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Managing Financial Resources and Decisions

799 Downloads1 I Published: 16 Dec ,2019

TASK 1

1.1 Financial sources

For government contract as establishing new branch of Osborne restaurant, accountant of the organization is looking for financial sources. Some of the sources can be expressed as follows:-

Internal Source

Personal savings:- By using personal savings, entrepreneur can establish new entity named as Osborne Terrace restaurant (Albelda,  2011). In addition to this, he can also take aid from his friends and family members by which effective fund can be allocated for commencement.

External Sources

  • Bank loan:- Bank advance gives a long haul sort of reserve for a start-up, with the bank communicating the settled period over which the loan is given (e.g. 6 years), the rate of interest, and the arranging and measure of repayments. The bank will generally speaking requires that the start-up give some security to the advance, despite the way that this security normally comes as individual affirmations gave by the business visionary. Bank loans are valuable for financing interest for settled assets and are generally at a lower rate of premium that a bank overdraft. In any case, they don't give much flexibility (Bowen and Rajgopal, 2010). Thus, adequate fund can be allocated by taking loan from bank  to setting up new branch of Osborne restaurant.
  • Bank overdraft:- This is a fleeting kind of reserve which is comprehensively used by new organizations and autonomous organizations. An overdraft is really a loan office, the bank allows the business "to owe it money" when the bank adjust goes underneath zero, as a final product of charging a high rate of premium. Consequently, an overdraft is a versatile source of back, as in it is quite recently used when required (Ehrhardt, 2016). Bank overdrafts are unfathomable for helping a business handle general instabilities in pay or when the business continues running into at this very moment income issues (e.g. an imperative customer fails to income on time).

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1.2 Implications of financial sources           

It is needed  to recognize all financial sources critically, therefore appropriate selection of source can be done. However, some implications are identified for getting financial sources as:-

Financial sources

Financial implications

Legal implications

Bankruptcy

Dilution of control

Loan from bank

Paying interest on loan and also impacts financial performance of organization

So many legal formalities to granting loan

In case of bankruptcy, creditor, debtors and suppliers impact get affected

No dilution of control

Share capital

Same as loan from bank

Same as bank loan

Same as of taking loan from bank

Control can be diluted.

Personal saving

Affects further operations

No legal implications

No bankruptcy

Same as for loan from bank.

1.3 The most appropriate sources of finance for Osborne Terrace restaurant plc

Decision maker of Osborne Terrace restaurant may consider the going with source of capital that is in regards to ideal for business establishment as:-

Working with Investors:- Contingent upon the traverse of the business and the degree of the improvement plans, the organization may look out subsidizing financing, or work with a private budgetary speculators to back the expansion. Examiners can be exceptionally significant to creating private endeavors, since they offer bits of information and experience about developing the business that the organization would not have in solitude (Floyd, 2005). Regardless, working with budgetary financial specialists implies surrendering an incentive in the business, and the theorist may request strategies for doing things that don't organize the arrangements.

Debt Based Financing:- Many business people will bolster their advancement plans through an autonomous venture loan either from a standard bank or from an option moneylender.  The decisions for obligation based expansion financing are as inconceivable as for some different business needs (Burritt and Schaltegger,  2010).

Above mentioned, both of two tools as working with investors as shareholders and debt financing are appropriate options for establishing Osborne restaurant's new entity. It will be suitable for effective expansion and enhancing efficiencies of organization adequately.

2.1 Analyse the costs of the two sources of finance under consideration

There are different kinds of sources by which decision maker can allocate fund including loan from bank, venture capitalist, share capital, personal saving and so on. Therefore, it is needed to analyze all sources critically as well making decisions for establishment of Osborne Terrace restaurant. For share capital, it is required to looking for dividend and potential to start up new entity. However, its impact on financial position of organization can be recognized through this system (Christ and Burritt, 2013). Including this, for taking loan from financial institutions like bank, it is needed to look at interest rates and entity's potential to refund amount. Therefore, cost analyses is created for making decision regarding allocating fund for establishment effectively.

