What Is Finance?
Finance is the branch of economics concerned with the management and allocation of resources, investment and acquisition. In other words, it can be said as the science that describes the management and creation of funds, investment, banking and assets & liability of the company. In this report, various sources of finance are discussed that are available within the organization in order to meet its short-term, medium-term and long-term requirements of finance. In this report, cost incurred by the company at the time of raising funds from these sources is also discussed.
In this report, importance of financial planning in the respect of Sweet Menu Restaurant is also interpreted. In this, impact of sources of finance on financial statements will also be discussed. In addition to it, 4 month cash budget of Blue Island restaurant is going to be analyzed in order to find its current market position. Along with this, various techniques are used in order to select the best project out of the two. In this, financial statements of different types of organization are interpreted. At last, various ratio of both the company are going to be discussed in order to find out which company’s financial position is good.
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Internal and External Sources of finance
There are various sources of finance that are available within the company in order to raise its finance. Thus, some of the internal and external sources of finance through which Sweet Menu restaurant can raise its finance are as follows:-
Internal sources of finance
Retained earnings: Sweet Menu restaurant can raise its capital by using retained earning available with them. Retained profit is the part of profit which is kept as a reserve by the company for the future use (Arnold, 2011).
Owner's investment: Owner investment is the capital that is incurred by the owner itself as a start-up or additional capital. This can also be termed as the personal saving of owner of the company.
Sale of fixed assets: By selling out the old or absolute fixed asset, company is able to raise its finance. Keeping the absolute machine will simply increase the cost of company.
External sources of finance
Issue of shares: This is one of the most common sources for company to raise its funds. Company can issue shares to the general public in lieu of which they can collect fund from them.
Bank Loan: This is a type of money that is borrowed by the company from bank at an agreed rate of interest over a set period of time (Beaver, McNichols and Rhie, 2005).
Hire purchase: By using this source, company can be able to use assets without purchasing it at that particular time.
Cost of different sources of finance
Retained earnings: - Sweet Menu restaurant can use this method in order to expand its business. But at the same time company is required to pay taxes on their savings. In addition to this Sweet Menu restaurant will not be able to garb any new opportunities.
Sale of fixed asset: - Sweet Menu restaurant can use this method in order to expand its business by selling the old and obsolescent assets. But at the same time it will increase the cost of the company (DRURY, 2013). Company assets will be reduced as compared to its liability. Sweet Menu restaurant can also face the loss if it is not able to sell out the asset at the deprecated value.
Issue of shares: - Company can be able to meet its long term requirement of the funds. But at the same time it will affect the cost of the company. Sweet Menu restaurant is required to pay dividend to the shareholders out of the profit earned.
Bank loan: - Sweet Menu restaurant by availing loan facility from the bank can be able to meet its urgent requirement of finance. But at the time it will affect the cost of the company. Company is required to submit the collateral security (Efendi, Srivastava and Swanson, 2007). In addition to which they are also required to pay high rate of interest to the bank. This in turn reduces the profit margin of the company.
Importance of financial planning for Sweet Menu Restaurant
To manage income available with the company more efficiently:- Financial planning of all activities in advance will assist the company to manage its available income more efficiently in order to achieve the desired objective.
To build a long term capital base and shape all the future activities related to finance: - Planning of all the financial activities in advance will aid the Sweet Menu restaurant to build a long term capital base which in turn will help the company to shape its all future activities related to the future.
Utilization of the resources to the full extent can be made: - Advance planning of all the financial activities will aid the Sweet Menu restaurant to utilize the available resources to the full extent (Hursti and Maula, 2007). In addition to which company will also be able to reduce the wastage of resources.
Sale forecast: - Sweet Menu restaurant can forecast the sale by planning all the financial activities in advance.
Able to distribute finance properly in each and every department: - Financial planning will assist the Sweet Menu restaurant to distribute the finance properly that is available with them in each and every department. Financial planning will also assist the company to overcome the problem of deficit or surplus.
Increase the cash flow and to monitor the spending habits and expenses: - Proper planning of all the financial activities will assist the company to increase its flow of cash. Along with this it will help the Sweet Menu restaurant to monitor the spending habits and expenses that are taking place in the restaurant.
Reduce Uncertainty: - Financial planning will assist the Sweet Menu restaurant to reduce the condition of uncertainty. Planning of all financial activities will help the Sweet Menu restaurant to know in advance the area which can affect the demand and supply of the products in there restaurant.
Avoid condition of Shocks and Surprises: - Sweet Menu restaurant will be able to avoid the condition of shocks and surprises that can be faced by them due to change in the internal and external environmental condition (Johnson, 2014).
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Maintain a balance between inflow and outflow of cash: - Planning of all the financial activities will aid the Sweet Menu restaurant to maintain a balance between inflow and outflow of the cash from within and outside the business organization.
Information needed by different decision maker of Sweet Menu restaurant
There are assortments of information that are required by different decision maker. Some of the information required by the stakeholders of the company is as follows:-
Shareholders: - Shareholders are the individual who invest their capital in the company. These shareholders want the company's financial statements in order to analyze the financial position of the company. They also prefer these statements in order to decide whether they should in the company (Kaplan and Atkinson, 2015). Along with this they also prefer statements to decide whether company is capable of paying dividend to them or not.
Employee: - Employees are the persons who work for the betterment of the company. They simply prefer the income and expenditure statements in order to find out whether the Sweet Menu restaurant is generating profit all not. In addition to this they also prefer this statement in know whether the company is in a position to pay them salary on time or not.
