Task 1.1: Identify the Sources of Finance available to a business.

Debt

Financial Institutions External

Leasing External
Retail Financing External
Additional Partner (selling equity) External/ Internal
Loans from Friends and Family

Equity

Bootstrapping Internal
Debt Financing External
Equity Financing External
Angel Investors External
Initial Public Offering External

Task 1.2: Assess the implications of the sources of finance identifies

in task 1.1.
Implications of the two main types of financing available to a business:
Debt Financing is the money provided by an external party, such as a bank, other
financial institutions, a credit union or a building society.
Financial institutions such as banks or credit unions are both long and short term of
financing methods available to a business to as a solution to take care of its
financing problems. Business loans would be an easy option for the Sweet Menu
Restaurant to undertake for its expansion because as they are already established
in the market, their credibility is very favorable and would be a positive factor for
the bank to consider when giving the loan.
Apart from the leasing is a very good option for the restaurant to expand its
operations. The building in which they can start new operations can be leased. Also
the heavy machinery which may be used in the back end of the business can also
be leased through a financial institution. This way they wouldnt need to incur a
short term high capital expenditure and would have the ability to pay the lease
payments through monthly revenues.
For their short term requirements, like cutlery, crockery or raw material, retailers
can be used as a source of financing. Store credit can be extended by the retailers
to the restaurant so that it doesnt face initial liquidity issues. Even though this
would be a higher interest option, yet this can be a viable solution if the restaurant
wishes to expand with small reserves, or can convince the retailers that they will
pay back quickly in return for a lower interest rate be charged.

Lastly a very viable solution in this regard can be to add a fourth or fifth partner to
the business. Not only would that person bring in the necessary capital but would
increase the managing power of the committee which would be needed after
expansion. On a contrary note these same friends and family who were previously
being offered to join the partnership in capacity of a partner can be asked for a loan.
Not only would that have favorable interest rates but will also have flexible return
conditions.
Equity Financing is the money sources internally by a business.
In terms of equity financing self funding is one of the first types of financing which
a person considers to use in terms of starting a new business or during expansion
plans. This type of financing is often called bootstrapping. These personal
finances come from the business savings or from personal bank accounts. Also
other investors or lenders would like that your own personal stake be involved
before they entrust you with their money or finances.
Partnership option which was provided as a debt option can also be used as an
equity option, because when a new partner would be added to the partnership his
equity would be at stake. This option should be carefully considered because often
personal relationships are at stake for the partners.
Private investors can contribute funds in the restaurant business in return for fixed
incomes or variable profits based on the earnings of the company. Angel investors
can be used to provide internal experience in terms of operations optimizations
along with the funds they provide.
The restaurant business can even go for an IPO, which means they float their shares
in the stock market. The type of business they operate would change but larger
amounts can be raised for expansionary purposes. Even though this is an expensive
and complex option, yet a financial analyst can help through with the process.

Task 1.3 Evaluate the most appropriate sources of finance for Sweet
Menu Restaurant expansion plans.
From all the resources which are currently available, as a financial analyst I believe
that the following sources would be most appropriate:

Loan/ Investor
Additional Partner
Bootstrapping
Leasing

Taking a loan from a bank or any other financial would be a good option for the
restaurant. They could cover the interest expenses through the monthly revenues
they generate. As they have a good standing in the market they would be able to

get good credit conditions. Taking money from an investor would have the same
effect.
Adding an additional partner might dilute the holding in the company of the
previous partners but the new partner would bring his additional skills along with
the money which can benefit the restaurant in the long run. If a specific skill set is
lacking in the business then such a partner can be made interested to join in.
Adding personal funds would be a risky option yet helpful as there would be no
return issues as partners would realize the situation the business is in and would
decide return accordingly, so it might not be fixed in nature and would be
proportional.
Leasing can ease the high capital expenditure and would be similar to renting
equipment. This is a safe option because of newer equipment comes up the lease
can always be updated and newer machines can be added in the restaurant so
that it is up to date.

