Managing financial resources and decisions

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MANAGING FINANCIAL
RESOURCES & DECISIONS

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Table of Contents
INTRODUCTION......................................................................................................................1
TASK 1.......................................................................................................................................1
AC 1.1 Sources available to the business organizations....................................................... 1
AC 1.2 Implication of internal and external finance sources................................................ 2
AC 1.3 Most appropriate source of finance for Sweet Menu Restaurant..............................3
TASK 2.......................................................................................................................................4
AC 2.1 Cost of identified appropriate finance source for Sweet Menu Restaurant.............. 4
AC 2.2 Importance of financial planning for the Sweet Menu Restaurant for their new......4
business plan..........................................................................................................................4
AC 2.3 Information needs of different decision makers in Sweet Menu Restaurant business5
AC 2.4 Impact of finance sources in the business financial statements................................6
TASK 3.......................................................................................................................................7
AC 3.1 Analysis of budgets and take appropriate decision...................................................7
AC 3.2 Calculation of unit costs (meal cost) and take pricing decisions.............................. 8
AC 3.3 Using investment appraisal techniques to know the project viability.......................9
TASK 4.....................................................................................................................................10
AC 4.1 Main financial statements produced by the organization........................................10
AC 4.2 Appropriate formats of financial statements for different type of businesses........ 11
AC 4.3 Interpretation of financial statement using ratio analysis method.......................... 15
CONCLUSION........................................................................................................................ 16
REFERENCES.........................................................................................................................17

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INTRODUCTION
Success of business depends greatly upon the availability of finance. The amount of
cash available for spending in business is termed as finance. There are number of sources
available to the business organizations to mitigate their financial need. It can be fulfilled from
the sources that are available internally in the organization. Moreover, outside sources also
can be used for such purpose. In this report, financial sources are identified for a reputable
Restaurant company named Sweet Menu Restaurant. The Restaurant is operating in Gants
Hill in East London founded before 10 years ago. This Restaurant has a good corporate
image and well known position in the market as it serves various types of inter-continental
foods at fair prices. Now, company’s owner desires to expand their business by opening its
branches in Central London and Croydon. Therefore, the present report helps in determining
the available financial sources, their implication as well as advantage and disadvantage for
the company. Furthermore, the report will explain that how managers can take efficient and
strategic decisions to manage these sources.
TASK 1
1.1 Sources available to the business organizations
Financial sources are categorised into two that are internal and external. Internal
financial sources comprise the sources that are available in the business whereas external
finance sources include the sources that can be taken from the outsiders.
Type of Internal sources Description
Angel investors
Under this type of source, business can take loans
from their friends and relatives. Business owner can
get funds from their friends and relatives for different
time period at cheaper interest rate that helps to
eliminate or minimize the financial needs.
Retained earnings and profits of other Balance of business profit which is not distributed as

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business dividend is called retained earnings (Broadbent and
Cullen, 2012). All the corporations can use this
source for fulfilling their financial need. Along with
the retained earnings, owner also can use profit of
their other businesses.
Owners personal savings
Personal savings of the owner can also be used as a
financial source for the expansion of business. It is
mostly used in case of newly business organization
when outside sources are available in very less
amount.
External sources Description
Issuing shares
There are two types of shares that are
ordinary and preference share capital.
Business can issue these shares in the market
in order to get funds easily.
Borrowed funds
Bank loan is the most common source of
borrowed funds (Thomas, 2001). Bank gives
loans to the corporate sectors for a specified
time period at an implied interest rate.
Lease
Under the lease financing, business can attain
rights for using assets without having
ownership (Brayley and McLean, 2001). It is
a contract between the asset’s owner and user
that provides rights for the use of assets at a
rental charges.

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Venture capital
Venture capital can be acquired in the highly
potential growth earning businesses. Venture
capitalists are much interested to invest in
such businesses that can provide higher
returns to them and fulfil long term business
requirements.
1.2 Implication of internal and external finance sources
Internal sources Implications External sources implications
Angel Investors: Borrowing loans from
friends and relatives, business needs to pay
interest to them. It will be paid on timely
basis.
Issuing shares: On the amount of equity
share capital, dividend rate is not fixed.
However, preference share capital requires
regular dividend payments at fixed rate.
Another implication is that ordinary
shareholders have voting rights. It gives
controlling rights to the shareholders in order
to take part in operating functions. Thus, it is
clear that diversification of control is also
existed in this source.
Retained earnings and other business profits:
Retained earnings involve opportunity cost. It
refers to the loss of return that businesses can
get through using retained earnings in any
investment proposal.
Borrowed funds: On the amount of borrowed
loans, business has to pay timely interest
charges to the loan provider. Thus, regular
interest payment brings financial risk to the
business. Another implication is that they
have to keep the business assets as a

