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6205 Downloads I Published: 21 Feb ,2017
Managing financial resources is the method to procure and allocate financial resources after a decision making process. Each business is required to conduct financial analysis to understand the probability and risk attached to each financial decision. Business has to understand different types of financial resources that are available to them (Barrett, 2007). Financial resource is the back bone for every business. Thus, the financial manager is responsible to evaluate different sources of fund resources available and then evaluate them as to which sources best fits business's requirements. Thus, management of financial resources is interrelated to the decision making process. This is because of the reason that right decision making ability of the manager can help to boost the business whereas one wrong decision can hamper the financial growth of a business.
The report discusses about two restaurants and their financial decision. Sweet Menu restaurant wants to expand its trade by opening two new locations in Central London and Croydon (Bonham, 2008). In order to expand, the restaurant requires infusing €300,000 and €500,000 respectively. On the other hand, Blue Island restaurant owners want to conduct financial study of its records. Both of the restaurants require making legitimate and viable decision to raise financial resources and analyse business proposals.
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The available resources are those resources that are currently accessible to the business. Financial manager is required to analyse these resources in order to select feasible resources for Sweet Menu restaurant (Sources of finance, 2012). They to expand to two new locations located in Central London and Croydon. In order to do that the available sources of finance are as followed:
These are those resources which are available to be used after a year. They are-
Bank Loan- Loan is the debt taken from a financial institute or a bank. They require studying the strength of profit earned by the respective business. Banker asks for a guarantee which is a security deposit in proportion to the loan amount (Chazi,2010).
Capital Market- This market refers to issue of new shares by a company. In this process, the company is required to issue new shares to the public or investors. With the purchase of share, the investors receive ownership right in the company as per the deed or the contract of issue.
Retained Earnings- Each year i.e. annually or semi annually the business is required to save an amount of money from the profits in the form of retained earnings. In simple terms, retained earnings are the profit re-invested in a business activity by them (Benedict, and Elliott, 2008).
Franchising- In this method, the business pays the right to the franchisor to operate the business. He/she is also entitled to bear establishment cost, marketing and day–to-day expense of the business. This way the business is operated on the responsibility of the franchisor (Davies and Drexler, 2010).
These sources are available to the business to be used within the financial year. They are as follow:
Bank overdraft- It is a facility provided by the bank or a financial institution. The business can withdraw or overdraft money in excess of the balance available in the current account of the business (Benedict, and Elliott, 2008).
Trade credit- This is the purchasing of services or goods from a trader on credit basis. Businesses that have goodwill in the market are provided with trade credit facility to pay the amount after a period of 90 days.
After ascertaining the available financial resources for Sweet Menu restaurant it is clear that the company can choose both long term and short term sources of fund. Sweet menu can raise funds through a bank loan and trade credit basis. On the other hand it can also franchise its brand to a franchisor to reduce the expense of expansion. It will be viable for the business to raise amount of €300,000 and €500,000 through a bank loan. As the restaurant is working since the past 10 years it is will be easy for the banker to sanction the loan amount (Tsai, Pan and Lee, 2011). Company can also save cost by performing trade credit. Instead of paying its traders amount on the due date they can undergo an agreement to pay the traders by the end of a 90 day cycle. Sweet menu restaurant has to purchase its inventory on day to day basis. Thus it can effectively save its expenses buy conducting trade credit from traders or retailers. Apart from this the company can also go for franchising its restaurant in one of the two locations. By franchising the restaurant will not have to bear all the expense of setting and still can continue business with its brand namer. In this method restaurant will be able to earn profits with the earning from the franchisor.
It is vital for the financial manager to ascertain the cost associated with each resources. By raising funds the business needs to use either long term or short sources. By doing this the business faces various financial implications. Financial implication are the affect of the cost incurred by the business. The major affect of these implications are on the balance sheet or profit and loss statement. For example, by raising loan Sweet menu restaurant will increase its creditors and liability side of the balance sheet (Brinckmann, Salomo and Gemuenden, 2011). This is due to the fact that while paying for the principal amount in a bank loan the debtor is also entitled to pay for interest incurred on the loan. On the other hand the business also will have to face drop in the amount of goodwill which may be hampered due to the franchisee store. The owners will have to pay attention on this cost as this has direct affect on the impairment as it is not considered an ideal situation for the income statement of the business. Altogether the business in risk as to face the issue of setting the increased liability amount.
Financial planning is the evaluation of a companies current market and financial position. Financial planning helps the manager in understanding the acquirements of budget and resources required by the company to conduct its business activity (Financial Planning - Definition, Objectives and Importance, 2016). With the help of planning the company can allocate financial resources to various types of expenses that incur in the business. The importance of financial planning is described as below-
Decision makers are this individual or parties who have a superior authority over the decision making process of the company. Stakeholders like the employees, suppliers, customer's and competitors are the major stakeholders. They are as followed.
Employee's- The employees or the staff working at the Sweet menu restaurant among the key decision makers. They provide various suggestions and ideas to the management (Boyd, Dyhr Ulrich and Hollensen, S2012). The brand image of the business depends on the customer service employee's generate. The restaurant responsible to provide with the financial information to the employees in order to motivate them and increase their loyalty with the business.
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Supplier's- The restaurant must maintain cordial relationship with the suppliers. They must be given information regarding their payment on timely basis. It is important for the business to make timely payments to them so as to maintain trust worthiness among the suppliers like the itinerary items of Sweet menu.
Customer's- They are among the most important decision makers (Jara and Ebrero, Zapata, 2011). The business must highlight in media about its goodwill and achievement and financial information like profit earned by the restaurant. This way Sweet Menu can raise customers interest and increase its customer support in two new locations.