2.2 The importance of financial planning for Osborne Terrace restaurant

  • a) Budgeting:- It is considered as decision making tool for preparing strategies to be implemented for establishment of Osborne restaurant. In this process, all fund and resources allocation factors are analyzed for starting up new entity as well planning to operate business operations. In this regard, it is helpful for best use of resources and fund for quality services and improving efficiencies effectively. Including this, through budgeting process, government plan can be succeed to establishing new entity that affects nation's effectiveness (DRURY, 2013). However, several ideas are created through this system for forecasting and decision making related to commencement and increasing all service qualities in systematic manner.
  • b) Implications of subjection to back acceptably:- Working capital is described as the regular fund utilized by a firm. It is the organization's present resources less its liabilities. Administering working capital is about ensuring that the business ought to have the ability to keep up the regular expenses. An Organization n can't work without working capital and, if messed up, it can possibly incite to the association's destruction. Powerlessness to palatable supervise working capital can exasperate a business' operations and benefit. Business may wrongly tie up a considerable measure of exchange out the kind of stock (Haiza and Hoque, 2010). This can happen if the stock is perishable it may accomplish the complete of its time period of reasonable ease of use before it can be sold. If the stock contains things that rapidly out of form, the stock may lose bigger part or most of its motivation before it can be sold. If over the top exchange is tied up out stock, it is not open for venture elsewhere in the business.
  • C) Overtrade:- This exist when a firm tries to do an abundance of too quickly with excessively negligible whole deal capital, so it is endeavoring to support excessively sweeping trade volume with compelled capital resources. To be sure, even a firm working in advantage may wind up in authentic conditions since it is in short of money situation. Such liquidity burdens ascend off the beaten path that it doesn't have enough money to pay off commitment as it falls due. Overtrading happens when a business recognizes work and tries to fulfill it, however fulfillment requires more unmistakable resources of people, working capital or net assets than the business has available to it. It is much of the time brought on by sudden events, for instance, deliver or movement taking longer than anticipated, achieving income being debilitated. Overtrading is a commonplace issue, and it habitually happens to starting late started Business and to rapidly augmenting Business (Lee, 2011). Money consistently needs to leave the business before more money comes into it.

2.3 Assessment of the information that will be needed to make decision on financing the takeover by

  • a) partners:- The Venture capitalist ought to study the update and article of relationship to review the terms and condition regarding advantage sharing and capital responsibility by Venture capitalist remembering the true objective to review the measure of capital that every accessory will add to the business.
  • b) Venture capitalist:- The Venture capitalist should survey the update and article of relationship to audit the terms and condition as to benefit sharing and capital commitment by Venture capitalist with a specific end goal to audit the measure of capital that each accomplice will add to the business (Malmi, 2010).
  • c) Financial speculator (We Finance Limited):- Funding will be excited about assessing the organization yearly answer to find out the liquidity hazard and valuation of the business with a specific end goal to determine the level of hazard that We back limited  will uncover itself while entering the agreement to give an advance of 20,000.
  • d) Finance broker:- Since the money related agent is interest with interest on loan, the fundamental data need is the organization's income statement execution and whether the organization has been a development in benefit after expense each budgetary period (Nandan, 2010). This is a pointer of business reasonability and setting up the level of liquidity hazard which is perfect for Finance broker since; it will give a diagram of the degree of hazard draw in with the organization and give the premise of making loan contract with the organization.

2.4 Impact of finance on financial statements if Osborne Terrace restaurant

Finance is considers as provision of money by which getting sources for fund and investment are analyzed affects performance of organization. In this regard, on the basis of business operations, financial statements are prepared including profit and loss account, balance sheet, income statement and so on. By preparing and maintaining these statements, different ideas are generated for further investment on business activities (Pitkänen and Lukka, 2011). However, decision maker for setting up new entity recognizes all inflows and outflows forecasting that affects further productivity and profitability to effective establishment. Decisions for financing is created for operating further activities.