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collateral security to the banks (Managing
financial resource and decisions, n.d.). In
case of any default in payment, banks have
legal rights to discharge business assets at the
market place. Further, it will greatly impact
the corporate image of company in an
adverse manner.
Personal savings: This is a cheaper source of
finance as it does not involve any cost to the
business. Moreover, by investing personal
savings, fixed financial burden can be
reduced to a great extent. Main reason for this
is that businesses have to take lower funds
from the outsiders.
Lease: Business does not need to purchase
assets for the purpose of using. In this source,
ownership will not be transferred but
business can lease assets from others. For
that, business has to pay rental charges on the
periodical basis. However, benefit of using
this source is that rental charges are
allowable expenditures for the tax purpose.
1.3 Most appropriate source of finance for Sweet Menu Restaurant
The given scenario stated that Sweet Menu Restaurant needs finance amounted to
300000£ and 500000£ for the business expansion. On the basis of above identified
implications, it can be said that under the internal sources, retained earnings and profits from
other businesses will be the best among them. The reason for such decision is that it does not
involve higher cost to the company. Further, these are the regular finance sources and
eliminate the immediate finance requirements also. However, if company receives funds from
the angel investors, then business will need to pay interest to them. On contrary, through
ploughing back of profits, firm can generate funds without any cost.
Moreover, Restaurant has a good market position and well known in the market. Loan
capital will be the most appropriate finance source under the external sources. The reason for

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such decision is that banks and other financial institutions provide loans on the basis of their
credit worthiness. Therefore, loans will be available easily to the Sweet Menu Restaurant.
Moreover, it fulfils the short term, medium term and long term finance requirements of
business. In addition to it, business has good reputation in the market thus, company is able to
bear fixed financial burden. Other benefits will be that control diversification can be
eliminated through using this finance source. Thus, it has become clear that both types of
sources are appropriate for Sweet Menu Restaurant for their expansion plans.
TASK 2
2.1 Cost of identified appropriate finance source for Sweet Menu Restaurant
The cost of retained earnings and other business profits for Sweet Menu Restaurant
business is opportunity cost. It concerns with the loss of possible returns that the business can
receive by investing the profits in other businesses or in other available alternative investment
proposal. Moreover, higher rate of ploughing back of profits may create negative impacts to
the shareholders.
Furthermore, the amount of borrowed funds imposes cost of regular payment of
interest. The interest rate may be fixed or volatile also called fluctuating. Fixed rate imposed
fixed amount of financial burden to the company (Managing financial resource and decisions,
n.d.). However, in case of fluctuates interest rates, the financial liability cannot be assessed in
a correct manner. Another, the need of giving business assets as a collateral security will be
included in the cost. Further, in case of having business loss it will affects the business
operations in a negative direction. In addition to it, at the time of maturity, Sweet Menu
Restaurant has to repay the loan amount.
2.2 Importance of financial planning for the Sweet Menu Restaurant for their new
Business plan
Financial planning plays a vital a significant role in the organization success. It
mainly concerns with the process of setting business goals, targets and objectives and making
plans for go ahead (Dunn and Liang, 2015). Financial manager is greatly responsible for

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making financial plans for the business. According to the scenario, Sweet Menu Restaurant
business is making plans for expanding their business operations. Therefore, the need of
making strategic financial plans will be arise for the business. It helps to acquire sufficient
amount of funds and manage it in a proper way so as to achieve financial goals.
Initially, the business financial planner has to determine the current available finance
sources that can be used for opening branches in Central London and Croydon. He has to
make strategic business plans to met their financial need at lower the cost factor. After that,
the financial manager has to forecast the future incomes and expenditures that can be occur
from the operational activities (Snider, 2015). It will be estimate for all the projects,
departments and the business divisions. The managers also identify the cash need and make
plans for raising the cash funds in business. Finance managers can prepare budget for that
purpose that combines all the probable incomes and expenditures for the future period. It
aims at running business operations successfully through controlling business cost and
maximize its incomes. This in turn, company will be able to generate higher the profits.
Furthermore, financial policy helps to manage the business funds in an effective and efficient
manner. Overall, the financial planning helps to achieve the predetermined financial targets
of business.
2.3 Information needs of different decision makers in Sweet Menu Restaurant business
Different users need distinct information to take better decisions. In Context to Sweet
Menu Restaurant business, the information need of different decision makers are explained
below:
Decision makers Information need
Business managers
In the present era, running business successfully is the
responsibility of managers. Therefore, they require
information regarding all the incomes and expenditures
from the financial statements. The managers analyse and

