Element of Operating Business
The management of financial resources is an important element in operating business. Different organizations render different services which require money to finance those services (Higgins and Gulati, 2006). MFRD means getting benefits from financial resources which is possessed by the organization. To achieve the best financial management, there should be a proper plan in a company. To promote success of an organization, entrepreneur is required to keep enough resources to operate sufficiently and efficiently (Rose and Hudgins, 2014). In this context, analysis of requirement of financial resources and importance of financial planning in context of Sweet Menu Restaurant Ltd and comparison of projects of the said company and Blue Island Restaurant has been presented in this report.
Types of Sources of Finance
There are two sources of finance one is internal and other one is external for new business, existing business or in case of expansion of business etc. (Darroch, 2005).Various sources of finance are capital markets i.e. new shares issue, loan stock, retained earnings, bank borrowings, government grants, venture capital and franchising etc. In short, sources of finance are of two types debt and equity finance.
- Debt finance is external source of finance provided by external lender. For example bank loan, debenture issue etc.
- Equity finance is internal source of finance provided by shareholders of the company. For example issue of equity and preference share capital, retained earnings etc.
There are different sources of finance for expansion of an ongoing business. In given case of Sweet Menu Restaurant which is engaged in restaurant business, its four owners are planning to expand the business by establishing its two branches in Central London and Croydon. They need different sources to finance for expanding new business. The first source of finance for an existing company is earnings retained by them for future period. Investors who want to invest in this expansion can also be treated as another source of finance (Becker and Huselid, 2006). Further, public offer for issue of share capital can help in funding expansion. Other sources are bank loans, investor’s money, government grants etc. (Swayne, Duncan and Ginter, 2012).
Implications of sources of Finance
At the time of starting a new business or at the time of its expansion, source of finance to be chosen should be correct because if the selection is wrong it might create hindrance for the company (Amit and Schoemaker, 2012). Following is the analysis of different sources of finance and their implications.
Funds raised from investors: The investors are major source of finance for a company (Mathauer and Imhoff, 2006). This company while expanding its business cannot raise entire capital alone; the firm needs investors for finance. Investors can be the present stakeholders as well as the outsiders.
Bank Loans: Banks are considered as an external source of funding (Chandra, 2011). The management of the company can take loans from banks at a nominal interest rate, chargeable at fixed intervals. The company will be able to easily repay bank loans, once they have secured their position in market.
Government Grants: The UK Small Business Administration provides help to new ventures and supports existing ventures in the expansion (Darnall and Edwards, 2006). Grants are given by government for expansion of restaurant along with interest payment at lower rate than the banks.
Evaluation of Most Appropriate sources of finance for the Restaurant
Sources which provide consistency, accountability, transparency, integrity etc are considered as the most appropriate source of finance (Shapiro, 2008). The restaurant is expanding its business in other parts of London so it needs to be financed through various sources. Equity share capital is the best source of finance for a company, because the shares become famous among the various investors in the market. (Kaplan and Atkinson, 2015). Bank loan will help them to get higher amount of loan at relatively low interest payment within a fixed period. Other source of finance i.e. government grant is helpful in its initial periods of expansion only by fulfilling certain conditions. Assets which are needed in the restaurant can be taken on lease for a fixed term by paying lease rentals. Retained earnings are also an appropriate source because they are used in case of emergencies only. Investors can also help in the expansion process of the company. Venture capitalists are the best source of finance for this company, since it is an established restaurant and famous for its best services and earning revenues therefore they can take help from venture capitalists.
Analysis of costs for different sources of finance
These are cost associated with various sources of finance in relation to expansion of the company.
- Costs, in relation to debt financing are the interest payments attached to them. The company has to pay interest on loans raised from bank and other financial institutions.
- In case of raising finance through issuing equity capital dividends and share in profits are required to be paid to the shareholders.
- In case of raising finance from investors, they have to be given equal right to take part in decision making process and attend general meeting (Stevens and et. al., 2005).
- In case of raising finance from government through grants, terms and conditions attached to them have to be fulfilled and there should be certainty that grants will be received Interest at comparatively lower rate is to be paid on the grants, so received.
- Lease rentals are to be payable in case of taking assets on lease and in case of hire purchase, hire purchase instalments are to be paid.
- In case of venture capitalists, cost involved is share in profits of the company and they hold power to attend the annual meetings.
Importance of Financial Planning
It is important for a company in case of expanding its business to manage financial resources so that operations can be done effectively and smoothly. For this company, it is essential to do financial planning for proper utilisation and administration of funds (Voss, Sirdeshmukh and Voss, 2008). Financial planning is done to raise funds for business and to see that resources are not used unnecessarily.
Firstly in planning, the restaurant is required to identify total capital needed. In case of expansion, new sales forecast is to be done by managers, to increase sales and services, better and qualitative services are to be provided to customers and it should be better than competitors. To increase sales and services, working capital of company, should be higher. The next step of financial planning is choosing the methods to raise finance. It can be raised internally within the business and can be raised from external sources like equity share capital, preference share capital, debentures and loans etc. Financial planning in this business is not only to raise finance but also to make long term investments. In the restaurant business, it also helps in collection of sufficient funds and deciding most convenient capital structure. It will be a guiding tool for the said company to invest in the correct projects. It helps in operating, investing and financing activities.