3.1 Analyses of the cash budget for Osborne Terrace restaurant

 

 November                         

 December                       

Jan-17

February                          

March                                

April                                  

May                                    

June                                      

July                                    

Sales

 £          150,000.00

 £           300,000.00

 £              300,000.00

 £            450,000.00

 £           600,000.00

 £           300,000.00

 £         300,000.00

 £               75,000.00

 £             150,000.00

Collection

 

 

 

 

 

 

 

 

 

5% first month

 £              7,500.00

 £             15,000.00

 £                15,000.00

 £              22,500.00

 £             30,000.00

 £             15,000.00

 £           15,000.00

 £                 3,750.00

 £                 7,500.00

80% Second Month

 

 £           120,000.00

 £              240,000.00

 £            240,000.00

 £           360,000.00

 £           480,000.00

 £         240,000.00

 £             240,000.00

 £               60,000.00

15% third Month

 

 

 £                22,500.00

 £              45,000.00

 £             45,000.00

 £             67,500.00

 £           90,000.00

 £               45,000.00

 £               45,000.00

 

 £              7,500.00

 £           135,000.00

 £              277,500.00

 £            307,500.00

 £           435,000.00

 £           562,500.00

 £         345,000.00

 £             288,750.00

 £             112,500.00

Opening cash

 £          110,000.00

 £           117,500.00

 £              252,500.00

-£            277,250.00

-£           107,000.00

 £           208,250.00

 £         333,500.00

 £             451,250.00

 £             520,250.00

Expense

 

 

 £              807,250.00

 £            137,250.00

 £           119,750.00

 £           437,250.00

 £         227,250.00

 £             219,750.00

 

Closing cash

 £          117,500.00

 £           252,500.00

-£             277,250.00

-£            107,000.00

 £           208,250.00

 £           333,500.00

 £         451,250.00

 £             520,250.00

 £             632,750.00

3.2 How unit costs will be calculated to make pricing decisions

The organization will utilize the action based cost to assess the unit cost. In this approach, each table will distribute cost on the premise of share of hours expected to attend to particular tables (Sisaye and Birnberg,  2010). For example, if the organization has 200 customers, the organization may work out the work, providers, and vitality expected to serve the 200 customers fairly taking a gander at each unit independently.

3.3 Investment appraisal techniques 

NPV:-

Criteria; Accept NPV of 2m

Investment 2                

 

 

Investment 1                 

 

Years

  £m

P.V.I.F 14%

Discounted cash flow

 

Years

  £m

P.V.I.F 14%

 

1

0.80

0.88

0.70

 £           0.70

1

1.600

0.877

1.404

2

1.40

0.77

1.08

 £           1.78

2

2.800

0.769

2.155

3

2.00

0.67

1.35

 £           2.43

3

3.400

0.675

2.295

4

2.40

0.59

1.42

 

4

3.600

0.592

2.131

5

2.30

0.52

1.19

 

5

4.000

0.519

2.077

6

2.60

0.46

1.18

 

6

4.200

0.456

1.913

 

 

Initial Outlay

-4.40

 

 

 

Initial Outlay

-8.600

 

 

NPV

2.53

 

 

 

NPV

3.375

 

From The above NPV Analysis, it is apparent that the venture doesn't the foundation of since, both venture delineate a positive NPV of less than 2M. Consequently the organization must consider interest in venture one since; unit has a high NPV of 3.375 Million not at all like speculation worth NPV of 2.53 Million.

Payback period

Choice criteria; Accept the venture if takes less 3.5 years

Investment 1                 

 

 

Years

  £m

P.V.I.F 14%

 

 

1

1.600

0.877

1.404

 £        1.40

2

2.800

0.769

2.155

 £        3.56

3

3.400

0.675

2.295

 

4

3.600

0.592

2.131

 

5

4.000

0.519

2.077

 

6

4.200

0.456

1.913

 

 

 

Initial Outlay

-8.600

 

 

 

NPV

3.375

 

 

 

 

 

 

Investment 2:

 

 

 

Years

  £m

P.V.I.F 14%

Discounted cash flow

 

1

0.80

0.88

0.70

 £           0.70

2

1.40

0.77

1.08

 £           1.78

3

2.00

0.67

1.35

 £           2.43

4

2.40

0.59

1.42

 

5

2.30

0.52

1.19

 

6

2.60

0.46

1.18

 

 

 

Initial Outlay

-4.40

 

 

 

NPV

2.53

 

Payback period = (2years+{2-1.78/1.35)=1.2 Years

From the above payback time frame examination, it is clear that venture one is perfect since, it takes 1.29 years to recoup the underlying capital contributed and thus the organization must consider interest in speculation one.

