 Enhancement of overall profitability of the company. (Hill, n.d.)
2.3 Need of information for decision makers”

Good information qualities:

Following are the some of the important qualities of the attractive information:

 It should be reliable and up to date.

 Accuracy of the information is necessary regarding balance sheets.
 Completeness of the information is important.
 Information should be summarizing.
 Information should be providing on time.

The company have different type of stakeholders having different type of interest
regarding the information of the company for example those parties which give loan to
the company have keen concern regarding credit worthiness of the corporation. The
financial statement of the corporation can produce relative information to the interested
parties of the company. (UNEP, n.d.)

2.4 Impact on financial statements of different sources of finance:

The financial statements of the company show the financial capability of the company.
The values of the financial statement have direct linkage with eh sources of the finance
selected. Following are some of the important factors which can affect the financial
statements of the company.

Personal savings – personal saving are put in the portion of the non-current liabilities
of the financial position. Interest is charged to the income statement of the company.

Sale of assets – the profit earned by the company on selling the asset is charged in the
statement of income and the figure in the final position is reduced. Depreciation is
removed from the figure of financial position.
Ordinary shares and preference shares – the equity component of the financial
statement is increased by the issuance of ordinary and preference shares. If the shares
of the company are issued at more value than nominal amount then share premium is
also recorded in the balance sheet.

Bank overdraft – the all the amount of cash taken as bank overdraft is recorded as
current liability of the company because it can be demanded by the bank within 12
months period.

Loan – the value of the loan is comprised in the non-current liabilities and the interest is
charged to income statement of the company. Repayment criteria also describe in the
financial position. (Arthur, n.d.)

Balance sheet cash flow Profit and loss

statement account
Owner investment The amount of the Increasing the The profit which is
capital is enhanced gearing of the taken out is showed
company or
business
Sale of assets The figure of the The value of the If the profit is
assets is minimized cash is increases earned on sale then
it is recorded
Debenture Account for as Issuance of No effect.
equity portion debenture increases
cash.
Retained profit Enhancement in the Increase of the After the calculating
value of the equity. gearing ratio in the account it is
transferred to the
balance sheet.

Bank overdraft It is account for as Increase the cash The profitability of

current liability for company the company is
reduced by paying
 the interest on
overdraft payment

Debt collection Under current Cash is increases. No effected

assets
Ordinary shares The value of the Cash is increased No effected
and preference equity is increases by new shares
shares and in this way the issuance
value of balance
sheet decreases.

Task 3

3.1 Analyze the budgets and make appropriate decisions

Blue Island’s cash budget is clear that balance brought forward has positive balance but
at the end of the month the cash deficit has occurred because of purchase of furniture.
There must be a strategy to sale the old furniture so as to increase the sources of cash
and decrease the use of cash. Deficit cash can be converted into surplus if restaurant
management take good decisions as the payment made with regarding the van can be
paid half in the net month so as to use the cash for operating purposes. The cash deficit
in September and December has almost same issue as the management has decided
to purchase furniture which has great cost resulted in the deficit of cash although cash
receipt in December were increased compared to previous months. Increment in
salaries and wages are being increased in November and December which must have
to be controlled by the management.

The major issue like purchase of furniture and salaries and wages have to be controlled
although cash receipts are also increasing but restaurant has only 1 main source of
cash that should be availed in a way that cash should not be in deficit.
3.2 calculation of the unit costs (meal cost) and make pricing decisions using
relevant information given above.
Food cost percentage = Total costs of ingredients / Sale price

The price of food has been set according to the cost incurred by the restaurant which is
variable cost. Selling price should be set after the break-even point as fixed cost of the
restaurant will be spread over the unit cost which is currently 10 sterling before any
mark-up cost. If customer of the market can bear the high cost then cost plus pricing
model can be used to set the sale price for the product. It set the minimum margins over
the occurred cost. Production level of any product can be established after having the
break-even analysis which will ultimately cover the fixed cost.