Task 2.1 Analyze the costs of the different sources of finance that
you have identified for Sweet Menu Restaurant in task 1.3 above.
The basic costs of a loan apart from the management fees would be the fixed
returns which the restaurant would have to pay to the bank or the investor.
Apart from that the change in interest rates might prove to be a cost factor
to the business owners of the restaurant.
The costs of the adding new partners would be that the partner would take a
salary/ return on his investment. Plus there might be some drawings from his
behalf which imposes some costs. The loss of power in terms of management
of the previous 3 owners would post another non financial cost which needs
to be taken into account.
Adding personal funds would be risky as return would never be constant and
would be variable. Also the loss of present consumption would be an
opportunity cost which should be taken into account. Even though it is non
financial in nature still it has been observed that if not taken into account
opportunity costs can have repercussion on the valuations of the company.
Apart from the rental agreement with the leasing company which involves
payment of rent, the maintenance of the equipment or premises would be a
cost which should be taken into account before going for this venture. Also a
basic administration fees will be charged by the leasing company for the
provision for their services.

Task 2.2 Explain the importance of financial planning for Sweet

Menu Restaurants with reference to the new business project.
Found financial planning is a very important component and is essential for any
successful business. Especially for restaurants, financial planning is necessary for
smooth working of functions as it involves fast moving goods and requires day to
day supplies of raw materials. So financial planning is essential for the following
reasons:
Collections of Optimal Funds: The financial planning estimates the precise
requirement of funds which means to avoid wastage and over-capitalization
situation. (Pujari)
Efficient Capital Structure mix: Funds can be arranged from various sources and
are used for long term, medium term and short term. Financial planning is
necessary for tapping appropriate sources at appropriate time as long term funds
are generally contributed by shareholders and debenture holders, medium term by
financial institutions and short term by commercial banks. (Pujari)
Correct investments: Financial plan suggests how the funds are to be allocated for
various purposes by comparing various investment proposals. (Pujari)
Optimization of Operational Activities: The success or failure of production and
distribution function of business depends upon the financial decisions as right
decision ensures smooth flow of finance and smooth operation of production and
distribution. (Pujari)
Financial Control: Financial planning acts as basis for checking the financial
activities by comparing the actual revenue with estimated revenue and actual cost
with estimated cost. (Pujari)

Efficient use of funds: Finance is the life blood of business. So financial planning is
an integral part of the corporate planning of business. All business plans depend
upon the soundness of financial planning. (Pujari)
Avoid uncertainty: By anticipating the financial requirements financial planning
helps to avoid shock or surprises which otherwise firms have to face in uncertain
situations. (Pujari)
Boosts Coordination: Financial Planning helps in coordinating various business
functions such as production, sales function etc and helps smooth running of
operations in the restaurant. (Pujari)

Task 2.3 Assess the information needs of different decision makers

in Sweet Menu Restaurant.
There would be a number of decision makers in Sweet Menu Restaurant:

Finance Director
o Budgeting and Forecasting: In order to plan ahead for future costs and
revenues.
o Book keeping and Reporting: To keep in check all the expenses and
maintain records.
o Payables and Receivables: See what payments have to be made and
received
Human Resource Director
o Workforce motivation: To see level of workforce engagement
o Workforce Assessment: Measuring their actual performance
o Rewards Schemes: Have the ability to rewards good performance
Marketing Manager
o Latest trends: Which new ideas would be successful
o Market response: Does the market even care about your campaign
o Marketing Costs: how much would it cost
o Channels available: what different channels for marketing are available

Task 2.4 Using the most recent financial statements of Sweet Menu
Restaurant given below explain the impact of the sources of finance

identified in Task 1.3 on the financial statements of Sweet Menu

Restaurant.

Loan/ Investor: If we add a loan from a financial investor or an institution

then it would boost up one time administrative expenses and add up a
constant interest expense which would be deducted after operating profit is
calculated from the profit and loss statement. All the elements would reduce
Net Profit. As for the balance sheet the non current liability would increase
along with cash/ asset which would be contributed to the business.
Additional Partner (selling equity): Having an additional partner would not
have any effect on the profit and loss except when the sharing of residual
amount would be done after the calculation of net profit and reserves to be
kept in the business. As for the balance sheet, it would increase the equities
and the cash/ asset.
Bootstrapping: The effect of bootstrapping on Profit and loss statement would
be the same as previously mentioned for the additional partner. The effect
would just be when sharing the net profit. The same would go for the balance
sheet.
Leasing: Leasing would add up to one time administration cost and a
continuing interest expense. As for the balance sheet, leasing components
would be shown as an asset and liability if they are capital in nature.

