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Managing Financial Resources And Decisions

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Sample on the Importance of financial statement

7361 Downloads I Published: 24 Feb ,2017

Managing Financial Resources

Every business corporation requires adequate availability of funds to operate successfully in the market. The need for funds arises for purchasing purchase premises, equipment and other capital assets. Moreover, they need working capital to run business operating functions in an effective way. Thus, it becomes clear that managing financial resources is very important aspect for organization’s success. Sweat Menu Restaurant Ltd. is a reputable restaurant business that is based on Gants Hill in East London. The restaurant was founded 10 years ago. It is a well known business which provides various intercontinental foods at affordable prices to the customers. Now, the business owner’s wants to take advantage of the business prospects by opening its two branches in Central London and Croydon. The business owner requires sufficient funds for opening two branches. Therefore, the present report will help in identifying the resources available to the restaurant owners for fulfil their finance requirement. It helps in determining the most appropriate finance source that can be obtained at minimum cost. Moreover, the role of financial planning will also be discussed in the report. In addition to it, different management techniques such as budgeting analysis and investment appraisal techniques will be identified in order to take appropriate decisions.

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Finance sources available to a business

There are number of sources available to every business organization that satisfy their financial needs. The sources are mainly categorised into two parts that are internal and external finance sources. Under the internal financing, sources are available inside the corporations. However, under the external financing funds are gathered from outside organizations. Sweat Menu restaurant Ltd. can acquire funds of 300000£ and 500000£ from both the sources to establish its branches in Central London and Croydon.

Internal sources:

Personal savings: One of the most important internal finance sources is owner’s personal savings. In context to Sweet Menu Restaurant, all the three business owners can invest their personal savings in the business. It is an alternative to getting funds from external investors and loans (Murphy and Yetmar, 2010).  It is a cheaper source of finance and maximizes the entrepreneurs controlling rights over the business.

Retained earnings: Every organization does not distribute all the profits among its shareholders. Some of the parts are retained in the organization for future. The proportion of business profits that have not been distributed to shareholders is called retained earnings (Dada, Azim and Ullah, 2014). Sweat Menu Restaurant business can acquire funds from their current business retained earnings.

Sale of assets: Business owners can sell its idle assets. The assets that are non productive assets and unusable can be sold into the market. Sweat Menu Restaurant business can sell its scrap and disposable equipment in the market and collect funds.

External sources:

Share capital: The SMR can issue both ordinary and preference shares to the investors. It helps the businesses to gather funds to a great extent. The shareholders are willing to undertake business risk with an objective of getting high investment returns (Copeland and Dolgoff 2011).

Loan capital: Banks or other financial institutions provide loan facilities to all the businesses. The benefits of these sources are that funds can be generated for different time duration required. Bank provides loans for short term, medium term and long term period.

Overdraft facility: It is the right given to the business to withdraw larger amount of funds than their account balance. It helps in fulfilling the immediate or urgent finance requirement.

Debentures: Sweat Menu Restaurant can issue debentures that help to acquire large amount of funds. The benefit of this source is that it is not secured by the business assets (Valle, R. and Gomes, 2014). Long term financial need can be highly satisfied through these sources.

Implication of finance sources

Each and every finance source implies some kind of obligations upon the organizations that are described here as under:

Retained earnings: The cost of using business retained earnings includes opportunity cost. For instance, if the retained earnings were not invested in the business than it can be used for another purpose which will further help in generating returns. The advantage of this source is that business is not required to repay the funds. Further, it does not impose any burden to the business for paying return on it (Nikuchroo, 2014). However, the disadvantage of this source is that in case of business loss, it will not be available. Moreover, higher ploughing back of profits may create dissatisfaction among the shareholders.

Sale of assets: Underused assets can be disposed off at the market place. The cost of this is that total production capacity may get reduce. The advantage of this source is that no repayment is needed. Moreover, large funds can be generated without requiring any interest payment. However, the disadvantage of this source is that it cannot generate required funds. Further, higher cost may be needed for purchasing the same assets later.

Share capital: Ordinary shareholders are the business owners which invest in the business for getting higher returns. The cost of this sources involves that restaurant business require to make dividend payments out of the business profits. The dividend payments are fixed for the preference share capital. However, equity shareholders do not need fix amount of dividend payments to bring benefits to the company (Managing Financial Resources and Decisions. 2013). Moreover, the costs include the expenditures for issuing the shares such as listing fee, printing, distribution fee and advertising fee. In addition to it, equity shareholders have voting rights through which they can control business functions.