3.3: Viability of Projects using investment appraisal techniques

The value of projects can be judged trough appraising the all possible proposals which
will include the costs and the anticipated returns from the project. Investments that have
to be made in the project can be assessed using investment appraisal tools and these
tools and techniques are:

 Payback period
 Net present value

Payback:

The particular technique explain the period required to receive all the investment made
in a project and the project having minimum payback period will be acceptable for the
management along with the following reasons;

Advantages

 Tool uses the real cash flow instead of profits which comes under accounting
convention
 Calculation using the tool is simple
 Business risk is reduced

Disadvantage

 Time value of money is not taken into consideration

  Overlook the cash flows

NPV:

This specific model uses the cash outflow (investment) and cash inflow and these are
discounted using cost of capital rate so that net present value can be calculated.

Advantages

 Consideration of money for all stakeholders

 Anticipated return can be assessed

Disadvantages

 Projects with different size cannot be compared

 Measurement of project size is not taken into account

Calculation of Payback Period

Years Proposal Proposal 1 Years Proposal 2 Proposal 2
1 Cumulative Cumulative Cash
Cash flows flows
Year -1200 -1200 Year 0 -1200 -1200
0
Year 800 -400 Year 1 300 -900
1
Year 600 200 Year 2 400 -500
2
Year 400 600 Year 3 500 0
3
Year 200 800 Year 4 600 600
4
Year 50 850 Year 5 500 1100
5

Proposal 1: 2Years + (400/600 * 12)

Machinery A: 2Years + 8Months

Proposal 2: 3Years + (0/600*12)

Machinery B: 3Years

Note: Proposal 1 is acceptable as the payback period of said proposal is less than other
and recovering the investment period is short.

Net Present Value Calculation

Years Descripti Propos Discou Discount Propos Discou Discount
on al 1 nt ed Cash al 2 nt ed Cash
Factor flow 1 Factor Flow 2
(10%) (10%)
0 Investmen -1,200 1 -1,200 -1,200 1 -1,200
t
1 Operating 800 0.909 727 300 0.909 273
Cash flow
2 Operating 600 0.826 496 400 0.826 331
Cash flow
3 Operating 400 0.751 301 500 0.751 376
Cash flow
4 Operating 200 0.683 137 600 0.683 410
Cash flow
5 Operating 50 0.621 31 500 0.621 310
Cash flow
5 Residual 0 0.621 0 50 0.621 31
Value
Net 491 530
Prese
nt
Value
Note: Net Present value of Proposal B is greater than proposal 1 as proposal 1 has
residual value at the end of project although both the proposals have positive net
present values.

As per net present value take the time value into consideration, proposal 2 will have
greater return which will increase the value for stakeholders although payback period of
the said proposal is little higher than proposal 1 but this proposal can maximise the
wealth of shareholders.

TASK 4:
4.1. Purpose and structure of Main Financial statement of a company
Profit and Loss Account

The statement of the company which shows the profit and loss bearded by the company
during the 12 months’ time period. The structure of the income statement revenue on
the top and the value of the gross profit are calculated by deducting cost from revenue.
After the gross profit the net profit is calculated by deducting all the relative expanses.

Statement of financial position:

Statement of financial position shows the financial reliability of the corporation. It

provides information to the users about the level of the assets of the company, its
liabilities in both long and short term. The financial position of the company is prepared
in the structure in which the non-current assets and current assets of the company are
calculated. The value of the assets of the company should be equal to the capital and
liabilities of the company.

Statement of cash flow:

Statement of Cash Flows gives the information about the movement of the cash in and
cash out during the year. Financial activities, investing activities and Operating activities
are the elements of the statement. All the cash transaction regarding the operation of
the company is included in the operating activities of the cash flow statement. The cash
relative to purchase and sales include in the investing activities portion and the finance
through shares and other include in the financial activities portion of the statement.
(Johnson, n.d.)