Task 3.1 Analyze the budgets and make appropriate decisions

For all the 4 months the cash sales seems to be quite less than the expenses the
restaurants is incurring so as to avoid any cash flow problems the restaurant needs
to either increase turnover or needs to charge higher prices to cover up its costs. In
terms of payments one time payments of Van or Furniture should be taken into
account in advance so that such a high expenditure doesnt affect the cash flows of
the business. Salary and wages should be cut down as they have increase 20% over
a 4 month period along with other expenditures. Petrol is a fixed expenditure so it
has to be incurred. In terms of lighting and energy, the restaurant should be careful
in its usage so as to incur minimum bills. Insurance is again a fixed expense. In
terms of purchases, long term agreements should be made with retailers so that
discounts can be availed on purchased and the burden due to increasing expenses
loosened up. The restaurant is not earning enough overall and needs to apply one
or more of the strategy given above to boost receipts and curb expenses for the
cash budget.
The trade payables budget seems fine on the face value but if we see the overall
condition of the cash budget it shows that there is a need for delayed payments to

be made. So the restaurant should get better contracts made with their retailer so
that rather than paying the amount in 2 installments they can pay it in 3-4
installments or more, putting less burden on the already low/ negative cash
reserves.

Task 3.2 Explain the calculation of the unit costs (meal costs) and
make pricing decisions using relevant information given above.
The cost of ingredients in a meal come up to 10, on which we add a 40% markup
and the price of the meal goes up to 14. While the VAT is 20% making the meal
worth 16.8 yet the restaurant only charges 16 for the dish. This means that the
0.8 of the VAT is coming out of the markup which the company is charging. This
comes out to 20% of the markup. As the accountant its a suggestion that seeing
the negative cash flow position the restaurant should charge the VAT from the
customer to the least if not charging any more. Apart from that the Food cost
percentage is 62.5% of the total selling price which needs to be reduced if the
company has to make further profit and overcome the rising expenditures.

Task 3.3 Assess the viability of the two projects using investment
appraisal techniques.
a) Payback method and Net present value for the two projects
and identify which project should be approved by Blue Island
Restaurant and explain why.

Proposal 1 should be approved by the Restaurant because it has a higher payback

period and even though it has a smaller NPV yet it provides higher cash flows to the
restaurant in the initial years which is a good indicator. Due to high initial return the
restaurant will be able to get their initial investment returned quickly and whatever
they make over it would be a profit starting from the second year. As residual value
is not a lot, it doesnt really affect the decision.

Task 4 Discuss the main financial statements.

Financial Statements represent a formal record of the financial activities of an
entity. These are written reports that quantify the financial strength, performance
and liquidity of a company. Financial Statements reflect the financial effects of
business transactions and events on the entity. (What are Financial Statements)
There are 4 main types of financial statements:
1.
2.
3.
4.

Statement of financial position

Income statement
Statement of Cash flow
Statement of Changes in Equity

Statement of Financial Position, also known as the Balance Sheet, presents the
financial position of an entity at a given date. It is comprised of the following three
elements:

Assets: Something a business owns or controls (e.g. cash, inventory, plant

and machinery, etc)

Liabilities: Something a business owes to someone (e.g. creditors, bank loans,

etc)