Average Rate of Return

Investment 2                 

 

Investment 1                 

 

Years

  £m

P.V.I.F 14%

Discounted cash flow

Years

  £m

P.V.I.F 14%

 

1

0.80

0.88

0.70

1.00

1.60

0.88

1.40

2

1.40

0.77

1.08

2.00

2.80

0.77

2.15

3

2.00

0.67

1.35

3.00

3.40

0.67

2.29

4

2.40

0.59

1.42

4.00

3.60

0.59

2.13

5

2.30

0.52

1.19

5.00

4.00

0.52

2.08

6

2.60

0.46

1.18

6.00

4.20

0.46

1.91

 

 

 

6.93

 

 

 

11.98

 

 

Initial Outlay

4.40

 

 

Initial Outlay

8.60

 

 

ARR

1.575

 

 

ARR

1.392

TASK 2

4.1 Discuss the key components of financial statements

Income statement:- It is financial statement tool that presents incurred expenses and gained revenue. Therefore, economic position of organization is analyzed (Ehrhardt, 2016). In addition to this, by analyzing income statement, balance of income and expenditure is evaluated by checking out this financial statement.

Statement of cash flows:- The Statement of cash flows shows the sources and utilization of money for a settled time allotment. The Statement of cash flows educates monetary masters and leasers about the indissolubility of the business, where the business is getting its money from, and on what it is spending its money

Explanation of changes in equity and gains:- The Statement of held income is a measure of the advantages of the business operation that have been made through beneficial business exercises, held in the business, and not paid out to shareholders as benefits. Generally, a ton of held pay is seen as a sign that the Organization n has done well and is reinvesting its advantages in itself (Few, 2009). In light of current circumstances, a start-up or early-sort out business frequently defies reporting negative held incomes it obliges venture to amass a business and get the opportunity to be particularly advantageous.

Statement of financial position:- The Statement of money related position is the essential "what do we have" explanation. The Statement of financial position exhibits what the Organization n has (assets, for instance, money, documentation s of offers, and Assets) and what the Organization n owes (liabilities, for instance, loan boss liabilities and advances). Any remaining divergence between these two entire ties (the benefits and the liabilities) shows what has a place with shareholders as their value interest (Madura, 2007). These three entire ties must adjust (Moyer, 2015). The Statement of budgetary position demonstrates a review of where the Organization n is at one point in time.

Notes to the money related statement:- Business can pick the bookkeeping standard on which to base their money related explanations. The notes to the money related articulations educates clients what technique choices have been made, and furthermore other information that can be vital to an aggregate cognizance of the budgetary clarifications.

4.2 Comparing the format used by Osborne Terrace restaurant  to presenting their financial statement with that of a partnership

Statement of Equity:- Organizations and organizations both make a declaration of significant worth, moreover called a held profit statement. This shows how much the business has left over after each one of its commitments are paid. In an affiliation, the declaration of significant worth exhibits every accessory's bestow of the business' an incentive along to total esteem (Moyer, 2015). An association's declaration of significant worth has only a solitary fragment - indicate esteem. Both have the measure of capital the business had toward the begins of a declaring period - consistently a year - trailed by additional endeavors, pay and withdrawals. The last line exhibits how much in capital is left over.

Balance Sheet:- The monetary record is a documentation of advantages, liabilities, and proprietor’s value. As opposed to speaking to a time span, for instance, a year, quarter or month, it's "beginning at" a particular date. Resources are at the top and include money, endeavors, receivables and distinctive things, for instance, arrive. Liabilities are next and consolidate the business' commitments. Esteem, or held benefit is at the base; affiliations show every associate's esteem, with a total, while Business demonstrate mean shareholder esteem (Lee, 2011). Mean liabilities notwithstanding accessory or shareholder esteem squares with total assets for both affiliations and organizations.