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evaluate the business expenses with the objectives of
making effective control (Slack, Chambers and Johnston,
2010). Further, budgeting is also an important tool that used
by managers to manage the cash sources and its
applications to ensure adequate cash availability. Through
managing the funds appropriately, financial position and
operational performance can be improved in a great
manner.
Creditors
They provide credit to the Sweet Menu Restaurant business,
therefore they analyse the business creditworthiness. They
analyse the financial statements and cash flow statements to
identify the liquid availability and cash earning capacity
(Zager and Zager, 2006.). Further, they analyse the
profitability statement to know the Restaurant business
profits.
Government
Government have the objectives to increase their incomes
sources. Tax is the most important source of government
incomes that is calculated on earned business profits.
Therefore, government need information regarding business
profits to identify the tax obligations and in case of any
default, they impose penalties and other lawsuits.
2.4 Impact of finance sources in the business financial statements
All the business transactions show in the business financial statements. It includes
financial and operating transactions. Therefore, the type of financial sources that have been

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used by Sweet Menu Restaurant business will impact the financial position statements.
However, the cost of financial statements impacts the profitability statement.
As stated earlier, most appropriate finance source for Sweet menu Restaurant are
retained earnings and borrowed funds. The cost of retained earnings that is opportunity cost
will not show in the profit and loss account. However, the amount of retained earnings used
will be shows in the statement of changes in retained earnings.
On contrary, cost of borrowed funds that is interest will be show in expenditure sides
of profit and loss account. Further, it will be deducted from the cash in the company's current
assets head. According to the given scenario, the cost will be show in profit and loss account
as interest charges however, under the current assets group; it will be subtracted from cash
and banks (Managing financial resource and decisions, n.d.). Another, the taken amount of
borrowed funds will be show in balance sheet. In context to Sweet Menu Restaurant business,
the amount will be show in liability side as long term loan under the noncurrent liabilities
head. Further, the amount will raise the business cash hence; it will be show in assets side
under the current assets group through increasing the cash and bank balance.
TASK 3
3.1 Analysis of budgets and take appropriate decision
The present scenario stated the cash and inventory budget of Blue Island Restaurant
for the upcoming four months. The company is a great competitor of Sweet Menu Restaurant
business. Under the cash budget, the Restaurant directors summarize the all estimated cash
receipts and payments together.
The cash budget can be analysing with identifying the changes in cash incomes and
expenses (Whited, 2014). In context to Blue Island Restaurant business, the percentage
changes are calculated as under:

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Percentage
changes in cash
sales
Changes in cash
sales/Previous month
sales*100 3.3333333333 16.1290322581
11.11111111
11
Percentage
changes in cash
expenses
Changes in cash
expenses/Previous
month expenses*100 -71.5299877601 13.7575236457
83.52229780
8
The prepared budgeted figures indicate that sales only a single factor which
contributes the towards the cash incomes. According to the budget it can be reported that the
cash sales are increasing in all the four subsequent months. The sales are 15000£, 15500£,
18000£ and 20000£ respectively. However, the percentage changes are 3.33%, 16.129% and
11.11% indicate that in the month of November, sales are increasing at higher rate
comparatively than other periods. However, in the month of October, sales increases by only
3% while in the month of December, the percentage changes get declined from 16.129% to
11.11%. It indicates that in this month, sales are increasing at lower rate. Therefore, the
managers should make planning to increase business sales (Cox, 2014).
On contrary, various components are existed that contributes towards the business
expenditures. It includes capital expenditures for buying assets such as Van and Furniture and
Fittings. However, operational expenses includes expenses for paying salaries and wages,
petrol charges, lighting and energy charges, insurance charges and purchase inventory
(Whited, 2014). The total cash expenses for the business are 40850£, 11630£, 13230£ and
24280£ respectively. The expenditures tend to decline in the month of October and increase
in both the following months. However, the percentage changes indicate that in the month of
October, the cash expenses declined by 71.53% due to eliminate the capital expenses. This in
turn, the net cash balance get converts from adverse balance to positive balance amounted to
3870£. After this month, it tends to increase by 13.75% due to increase salary and wages,
purchase and lighting and energy expenses while the available cash at the ending period is
positive amounted to 1290£. The reason behind that is the net cash balance for the month is