Equity: What the business owes to its owners. This represents the amount of
capital that remains in the business after its assets are used to pay off its

outstanding liabilities. Equity therefore represents the difference between the

assets and liabilities. (What are Financial Statements)
The income statement (also known as the profit and loss statement or P&L) tells
you both the earnings and profitability of a business. The P&L is always for a specific
period of time, such as a month, a quarter or a year. Because a company's
operations are ongoing, from a business perspective these cut-offs are arbitrary,
and they result in many of the problems in income measurement. Nevertheless,
periodic income statements are essential, because they allow users to compare
results for the company over time and to the results of other firms for the same
period. Depending on the industry, year over year comparisons that eliminate
seasonal variables may be especially useful. (Schneider)
The cash flow statement shows the amount of cash within a company. Items that
affect the cash balance are listed on the statement. The first section of the cash
flow statement is operating activities, which shows the cash flowing in and out of
the company in relation to its business operation. The operating activities section
also includes net income and the change in dollars of certain accounts listed on the
balance sheet. The next section, investing activities, shows cash the company
received and spent on a company's capital investments. The financing activities
section shows the inflows and outflows of cash related to the companys issued
financial securities, which is also listed on the balance sheet and statement of
shareholders' equity. (Johnson)
Changes in shareholder equity statement show the changes in the shareholders
equity account. The first line item is the beginning balance for common stock. The
amount of newly issued common stock is added to the beginning balance to get the
ending balance. The same goes for preferred stocks. Listed next is the beginning
balance to retained earnings, which is also listed on the balance sheet. The net
income listed on the income statement is added to the beginning retained earnings
balance and the amount of dividends paid out to shareholders is subtracted to get
the ending balance. The ending balance for common and preferred stock and the
ending balance for retained earnings is added together to get the total of the
shareholders equity. (Johnson)

Task 4.2 Compare appropriate formats of financial statements for

different type of business
IFRS: Entities present current and non-current assets, and current and non-current
liabilities, as separate classifications on the face of their balance sheets except
when a liquidity presentation provides more relevant and reliable information. All
assets and liabilities are presented broadly in order of liquidity in such cases.
Otherwise there is no prescribed balance sheet format, and management may use
judgment regarding the form of presentation in many areas. However, as a

minimum, IFRS requires presentation of the following items on the face of the
balance sheet:
1. Assets: PPE, investment property, intangible assets, financial assets,
investments accounted for using the equity method, biological assets,
inventories, trade and other receivables, current tax assets, deferred tax
assets, cash and cash equivalents, and the total of assets classified as held
for sale and assets included in disposal groups classified as held for sale in
accordance with IFRS 5; and
2. Equity and liabilities: issued share capital and other components of
shareholders equity, minority interests (presented within equity), financial
liabilities, provisions, current tax liabilities, deferred tax liabilities, trade and
other payables, and liabilities included in disposal groups classified as held
for sale in accordance with IFRS 5. (Putra)
US GAAP: Generally presented as total assets balancing to total liabilities and
shareholders equity. Items presented on the face of the balance sheet are similar to
IFRS but are generally presented in decreasing order of liquidity. The balance sheet
detail should be sufficient to enable identification of material components. Public
entities should follow specific SEC guidance. (Putra)
Current/Non-current distinction (general)
IFRS: The current/non-current distinction is required (except when a liquidity
presentation is more relevant). Where the distinction is made, assets are classified
as current assets if they are: held for sale or consumed in the normal course of the
entitys operating cycle; or cash or cash equivalents. Both assets and liabilities are
classified as current where they are held for trading or expected to be realized
within 12 months of the balance sheet date. Interest-bearing liabilities are classified
as current when they are due to be realized or settled within 12 months of the
balance sheet date, even if the original term was for a period of more than 12
months. An agreement to refinance or reschedule payments on a long-term basis
that is completed after the balance sheet date does not
result in non-current classification of the financial liabilities even if executed before
the financial statements are issued. (Putra)
US GAAP: Management may choose to present either a classified or non-classified
balance sheet. The requirements are similar to IFRS if a classified balance sheet is
presented. The SEC provides guidelines for the minimum information to be included
by registrants. Liabilities may be classified as non-current as of the balance sheet
date provided that agreements to refinance or to reschedule payments on a longterm basis (including waivers for certain debt covenants) are completed before the
financial statements are issued. (Putra)