Loan capital: On the amount of borrowed funds, Sweat Menu restaurant business needs to pay regular interest to the lenders. Thus, it impose fixed financial burden to the business. Moreover, the business is required to keep its business assets as security against loans. Thus, collateral is needed under this finance source. Moreover, the legal implication is that lenders have legal rights through which they can sell business security in case of any default. However, the benefit of this source is that lenders do not have controlling rights (Shim and Siegel, 2007). Therefore, diversification of business control is not required. Further, large amounts can be borrowed by taking loans. In addition to it, the amount of interest payments is allowable for tax purpose.

Overdraft: The advantage of this source is it will mitigate the urgent financial needs. However, the cost of this facility is that bank charges a higher rate of interest on the amount of overdraft. Further, it will be available up to a certain amount. It is only a short term finance source which cannot be used for long term perspective.

Debentures: Sweat Menu restaurant business is required to pay fixed interest payments to the debenture holders. Further, the amount must be repaid after a certain time period. However, the advantage is that it helps in fulfilling the long term funds need and collateral is not required on the amount of issued debenture capital.

Appropriate source of finance

As per the stated scenario, business requires funds amounted to 300000£ and 500000£ for opening its branches in Central London and Croydon. On the basis of above explained advantages and disadvantages, Sweat Restaurant Business can identify appropriate source of finance. Under the internal finance source, the most appropriate finance source will be personal savings. All the three business owners can invest their own savings for funding purpose. Moreover, if additional funds will be required than retained earnings can be invested. Ploughing back of the business returns helps the business in financing the short term needs. On the other hand, all the financial needs cannot be fulfilled by using only the internal sources. Therefore, additional financial needs can be accomplished by using external sources. Under the external finance sources, share capital will be the most appropriate finance source. Restaurant business can issue ordinary share capital to the investors. The reason for identified share capital as most appropriate sources is that it does not impose fixed financial burden to SMR. It can pay dividend at the time of having profits in the business. Moreover, loan capital also will be the most appropriate finance sources. The reason for this is that it helps in fulfilling the financial needs for distinct time period. Further, no dilution of control exists. Only through keeping a collateral security, business can take loans at implied interest rates.

Analyse the cost of identified appropriate finance sources for Sweat Menu Restaurant

Identified most appropriate finance sources were personal savings, retained earnings, share capital and loan capital for Sweat Menu Restaurant business. The cost of all the finance sources is explained here as under:

Personal savings: The cost of personal savings may include opportunity cost. For instance, if the business owners do not invest their funds in the business than, they can invest it in alternative invest and can earn return on it.

Retained earnings: Business does not require paying off its used retained earnings. Thus, normally it does not impose any cost to the business. However, if the restaurant business is investing their undistributed profits somewhere else than they can achieve return on their funds. However, through investing the funds in business they will not be able to get return on it. Thus, this opportunity cost means loss of incomes which can be generate through investing retained earnings in profitable investment may arise to SMR.

Share capital: On the amount of issued share capital, Sweat Menu restaurant business has to pay return in terms of dividend to their shareholders. However, the rate of dividend is not fixed on the ordinary share capital. Further, the business equity shareholders have voting rights that give controlling rights to them. Therefore, dilution of control is existed through which the shareholders can take part in the managing the operations (Orens and et. al., 2009). In addition to it, the expenditures that the business will incurred for issuing the shares such as printing charges, advertisement charges and listing fee will be include in cost of issuing shares.

Loan capital: Borrowed funds require timely payments of interest to the lenders. Therefore, the cost is that Sweat Menu restaurant business has to make timely and fixed interest payments. Moreover, it includes the cost of keeping any business assets as security. In addition to it, the cost involves the legal rights of the lenders in case of business default.

Importance of financial planning

Financial planning plays a vital role in the organization as it greatly contributes towards the organization success. Before opening both of the two branches in Central London and Crydon, Sweat Menu Restaurant has to make efficient financial planning. It helps to determine the short term and long term financial goals and make planning in order to achieve these goals. Initially, it determines the finance requirements so as to establish the business and running successfully. Thereafter, different financial sources are analysed and select best among these sources. This in turn, helps to minimize the business finance cost (Jakhotiya, 2002). Moreover, the planning helps to manage the business income more effectively. Incomes can be managed through allocating the resources efficiently. On contrary, cash flows can be managed through evaluating the cash revenues and cash expenses. It restricts the unnecessary cash expenses through monitoring it on a regular basis. This in turn, funds can be administrated in a proper way. Further, it designs the policies so as to ensure effective administration of funds helps to use maximum utilization of resources (Booker, 2006). In addition to it, it manages the business risk and reduces it through taking qualified decisions. It helps to mitigate the difference between the set targets and actual business results. This in turn, targets can be achieved. It manages the working capital and liquidity in order to operate successfully. Well capitalized corporation contributes to achieving greater the business success (Overton, 2007).