Assessment of information needs of different decision makers
The company has four owners, who formed restaurant 10 years ago. They are now expanding same business in other parts of London. The expansion strategy cannot be planned by the owners only as there are other persons also who take part in the decision making process. They are investors, banks, government and management. Brief discussion about their information is presented here.
Management: In decision making process, the management plays an important role. The information they share about the financial position of the company, helps in the growth of the company. (Brimley, Garfield and Verstegen, 2005). Strategic management includes top executives which develops overall organizational goals, policies and strategies. The tactical management includes unit managers and professionals who develop short and medium range plans and budgets.
Government: The government departments are also included in the decision making process. They take decisions in respect of taxes and duties which are to be payable by company on revenues they have earned during the year.. For assessing, they see company’s Balance sheets, Profit and loss account, cash flow statements and other financial statements and proof of tax deducted like income tax returns etc. In case of shortage of tax paid, the department raises demand of shortage to the company.
Shareholders: They require prospectus and annual reports from the company. They need to know through prospectus about the future prospects of investing in company or not. With the help of annual reports, shareholders get to know the performance of company during the previous year.
Impact of Sources of Finance
Observation of Balance sheet and Profit and loss account of this company shows following impact of sources of finance.
Equity Finance: Company has 60000 ordinary shares with a paid up value of £1 per share which reflects that company has raised finance from issue of equity share capital which gave power of voting in the company.
Loan from banks and other financial instruments: The Balance sheet for the year ending 31st December 2014 is showed in noncurrent liability, long term loan taken from banks and other financial institutions which is payable in more than twelve months period (Molina-Azorín and et.al., 2009). Interest payable is shown in the profit and loss account as shown in the question.
Retained Earnings: The Balance sheet shows profits in the form of revenue reserves which includes profits earned during the current year and previous years. These profits are used to finance new business expansion.
Creditors: The creditors are also considered as the source of finance to the company as they give the money which is due to the supplier or seller for the goods sold and the services rendered by the company.
Lease and Hire purchase: The balance sheet shows the noncurrent assets i.e. fixed assets like equipment, delivery vans and furniture fittings. The company has taken the equipment on lease and for which it is paying lease rentals.
Analysis of Budgets
The budget given in the question is cash and trade payables budget. The company has prepared the cash budget of 4 months to analyse the variances between the receipts and payments made during this period.
Cash Budget: It is prepared by the company for estimating all future cash receipts and expenditures which will take place in the future time (Surroca, Tribó and Waddock, 2010). In this budget, it seems that sales were declined in October in compare with September but ultimately increased in December. The company should keep an increasing trend in the sales. Expenditures should be in proportion to sales, neither too high nor too less. Cash balance in this budget is negative which is not acceptable, so company should increase sales and reduce expenses to an acceptably low level. The sales are most important source of revenue for the company and it should not decline at any cost. So, the restaurant should have to take steps in improving sales fluctuations in the coming years.
Trade Payable Budget: Creditors are those, to whom company is liable for payment , regarding the purchases made by them.. The given budget shows percentage increase in trade payables in compare to previous month. The purchases in September, October and November are high but in December purchases are low and due to which payables are reduced. But total payments from all 4 months have been increased. The company should take necessary steps to keep balance between sales and purchases.
Main Financial Statements
Main elements of financial statements are Balance sheet, Profit and loss account and cash flow statement. Brief discussion about financial statements of the company is as follows.
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Balance Sheet: This reflects position of the company at the end of financial year. It can be made vertically or horizontally. The Liability side includes share capital, reserves and surplus, long term and short term borrowings, bank loans, trade payables, outstanding salaries etc. similarly asset side shows tangible and intangible assets, current and noncurrent investments, current assets including inventories, cash and bank balances and trade receivables (Bodie, Merton and Cleeton, 2009).
Profit and Loss Account: This shows net profit after taxes earned by the company during previous year. It has following elements like revenue from sales and from rendering of services, other incomes, expenses like directors' remuneration, interest charges, purchases of stores and consumables, travelling and other petty expenses.
Cash flow Statements: It reflects the cash position of the company during year. It includes cash inflow and outflow from operating, investing and financing activities, that taken place during the year (Brigham and Houston, 2011).
Different kind of businesses has to maintain different types of financial statements. In the case of sole proprietorship, they have to maintain individual balance sheet and income statement only in case if their sales exceeds a particular limit prescribed by law (Nagelkerk, Reick and Meengs, 2006). In case of partnership they maintain partner's capital account. In case of public limited companies, they have to make financial statements like balance sheets, profit and loss account and cash flow statement as per the laws applicable in the country. Lastly, for private limited companies they have to make all three financial statements mentioned above.
From the above report, it has been concluded that, two restaurants are performing well in the market. Expansion strategy as mentioned above is to be adopted by the company. Sources of finance are of prime importance in expansion of the company. Budget and ratio analysis helps the organization in analysing current status of the company. Since the project's viability was assessed by NPV and payback period method by which it was concluded that the project 2 was more feasible than project 1.
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