Off-setting assets and liabilities

IFRS: Assets and liabilities cannot be offset, except where specifically permitted by
a standard. Financial assets and financial liabilities are offset where an entity has a
legally enforceable right to offset the recognized amounts and intends to settle
transactions on a net basis or to realize the asset and settle the liability
simultaneously. A master netting agreement, in the absence of the intention to
settle net or realize the asset and liability simultaneously, is not sufficient to permit
net presentation of derivative financial instruments even if it creates a legally
enforceable right of offset. Generally, however, an entitys right of offset under a
master netting agreement is conditional and enforceable
only on the occurrence of some future event and to offset a financial asset and a
financial liability an entity must have a currently enforceable legal right to offset the
recognized amounts. Thus, master netting arrangements generally do not meet the
conditions of offsetting. (Putra)
US GAAP: Off-setting is permitted where the parties owe each other determinable
amounts, where there is an intention to offset and where the offsetting is
enforceable by law. An exemption to these requirements applies to derivative
financial instruments under master netting arrangements where a net presentation
is permitted. (Putra)
INCOME STATEMENT
Each framework requires prominent presentation of an income statement as a
primary statement.
IFRS: There is no prescribed format for the income statement. The entity should
select a method of presenting its expenses by either function or nature; this can
either be, as is encouraged, on the face of the income statement, or in the notes.
Additional disclosure of expenses by nature is required if functional presentation is
used. IFRS requires, as a minimum, presentation of the following items on the face
of the income statement:
1. revenue;
2. finance costs;
3. method;
4. tax expense;
5. Profit or loss for the period.
The portion of profit or loss attributable to the minority interest and to the parent
entity is separately disclosed on the face of the income statement as allocations of

profit or loss for the period. An entity that discloses an operating result should
include all items of an operating nature, including those that occur irregularly or
infrequently or are unusual in amount. (Putra)
US GAAP: Presentation in one of two formats. Either:
1. A single-step format where all expenses are classified by function and are
deducted from total income to give income before tax;
2. A multiple-step format where cost of sales is deducted from sales to show
gross profit, and other income and expense are then presented to give
income before tax. SEC regulations require registrants to categorize expenses
by their function. Amounts attributable to the minority interest are presented
as a component of net income or loss. (Putra)

Task 4.3 Interpret the financial statements of the two restaurants

using ratios and comparisons, both internal and external.

The gross margin of both the companies is similar which means that they both are
doing similar net trading. Blue Island has a 10% approx higher Net operating profit
margin which shows that it has been able to keep expenses to a low even though
their sales are approximately 50000 less than sweet menu.
The asset turnovers are pretty much the same meaning the both the restaurants
are earning 1.5 per amount of their assets, yet again here Blue Island is ahead of

sweet menu. In terms of inventory turnover the same is true that Blue Island is
doing a much better job than sweet menu. They are earning 9.65 per 1 of
inventory while sweet menu is earning 7.95.
In terms of debt both the restaurants have less debt in terms of total investment. As
blue island has more debt it would have to make higher interest payments but as
they mightve taken hold off better loan contracts hence their interest expense is
much lower than sweet menu. In the D/E ratio sweet menu shareholders will be able
to get higher of their investment in case of bankruptcy while blue island would not
as much, still the difference is not much.
In the current ratio, sweet menu takes lead as they have sufficient resources to pay
up their creditors. On the contrary Blue Island can face severe liquidity crisis if
theyre not able to achieve current assets or cash because they have a high
payables value which would be due in the near future. In terms of interest coverage,
due to favorable contracts blue island faces no problem in paying their interest.
Sweet menu also has a very safe position but still they need to lower their interest
expenses to make the ratio even better.

Bibliography
Johnson, R. (n.d.). The Basic Features of the Four Financial Statements & Their
Interrelationships. Retrieved from Small Business:
http://smallbusiness.chron.com/basic-features-four-financial-statementsinterrelationships-24250.html
Pujari, S. (n.d.). The Objectives and Importance of Financial Planning for an
Organization.
Putra, L. D. (n.d.). IFRS VS GAAP: BALANCE SHEET AND INCOME STATEMENT.
Retrieved from Accounting-financial-tax: http://accounting-financialtax.com/2008/06/ifrs-vs-gaap-balance-sheet-and-income-statement/
Schneider, B. (n.d.). Accounting Basics: Financial Statements. Retrieved from
Investopedia.
What are Financial Statements. (n.d.). Retrieved from Accounting-Simplified:
http://accounting-simplified.com/financial/statements/types.html