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Information needs of different decision makers

The success of the organization greatly depends upon the decision making process. Reliable and prominent information helps to take qualified decisions. There are different types of decision makers who require numerous information to take strategic business decisions that are described below:

Managers: Business managers are responsible for smooth functioning of the Sweat Menu restaurant business. Therefore they need information regarding business expenditures and incomes. Profitability statements provide such information to the managers. Moreover, budgets also will be use by the managers to analyse the variances. The managers can determine the deviations through comparing the budgeted and actual business performance. It helps to take corrective actions in order to eliminate these variances (Rasid, 2014). Further, through monitoring the business expenditures, resources can be allocated efficiently. Cash flow statements help to maintain cash balance through analysing the cash.

Lenders: Lenders give credit to the Restaurant business on the basis of their financial performance. They analyse the business cash earning capacity and profitability so as to determine the business ability to pay the interest at the right time (Wahlen, 2011). Therefore, they need information about business revenues and expenditures from the profitability statements.

Investors: They invest their own funds so as to increase their return. Therefore, they make risk and reward analysis associated with investing funds in the restaurant business. Investors analyse the business profits as increasing the business profits will attract higher the investors. Further, they analyse the level of debts as higher the level of debts will create fixed burden to the organization and bring risk and vice versa.

Impact of finance sources on financial statements

Every finance source and its cost will be show in the financial statements of the business. It covers both the profitability statement and statement of financial position. As per the scenario, most appropriate finance sources in context to Sweat Menu Restaurant business will be shows in the company's financial statement.

The portion of owner’s personal savings that are invested by the business owners will be shows under the equities head in the balance sheet. It also will be include in the cash and bank balance is the assets side. Moreover, the amount of retained earnings and the issued share capital will be show under the head equities. Further, in current assets head, it will be include in the cash and bank balance. However, the amount of dividend payments will be show under the profit and loss account. It will be show as proposed dividend payments and subtracted from the total cash balance in assets side. Thus, it can be said that the dividend payment will reduce company's profitability. However, the printing, listing and advertisement expenditures will be disclose under the administration expenses hence, decrease profits and also reduce the cash balances. On contrary, the amount of taken borrowings will be show under the long term loans in the liability side (Managing Financial Resources and Decisions. 2013). However, in assets side it will increase the current assets through increasing the cash balance. In addition to it, the cost of loan capital that is interest will shows in the profit and loss account as interest payments. The interest obligations on loans will reduce SMR's profitability and increase its long term liabilities. SMR will need to pay the amount of taken loans at the maturity date. Further, it reduces the cash balance hence, subtracted from the available cash balance under the current assets head.  Thus, it becomes clear that all the finance sources impact the business financial position and also the profitability.

Budget analysis and take appropriate decisions

Budget combines all the future estimated revenue and expenditures for a certain period (Whited, 2014). As per the scenario, Blue Island Restaurant directors prepare budget for the four months ending on 31st December, 2015. Under the cash budget, directors estimate the future cash sales and necessary expenses that require to be paid by the business. The amount of cash sales shows both an upward or downward trend. In the month September, the cash sales is 15000£ tends to decline by 13.33% in the month October. Therefore, business sales get decrease to 13000£. Thereafter, it get increased to 15000£ and 18000£ in the month of November and December.

On contrary, under the cash expenses both the capital and revenue expenditures are combined. Purchase expenditures remain constant to 3000£ in the month of September and October without increasing the sales. It leads to decrease the profits margin of the business. However, in following month purchase payment get increase to 3500£ and 4000£ respectively. In the month of September, Restaurant business need to purchase van and furniture and fittings amounted to 12000£ and 18000£ respectively. However, the petrol and insurance expenditures are fixed as it remain constant to 500£ and 350£ in all the months. In addition to it, the salary and wages expenditures remain fixed to 7500£ in initial two months. Then after it get increase to 8500£ and 9000£ respectively. Furthermore, the lighting and energy expenditures get incline from 500£ to 600£ and 650£ respectively. With the affect of these changes, total cash expenses get changed from 40850£ to 11630£, 13230£ and 24280£ respectively. The net cash balance is the difference between the total cash revenues and expenditures. In the month of September, the budget indicates negative cash balance of 25850£. Thereafter, it get improved to 3870£ and 4770£ due to decreasing the expenditures. However, in the month of December, it again tends to decrease and indicate negative balance amounted to £4280 respectively. The reason for such decreases is that in this month cash expenses are increase at higher rate as compared to the sales increase. This in turn, net cash balance at the end of the month get change from (7350£) to (3480£), 1290£ and (2990£) respectively.