Income Statement:- The income statement exhibits a business' income and cost over a set time period. Income and income are at the top, and expenses are at the base, then the business net income estimation (Christ and Burritt, 2013). Net pay is equal to total pay less total expenses. Regardless of the way that there are complexities between the bookkeeping report and explanation of significant worth for Business and ventures, the pay announcement is the same (unless pay and expenses are requested by assistant.

Cash Flow Statement:- The income statement for both Business and endeavors exhibits how much trade turns out and goes out over a time period. It changes income from working and contributing exercises to money. It in like manner portrays the installment made by the business for financing and charges, and delineates the business' ability to cover its responsibilities (Floyd, 2005). The income clarification not simply shows the organization's and the association's past activities, it demonstrates future activities, at well (Albelda, 2011). Like the income decree, the Organization n and corporate income clarifications are equivalent

4.3 Interpreting the current money related statement of Osborne Terrace restaurant utilizing proper proportions and making examination with the earlier year

Liquidity/Financial Health

2016

2015

Current Ratio

Current Asset/Current Liability

0.33

0.23

Quick Ratio

Current Asset-stock/Current Liability

0.18

0.08

 

 

 

 

Investor ratio

 

 

 

Return on Assets %

Net income /total Asset

0.06

0.05

Return on Equity %

Net Income/shareholder's equity

0.31

0.24

Ratio analysis is financial component by which economic position of organization is gained. It is considered as comparative tool to compare last years' profitability. It leads to making decisions for further years' activities. However, different kinds of ratios are evaluated and analyzed including profitability and liquidity that presents profit earning capacity as well market position of entity.

For setting up Osborne restaurant, decision maker analyses other organization's ratios thereby different ideas can be implemented for funding. The company's ratios are determined as:-

Liquidity ratio:- Under this ratio analysis, gross and net profit margin are evaluated through which profit earning potential of organization is analyzed. As per comparison, it is evaluated that in 2015, current of the company is 0.23 while in 2016, this ratio is 0.33 which is increased through effective production and distribution system. However, quick ratio in 2015 is 0.08 and in comparison to this, for 2016, this ratio is enhanced by 0.10 that is 0.18.

Investor ratio:- Through this ratio analysis, return on asset and equity are measured thereby performance of organization is gained that affects further investment and return on share capital also interrelated with financial performance of entity. It is recognized that return on assets in 2015 is 0.05 while in 2016 this ratio analyzes as 0.06. Moreover, return on equity in 2015 is 0.24 and in 2016 it increases and value determines as 0.31. On the basis of this interpretation, ideas can be generated for establishment of restaurant to succeed  government plan.

As per ratio analysis, new branch of Osborne can be established as because of effective financial position. Planning for expansion of organization can be done through managing resources as well making decisions for proper investment and projecting efficiently.

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Reference

  • Albelda, E., 2011. The role of management accounting practices as facilitators of the environmental management: Evidence from EMAS organisations. Sustainability Accounting, Management and Policy Journal.
  • Bowen, R. M., Call, A. C. and Rajgopal, S., 2010. Whistle-blowing: Target firm characteristics and economic consequences. The Accounting Review.
  • Burritt, R. L. and Schaltegger, S., 2010. Sustainability accounting and reporting: fad or trend?. Accounting, Auditing & Accountability Journal.
  • Christ, K. L. and Burritt, R. L., 2013. Environmental management accounting: the significance of contingent variables for adoption. Journal of Cleaner Production.
  • DRURY, C. M., 2013. Management and cost accounting. Springer.
  • Ehrhardt, M., 2016. Corporate Finance: A Focused Approach. New York: Springer.
  • Few, C., 2009. Advances in Investment Analysis and Portfolio Management New York: Cengage Learning.
  • Floyd, D., 2005. Financing International Projects. New York: Springer.
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