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comparatively higher than cash availability at the ending month of October. Once again,
expenditures increases by 83.52% due to acquiring the fixed assets amounted to 10000£.
Another reason for such increases is increasing the operating expenses of salary and wages,
lighting and energy and purchasing inventory. This in turn, resulted in negative cash balance
and adverse cash availability at the month ending. On the basis of above identification, it can
be reported that the months in which capital expenditures will be occur lead to highly
increase in the cash expenses results in adverse availability of cash. Through implementing
an effective control tool, expenditures can be minimised (Amoako and et. al., 2013). Apart
from it, inventory budget indicate that Restaurant is paying 60% of purchase obligations in
same month and 40% in the next month.
3.2 Calculation of unit costs (meal cost) and take pricing decisions
Blue Island Restaurant cost sheet indicate costs for purchasing steak, vegetables and
other ingredients, making payment to labour and all the other overheads. The overheads are
absorbed using absorption costing technique. The cost is the basis for setting price for the
offered meal. The scenario depicts that prices are decided by adding mark up cost of 40%.
Along with it, the rate of value added tax (VAT) is 20%. Thus, prices can be determined as
under:
Item name Cost (In £)
Steak 3
Vegetables and other ingredients 1.5
Labour 3.5
Overheads (using absorption costing technique) 2
Meal cost 10
Add: mark up percentage @40% 4
VAT @20% 2

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Set meal prices 16
Food cost percentage: It can be calculated by dividing total costs with the decided
sale prices. The food cost percentage for Blue Island Restaurant business is computed below:
Food cost percentage = Total Ingredients costs/Sale price
= 10£/16£*100
= 62.50%
Thus, it can be reported that deciding the meal prices at 16£, company is earning
37.50% profit on total sales. It indicates that company is earning good profitability.
3.3 Using investment appraisal techniques to know the project viability
The scenario stated that Blue Island Company have available space for open its
branches for expansion purpose. Two investment proposal are available that can be go ahead
to utilize the available space.
Investment appraisal techniques: Two techniques require to be applied with both the
proposals that are net present value and payback period. The time period taken by the
proposal to get back its initial outflow called payback period (Baum and Crosby, 2014).
However, the difference between the discounted cash inflows and initial outlay called net
present value.
Calculation of payback period
Year Proposal 1 Cumulative Proposal 2 Cumulative
0 -1200 -1200 -1200 -1200
1 800 -400 300 -900
2 600 200 400 -500
3 400 600 500 0
4 200 800 600 600

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5 50 850 500 1100
Residual value 0 850 50 1150
Payback period of proposal 1st
= 1 year + (400£/600£)
= 1.667 year
Payback period of proposal 2nd
= 3 year
Calculation of net present value
Year Proposal 1st
Discount
factor@10% Discounted cash flow
0 -1200 1 -1200
1 800 0.909 727.2
2 600 0.826 495.6
3 400 0.751 300.4
4 200 0.683 136.6
5 50 0.621 31.05
Net present value 490.85
Year Proposal 2nd
Discount
factor@10% Discounted value
0 -1200 1 -1200
1 300 0.909 272.7
2 400 0.826 330.4
3 500 0.751 375.5
4 600 0.683 409.8
5 500 0.621 310.5
Residual value 50 0.621 31.05
NPV 529.95

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On the basis of above computation, it can be suggested that Blue Island Restaurant
has to adopt 2nd
investment proposal due to higher the net present value of 529.95£. However,
the payback period of this proposal is higher to 3 years but decision cannot be taken on the
basis of this method. The reason behind that is the method does not identify the overall
viability of the investment proposal (Götze, Northcott and Schuster, 2015).
TASK 4
4.1 Main financial statements produced by the organization
Every business organization desire to know their performance after the end of the
financial year. Therefore it prepares financial statements includes income statement and
financial position statements.
Particular Description
Income statement This statement summarizes data regarding business incomes and
expenditures. All the operating transactions are combined in this
statement (Miller-Nobles, Mattison and Matsumura, 2015). The
excess of incomes over expenditures indicate business profits.
However, in case where expenditures are higher than business
incomes indicate worst business performance due to loss available.
Profit and loss account is known as income statement indicates
gross as well as net profits. Gross profit is the difference between
the total sales and cost of goods sold. However, the difference
between gross profit and total indirect expenses indicate net profit or
loss.
Balance sheet It combines all the assets and liability of business. Under the assets
side, all the current, noncurrent and intangible assets will be shown.