Customer:-Customers are the persons who want value for the money invested by them. These individual does not require any type of statements. They simply want that the Sweet Menu restaurant should provide them with high quality product at low price.
Suppliers: - They supply raw material to the Sweet Menu restaurant. They want the financial statements of the company in order to decide whether the company is in a position to pay them on time for the goods supplied by them or not.
Manager: - Managers are the individuals who form various strategies in order to achieve the desire objective of the company. Managers want balance sheet and financial statements of the company in order to find out the growth of the company (McKinney, 2015). In addition to these managers requires these statements in order to form various strategies to achieve the desired objective.
Government: - Government is the corporate body which affects the functioning of the organization. They want financial statements and company audit report in order to calculate the amount of tax need to be paid by the company. Along with this they prefer these statements to decide whether the company is in a position to survive or not.
Impact of source of finance on financial statements
Retained earnings: - Entry of retained earnings will be made on the liability side of the balance sheet under the head of Share capital.
Issue of shares: - Entry of issue of shares will be made on the liability side of the balance sheet under the head of share capital. Along with this entry of dividend paid to the shareholders will be shown on the debit side of the profit and loss account.
Bank loan: - Entry of bank loan will be will be shown on both asset and liability side of the balance sheet under the head of non-current liability and current assets.
Analyze of cash budget in order to make appropriate decision
From the following cash budget it can be concluded that financial position of the company is relatively not good. It inflow and outflow of the cash is constantly changing. In the month of September payment made by the Blue Island restaurant was almost three times that of its income generated. It is also seen out the in the month of October and November Blue Island restaurant was able to manage its flows of cash from the organization. But again in the month of December Company’s payment was more than its income generated. Thus, at last it can be concluded that financial position of the Blue Island restaurant is not relatively good. The reason behind this could be that company is not focusing more on the formation of the various strategies in order to control the flow of cash.
Payback period:- Payback period method is used by the company in order to calculate the time period after which they are able to recover back the amount invested by them (Sabău, 2013).
Net present value: - Net present value method is used by the company to calculate the flow of cash by taking into consideration the rate of discounted factors (Shahrokhi, 2008).
Main financial statements
There are three types of financial statements that need to be issued by the UK limited company are as follows:-
Income statements/Profit & loss account: - Income statement is the statement that set out the summary of the trading event that impact the working of the company over a particular year of time (Moyer and et.al, 2011). This statement shows how each type of events affects the wealth of the company. The income statement varies from one business to another. This statement is also prepared in order to find out the income generated and expenses made by the company during a financial year.
Balance sheet: - Balance sheet is prepared by the company in order to find out the actual position of the business. These statements are also used by the manger to prepare various strategies. This is a statement of the manner which indicates how business holds its wealth, how much of the wealth is pledged to outsiders and the net wealth of the business.
Cash flow Statement: - This statement includes the analyzed of the cash including the short-term highly liquid investment that are received and paid by the company during the financial year. This statement gives the reader an insight into the sources and uses of cash over a period of time (Muradoglu and Harvey, 2012). This statement is divided into three different types of activities (i.e. operating, investing and financial activities). In addition to this, this statement also aids the company to find out its actual position at the end of every financial year.
Format of financial statements for different types of organization
Limited company: - Limited company is the company that is listed on the stock exchange. Limited company can be a private firm or a public firm. Function of private firms are managed and controlled by the owner itself (Paramasivan, 2009). Similarly, functions of public firm are controlled and managed by government. These both companies are required prepare all type of financial statements along with the company audit report in order to calculate the amount of profit and tax that need to be paid by the company.
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Partnership: - Partnership firm are the firms which is established by making an agreement between all the partners (Rose and Hudgins, 2014). This firm is also required to prepare all types of financial statements along with partners’ capital account.
Sole traders: - Sole traders/proprietor is the firm that owned and controlled by the single individual person (Ryan, 2005). These organization is required to prepare only income statement if its size is small otherwise if its size is large than are required to prepare all financial statements.
The following report emphasizes on the several of finance will aid the Sweet Menu restaurant to start up its two new units in different countries. In this importance of financial planning to Sweet Menu is also concluded. In this report cash budget of the Blue Island restaurant is also analyzed in order to find out its flow of cash. In it also concluded that Blue Island restaurant should move on with proposal 1 because it is much more beneficial as compared to proposal 2. At last, various ratios of both the restaurants are calculated and it is concluded that financial position of Blue Island Restaurant is fairly better as compared to Sweet Menu restaurant.
You may also like to read:
- Beaver, W. H., McNichols, M. F. and Rhie, J. W., 2005. Have financial statements become less informative? Evidence from the ability of financial ratios to predict bankruptcy. Review of Accounting Studies.
- Brigham, E. and Daves, P., 2012. Intermediate financial management. Cengage Learning.
- Brigham, E. and Ehrhardt, M., 2013. Financial management: theory & practice. Cengage Learning.
- Brigham, E. and Houston, J., 2011. Fundamentals of financial management. Cengage Learning.
- Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
- DRURY, C.M., 2013. Management and cost accounting. Springer.
- Efendi, J., Srivastava, A. and Swanson, E. P., 2007. Why do corporate managers misstate financial statements? The role of option compensation and other factors. Journal of Financial Economics.
- Hursti, J. and Maula, M.V., 2007. Acquiring financial resources from foreign equity capital markets: An examination of factors influencing foreign initial public offerings. Journal of Business Venturing.
- Johnson, P., 2014. Fundamentals of collection development and management. American Library Association.
- Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
- McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-CLIO.
- Molly, V., Laveren, E. and Deloof, M., 2010. Family business succession and its impact on financial structure and performance. Family Business Review.