4.2. Comparison of appropriate formats of financial statements of Unincorporated

and Incorporated business

Sole Proprietorship

 Partnership has only one account of capital.

 All the profit goes to owner of the business.
 There is only one owner of the business.
 No legal requirement to make balance sheet.

Partnership

 Profit is distributed among the partners.

 Profit is distributed on the basis of profit sharing ratio.
 Depends upon the number of partners
 Income statement shows the profit for each partner.

Company

 The income statement of the company includes gross profit and net profit is
calculated by deducting all the expanses.
 The financial position of the company includes assets, capital and liabilities.
 The profit of the company is given to the shareholders as dividend.
4.3: Interpretation of Financial statements of Sweet Menu Restaurant and Blue
Island Restaurant

Sweet Menu Restaurant

Profitability Analysis 2014
£0
Gross Profit 222,500
Sales 350,000
Gross Margin 63.57%

Blue Island Restaurant

Profitability Analysis 2014
£0
Gross Profit 198,000
Sales 299,000
Gross Margin 66.22%
On analysis of the year end 2014, gross profit margin of Sweet Menu restaurant was not
much better as compared to the margin of Blue Island restaurant. This was mainly
because of control over cost of sales as the sweet Menu Restaurant has not controlled
the cost as compared to the cost of sales of Blue Island. Percentage of sales revenue to
profit of Blue Island is much better than Sweet Menu.

Sweet Menu Restaurant

Profitability Analysis 2014
£0
Net Profit 85,000
Sales 350,000
Net Margin 24.29%

Profitability Analysis Blue Island Restaurant

 2014
£0
Net Profit 94,800
Sales 299,000
Net Margin 31.71%

Blue Island has shown the better results for the year ended 2014 as the net profit
margin of Blue Island is 31.71% which is almost 30% higher than Sweet Menu. Blue
Island has managed to control he administrative expense as compared to Sweet
Menu’s administrative expenses. Admin expenses of Sweet Menu is 26% of sales and
Blue Island’s expenses are 13% of sales revenue. This shows that profitability of Blue
Island is better than Sweet Menu.

Sweet Menu Restaurant

Liquidity Analysis 2014
£0
Current Assets 68,000
Current Liabilities 38,000
Inventory 44,000
Current Ratio (Times) 1.79
Acid Test Ratio (Times) 0.63

Blue Island Restaurant

Liquidity Analysis 2014
£0
Current Assets 41,000
Current Liabilities 65,000
Inventory 31,000
Current Ratio (Times) 0.63
Acid Test Ratio (Times) 0.15

Liquidity position of Sweet Menu is too better than Blue Island as the current assets of
Sweet Menu is improved than competitor. Current liabilities of Blue Island are greater
which made the liquidity position worst of the restaurant. Current ratio of Sweet Menu is
greater than acceptable level as the ratio is 1.79 times. Acid test ratio of both
restaurants is below acceptable level which should be at any rate 1 time. Reason
behind the better acid test ratio of Sweet Menu is inventory hold by the restaurant is
lower in comparison and greater current assets.

Sweet Menu Restaurant

Solvency Analysis 2014
£0
Debt 31,000
Equity 164,000
Net profit 85,000
Interest 10,000
Debt to Equity Ratio 19%
Interest Coverage Ratio (Times) 850

Blue Island Restaurant

Solvency Analysis 2014
£0
Debt 5,000
Equity 118,000
Net profit 94,800
Interest 3,000
Debt to Equity Ratio 4%
Interest Coverage Ratio (Times) 3160
Debt taken by Sweet Menu is much higher than Blue Island as the debt to equity
percentage of Sweet Menu restaurant is higher than the latter restaurant. Non-current
liabilities held by Sweet Menu are greater due to which interest cost is high which made
the interest cover ratio worse than Blue Island as letter restaurant has low interest cost
which made the interest cover ratio 3160 times.

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