Competitor's- They are the external factors that affect the decision making of the restaurant. The management at Sweet menu restaurant is required to make alterations in its pricing policies s per its competitors.
Financial decision have an impact on the ability of the business to get finances for its business activities. The finances accessible to Sweet menu restaurant also created an impact on the financial statement of the business. In order to expand business to two new locations the business requires to raise finances. This shows that the company has dis-balance in its capital structure as it has to raise money through bank loan (Mayne and Zapico-Goni, 2007). The liability of the company rises due to taking credit from the bank as well as the trader. The goodwill of the company also hampers as it has to take credit from its suppliers and traders. It shows that the company is short in finance and also this can destroy the cordial relationship with the traders of Sweet menu restaurant. Due to high interest levied on the loan the profit of the company reduces. This is not considered as an ideal for any business. The business brand image depletes due to low earning and profit. As the restaurant is in liability to pat for the interest and creditors its balance sheet also looks disoriented.
Budget analysis is to evaluate the budget generated by the financial manager of the company. Budget analysis helps in identifying the loopholes faced by expenses and deficits in the business. From the budget made by the accountant it is clear that the business is doing good while making cash in sale. This shows that the business is not facing any issue through credit sales (Nickel, Saldanha-da-Gama and Ziegler, 2012). On the other hand the expenses of the business are more then the income earned by the business. This is evident that in the month of December specifically business had to face greatest negative net balance. Apart from this each month company is facing losses instead of making profits, the Blue Island restaurant needs to reduce its expenses. It was observed that the restaurant has to expend money on furnitures and fittings which is considered as a huge wastage of money. Despite of this company can purchase furniture made of plastic which does not deplete and last longer. Apart from this the restaurant can also improve its infrastructure by introducing more natural light in the restaurant. This will help in reducing the expense incurred on the lighting bills. From the trade payables statement it is clear that the company can reduce cost on purchasing inventory from its suppliers (Davies and Drexler, 2010). The company can find new wholesaler who provide quality product in a lower cost in comparison to the other suppliers.
Unit cost analysis is identifying profit margin achieved by a business. It is important fro the financial manager to understand the importance of conducting unit cost analysis. This is relevant in analysing the profit that will be generated after sales. By conducting a cost analysis the restaurant can make changes in the cost of the services by making desirable changes (Shaoul, Stafford and Stapleton, 2010). From the above calculation it is clear that the total cost of the food items will be near 60%. thus the restaurant will be able to make 40% profit from the sale of its product. The profit margins shows that Blue island restaurant can still increase its earring by lowering the cost of its menu items. The company has levied 20% VAT on the menu items. This is because the restaurant has to adhere by the polices made by the legal framework of UK.
Investment appraisal technique is used to identify the return on investment and profitability of a business proposal or projects. In this technique the financial manager conducts a feasibility through Net Present value and Pay Back Period (Tsai, Pan and Lee, 2011). It is important for a business to conduct this technique to identify the feasibility and viability of the business options available for the business.
Financial statement are made by the business top record all the business transactions done by the business. The financial manager has to record all the monetary transaction in these statements to generate the profit earned by the business at the end of each year. They are as followed-
Balance Sheet- Blue Island restaurant makes a balance sheet which shows the status of its assets and liabilities (Types of Financial Statement, 2016). It is created in order ascertain the financial position of the business. The items are categorised under assets and liability and are shown in the order of their liquidity.
Income Statement- It is made to evaluate the financial performance of the business. In this the accountant records all the sale and deducts the expenses incurred by the business to identify the total money earned by the restaurant at the end of each month.
Cash Flow Statement- The cash inflow and outflow done by the organisation are recorded in a cash flow statement (Nickel, Saldanha-da-Gama and Ziegler, 2012). All the cash flow from the investing, operating and financing activities are recorded in this statement. This is useful for the manager is to identify the usage and expenses done in cash by the restaurant.
Each business is operated on the basis of its ownership. There are various types of business like the sole proprietor, limited company and the partnership. The financial formats used by these business are as followed.
Partnership- In a partnership firm two or more individual together performs the activities of the business. In this type of business the partners are required to maintain al the financial formats to ascertain the profit made by them (Chazi,2010). As the liability to face the expenses and profit is based on the profit sharing ratio the business is required to maintain a partners income statement.
Sole Proprietor- A proprietor is an individual person, who is not separate from its business. He/she is responsible to bear all the losses and profit made by the business. The proprietor is not mandated to make all the financial statement but is required t maintain the earning made by the business. This is done so as to calculate the profit and tax for his/her business.
Company- A company is a separate legal entity from the business. It is compulsory for the company to maintain all the records of each financial statements (Mayne and Zapico-Goni, 2007). It is important to maintain all the records by the company so as to conduct financial audits.
Ratio analysis is calculating ratios on the financial data of the organization. The liquidity ratio is calculated to analyse the ability of the organisation to pay its liability (Financial ratio and Analysis, 2013). As per the calculation Blue Island restaurant has difficulty in paying its short term finances due to lower range of the ratio. Whereas Sweet Menu restaurant is able to pay off it liability and has good liquidity position. Profitability ratio is a way to measure the profitability made by the organisation. From the above table Blue Island restaurant is earning more profitability then Sweet Menu. The above calculation also shows that financial position of Sweet menu restaurant is better then the Blue island (Liquidity Ratios, 2016). This is due to the fact that it is more efficient and solvent then the later.
From the above research it can be said that financial management play an important role in the business. It is important for the business to conduct planning of its financial resources to ascertain their profitability. Financial manager has to make decision in order to achieve the objectives and goals of the organization. From the research it is evident the financial management helped Sweet Menu restaurant in acquiring appropriate sources of finances for expansion in two new locations. Other then this the research also show how study of financial statement is conducted to ascertain the financial position of Blue Island restaurant.
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