Introduction to MFRD
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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Available source of finances to Sweet Menu restaurant
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:
Long term Sources
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).
Short term sources
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.
Evaluation of the most appropriate sources for Sweet Menu restaurant
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.
Analysing cost of different sources of finances chosen by Sweet Menu restaurant
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.
Importance of financial planning within a business
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-
- Financial planning is an effective tool in identifying the flow of cash. The manager is able to make a balance between outflow and inflow of cash in the organisation. This assists the manager in maintaining the stability of the business activities (Lusardi and Mitchell, 2011).
- By properly planning the financial requirements of the business. The manager can ensure about the current availability of funds for the organisation. It can only be done by pre planning and finding activities that may require financial help in the near future.
- Allocation and procurement of resources can be evaluated with the help of financial planning. The business can identify proper utilisation of its financial resource by the employees through financial planning (Bonham, 2008).
- Financial planning provides various tools and techniques to assist the business in making right choices while investing. The business at many times is required to invest its money internally as well as externally. By planning the manager can ascertain ass to where return in investment will be higher.
- Financial planning helps in making the right decision for the business. The manager is able to effectively understand the financial position of the business by proper planning (Shaoul, Stafford and Stapleton, 2010). This helps the business in achieving better results and increase the performance of the activities.
Assessment of information needs of decision makers
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