In addition to it, the prepared inventory budget indicates that supplier gives credit terms of 1 month for the 40% purchase. Blue Island Restaurant business is paying 60% of the purchase expenses in same month. However, 40% of the payments have been made in the following month.

On the basis of above identification, it can be suggested to the directors that they have to increase the business sales and reduce the expenditures. By doing this, the managers will be able to increase the cash sources and minimize the business expense that will contributes to have positive cash balance in the uncertain business environment. Moreover, the managers are required to maintain proper balance between the cash inflows and outflows so as to have positive availability of cash for operating successfully. They can manage the cash shortfalls or deficit balances by monitoring the business expenses on a regular basis. Further, curtailment of unnecessary expenses leads to decrease the total expenses. This in turn, restaurant business will be able to generate positive cash balances.

Discussion of the main financial statements

In the present market scenario the organizations operating in corporate world are required to prepare several financial statements. This is for the purpose of recording the varied business activities that took place during the financial year (Purpose of Financial Statements. 2013). The reason behind preparation of all the major financial statements is that it reveals sufficient and useful information to the stakeholders who are associated with Blue Island Restaurant. The main financial statements of the cited business have been enumerated in the manner below:

Income statement: The major purpose beside preparation of income statement is that it acts as an aid in presenting the outcomes of business operations for a particular period of time like one year. This statement includes all the income generated by the firm. In addition to this it also includes all the expenditure made by the organization during financial year. There is greater need for the business to manage its expenses in accordance with the income it possess (Komissarov, 2014). This is because it assists firm in managing and controlling its economic position with effectiveness.

Cash flow statement: With the assistance of this position manager of Blue Island Restaurant can make effective evaluation of the position of cash and cash equivalents in the organization. In addition to this cash flow statement helps in making evaluation of inflow and outflow of cash during accounting period. Moreover this statement is divided into three categories (Eccles and Holt, 2005). This includes cash flow under operating activities, financing activities as well as investing activities.

Balance sheet: It is regarded as one of the most essential statement of the organization that facilitates in making evaluation and analysis of the actual financial position of the enterprise. This can be presented with the equation that is Assets = Liabilities + Equities. Moreover with the assistance of balance sheet stakeholders can effectively make analysis of the information relating to assets owned and liabilities of the firm in a particular financial year (Herman, 2011). Along with assets are categorized into two that is current assets and fixed assets. In contrast to this classification of liabilities is on the basis of short term and long term.

Difference between major financial statements

There is existence of different businesses in UK that operates at varied level. Further they are required to prepare several statements of finances in order to record information in an appropriate and effective manner. Such organization is divided into three segments which includes the following:

Sole trader: It is the kind of business that is owned and managed by the owner on its own. Under this the owner has no obligation in preparing all the major financial statements (Wyk and Rossouw, 2009). However the firm only prepare profit and loss account and record entire information for the purpose of decision making process.

Partnership: In this kind of firm in which there is association of two or more person who agrees to carries out common business with an aim to attain common goal of the firm. This type of business has to prepare all the financial statements for the purpose of revealing their financial position (Schulze, 2007). In addition to this partnership firm is also required to prepare partner's capital account that includes the amount contributes by each partner and the proportion in which profit and losses will be distributed among them.

Limited companies: It includes all those organizations that are operating on large scale. For the purpose of satisfying the needs and wants of various stakeholders it is important for finance manager to prepare all the major financial statements including cash flow statement, balance sheet as well as income statement (Melo, 2012). It is essential that all these accounts are prepared in accordance with the international accounting standards in order to reveal accuracy within the statements.

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Conclusion

It can be concluded from the study that there is existence of several sources of finance available with the business. It has been inferred from the report that it is important for the organization to manage its finances with the aim to attain its objectives in an effective manner. In this report financial performance of the two different firms has been evaluated. With the assistance of ratio analysis it has been assessed that current position of Sweet Menu Restaurant is better than Blue Island Restaurant despite of the low profitability. It has been inferred from the report that there are different types of business like sole trader, partnership and limited companies who prepares varied financial statements.

References

  • Götze, U. and et.al., 2007. Investment Appraisal: Methods and Models. Springer Science & Business Media.
  • Herman, R. D., 2011. The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
  • Ismail, T. and Cline, M., 2005. Investment appraisal under conditions of continuous and discrete cash flows and discounting. Managerial Auditing Journal.
  • Jakhotiya, G., 2002.   Strategic Financial Management. Vikas Publishing House Pvt Ltd.
  • Kinney, R. M., 2012. Cost Accounting: Foundations and Evolution. 9th ed. Cengage Learning.
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