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However, liabilities include shareholders fund, current liability and
long term liability. Financial performance can be determined from
this statement. Investors and creditors use this statement to analyse
the solvency position and make risk and reward analysis.
4.2 Appropriate formats of financial statements for different type of businesses
Every business organization prepares financial statements in the prescribed formats by
Generally Accepted Accounting Practices (GAAP) and International Financial reporting
Standards (IFRS) (Picker, 2016).
Sole proprietorship: In this form of organization, business owner have not legally
obliged to prepare financial statements. They prepare profitability statement and balance
sheet for their own purpose. The sole proprietors follow simple accounting procedures and
prepare financial statements so as to ascertain business profitability.
Partnership: Under this form of organization, association of two or more person
establish the organization. They make agreements for deciding the terms about their profit
sharing ratio in which partners can share the business profits. In case of partnership firms, the
business units need to prepare capital accounts for each of the partners.
Company: It is a legal body that came into existence by incorporating with the
company law. The owners are the ordinary shareholders who make investment in the
company with the objective of getting larger the return. The publically listed company
prepares financial statements as per international and domestic accounting standards. Many
of the organizations need to follow International Financial Reporting Standards (IFRS) so as
to report financial statements. Moreover, they need to publish financial statements so as to
meet information need of stakeholders.

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4.3 Interpretation of financial statement using ratio analysis method
After preparing the financial statement, business needs to analyse their performance
by adopting various analytical techniques. Ratio analysis is the most significant among them.
It calculates different kind of ratios that represent relationship between two components of
the statements (Chan, 2015). It makes analysis of business profitability, solvency, liquidity
and efficiency.
Ratios Formula
Sweet Menu
Restaurant
Blue Island
Restaurant
Profitability ratio
Net Profit margin Net profit/sales 0.01 0.13
Gross Profit margin Gross profit/sales 0.63 0.66
Liquidity ratio
Current Ratio
Current assets/
current liabilities 1.78 0.63
Quick Ratio
Current assets –
Inventory/ current
liabilities 0.63 0.15
Efficiency ratio
Asset Turnover Net sales / net assets 1.79 2.4
Solvency ratio
Debt/equity ratio Debt/Equity 0.41 0.58

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Profitability ratio: The gross profit of Blue Island and Sweet Menu Restaurant
businesses are 0.66 and 0.63. However, net margin ratio is 0.13 and 0.01 respectively. Both
the ratios are higher in case of Blue Island indicate that business have better operational
performance comparatively than Sweet Menu Restaurant business.
Liquidity ratio: The current ratio indicates proportion of current assets and current
liability. Blue Island Restaurant has current ratio of 0.63 while in case of Sweet Menu
Restaurant the ratio is 1.78. Another measurement of the liability is quick ratio. The ratio of
Blue Island and Sweet Menu Restaurant are 0.15 and 0.63. Both the ratios are higher in
Sweet Menu Restaurant business implied that this business has greater liquid availability.
This in turn, it can be said that Sweet Menu Restaurant business is highly able to meet its
short term obligations effectively.
Efficiency ratio: Assets turnover ratio of Blue Island and Sweet Menu Restaurant
Business are 2.4 and 1.79. It indicates that Blue Island Business Company is using business
assets efficiently due to higher the turnover ratio (Henry and Robinson, 2015).
Solvency ratio: Blue island Restaurant has debt equity ratio of 0.58 while in case of
Sweet Menu Restaurant business the ratio is 0.41. Higher the debt to equity ratio indicates
higher the risk and vice versa. Thus, it can be said that Blue Island Restaurant is using higher
level of debts as compared to the business equity.

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CONCLUSION
The present report concluded that financial sources and making effective financial
decisions are crucial for the business. Financial planning is plays a significant role in carrying
out business successfully. It helps all the business organizations to acquire finance sources
that imposed minimum the cost to the company. This in turn, business can yield higher the
profitability. In addition to it, the report concluded that investment appraisal techniques are
most important tool through which business can invest the funds in most profitable
investment proposal. On contrary, ratio analysis is the tool that analyse the financial
statement in every aspect.
REFERENCES
● Amoako, K.O. And et. al., 2013. Cash Budgetan Imperative Element of Effective
Financial Management. Canadian Social Science.
● Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
● Broadbent, M. and Cullen, J., 2012. Managing financial resources. Routledge.
● Chan, J.L., 2015. New development: China promotes government financial accounting
and management accounting. Public Money & Management.
● Cox, P., 2014. Master Budget Project: Miscellaneous Cash Flow. Strategic Finance.

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