Management of Financial Resources Decisions

A Research on Financial Managment

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Introduction to MFRD

Management of financial resources refers to effectively allocating monetary fund in a business. The financial manager is responsible to manage the resource in a way so that it can be utilised to their maximum capacity. Managing finance is a crucial aspect for the financial manager. Due to the fact that finance is the main element help to operate business activity. For managing the finance, the manager makes different strategies so as to effectively achieve his/her objectives. Another aspect of financial management is decision making ability of a financial manager. The organisation must make accurate decision regarding management of financial resources of the company.

The report discusses the financial management of Sweet Menu restaurant and Blue Island restaurant. The main objective of the research is to identify appropriate financial resources for Sweet Menu restaurant. It is vital for the restaurant owner to select a financial source to raise the capital. As the organization wants to raise €300,000 and €500,000 for its branches in Central London and Croydon various options are evaluated in order to choose correct source to raise finance. On the other hand, the research also highlights the importance of financial statement for the Blue Island restaurant. The owner of the restaurant wants to evaluate the effectiveness of a financial statement. This report conducts a study to properly analyte various statements and their significance to an organization.

Available sources of finances

Available sources of funds refer to the current accessible funds for a business. Source of finance are bifurcated into two types i.e. long term finances and short term sources of finance. Long term sources provide financial assistance that can be used for more than one year whereas short term is supposed to be used within a year. Sweet menu restaurant wants to expand its business on two locations, thus the first step must be to identify appropriate source of finance. They are as followed.

Long term source are-

Retained Earnings- The business can use the earning that has been retained by it.Each year the business can store a portion of its earnings from the profit or may distribute it to the shareholders or the debenture holders. These earnings can be saved by reducing the dividend given to the shareholders.

Long term loan- A loan is an amount which is taken on credit basis from the financial institution or a bank. The business which is applying for a loan has to agree to deposit a security in order to acquire loan as well as the company is entitled to pay for an interest amount in each instalment.

Share Capital or Debenture- The business can also raise an IPO i.e. initial public offering. In this, the public invests a portion of their income in the business by acquiring ownership of business in the form of shares or debentures. The company does not have to pay interest over the raised amount but each year they can pay back profit in the form of dividend to the shareholders.

Venture Capital- A venture capitalist is a person who is eager to invest his/her income in other business. These individual are generally bothered to receive the ownership or a certain amount of profit in return to their investment.

Short term sources are-

Trade/Cash Credit- This credit is given by traders or the banker on the basis of cash or inventory. The trader or the banker may lend money or goods to the business on credit business. The business is entitled to pay back the amount to the respective person within a period of 90 days.

Hire purchase and leasing- These are loans which are provided to the business while purchasing inventory or machinery for the organization. The business can purchase machinery or inventory and can pay the amount either in instalment or on lease basis.

Evaluation of most appropriate sources

As per the above evaluation of the available financial resources few sources are considered to be most appropriate for the Sweet Menu restaurant. The restaurant requires to raise €300,000 and €500,000 for two new location in Central London and Croydon, thus it must exercise to raise capital through issues of shares and a bank loan (Drake and Fabozzi, 2012). As the company is already listed, thus it can issue shares to rise its finances through investment from shareholders. This will be a accessible option for the company as it is working from past 10 years, thus the organisations would have good loyalty amongst its investors. Bank loan is another feature that will help the company to raise a large amount. The banker will easily sanction the loan amount due to companies good reputation in the market. Apart from this Sweet Menu restaurant can also take trade credit from its suppliers against the purchase of day to day item. Instead of paying the suppliers on daily the company can pay them back in a period of 90 days. This will, save the restaurant from a heavy outflow of cash. Apart from this organization can also use hire purchasing of machinery (Keller, 2013). The electronic items of the kitchen can be taken on lease thus it will save the restaurant from heavy purchasing.

Analysing cost

Each source of finance have its own advantages and disadvantages associated with them. Bank loan, issue of shares, trade credit and hire purchase are the methods selected by Sweet me nu restaurant to raise finance. These methods are accessible by the company but also their is certain cost associated with them (Nicholson and Aman, 2012). For example while getting a bank loan the company will have to block its assets to deposit them with the bank as a form of security. Apart from this the company will also have to pay a certain rate of interest mandated by the bank. In the end company will end up paying the principal as well as the interest amount which will raise cost for the company. Although issue of shares is also a risky method. The restaurant may or may not receive the subscribed amount from the allocation of shares. This may create a shortage of funds for the business. Trade capital is a easy way to block outflow of cash from the organisation but in order to do it company will have to maintain a cordial relations with the suppliers. If the company failed to do the same it will be entitled to pay the amount right away to the suppliers. This will be an unwanted invitation of expense for the company. Hire purchase system also requires the restaurant to pay for a interest amount tat has to be paid by each instalment (Reid and et. al., 2008). Thus it can be easily analysed that every source of finance has certain limitation and cost associated to them.

Importance of financial planning

Financial planning is the method to identify the potential objective of the business to meet the market demands. Financial planning is a tool to analyse the current position of the organization with the expected market demand. The importance of planning is described as below-

  • With the help of planning the organization can set certain targets that has to be achieved by the business in the respective time period planning enhances the analytical kills of the manager in ascertaining the appropriate demand of services in hospitality industry (Ryan, 2009).
  • Planning involves identifying the sources of finance available and accessible to the business. Thus it helps in analysing the financial resources of the organization (Nicholson and Aman, 2012). Thus way the organization can evaluate the departments which require financial assistance for smooth running.
  • Manager creates certain strategies assist him/.her in planning of the financial decisions of the business (Palepu andHealy, 2007). The business is benefited from these strategies as they bring competitive advantage for the organization over its competitors.
  • Proper utilisation of resources is also done with the help of financial planning. This is very important for the manager to check where the procured resources are utilized up to their maximum capacity or not (Cortes, 2009). It is very important for the business as to optimally use the resources to increase their productivity.
  • Cash flow is another aspect that is benefited with the help of financial planning. The business on day to day basis requires cash for outflow and inflow of business activities (Sources of finance, 2012). Thus the manger with the help of financial planning can manage the cash flow required by the organisation.

Assessing information of stakeholders

Stakeholders are the factors that affect the decision making process of the organization. Each business has a set of stakeholders who have intention in the profitability of the organisation. The stakeholders at Sweet menu restaurant are as followed.

Supplier: In hospitality industry, suppliers play a very crucial role. They are the core pillars for a restaurant business as they provide day to day itinerary item to the business (Brandon and Welch, 2009). The business must ensure to pay the suppliers on time so as to maintain cordial relationship with them.

Investors: They must be very well informed with the financial information so as to build trust among them (Managing financial resources, 2014). The investors are the persons who invest money into companies business thus it is vital for the business to provide them with greater return on investment.

Customers: The customers are the most important aspect for a restaurant business. The restaurant has to incorporate customer satisfaction to increase its quality and brand image among the consumers (Mason, 2007). It is important to understand consumer’s needs and wants to achieve higher loyalty from them.

Employees: The employees are responsible to perform their task and responsibilities allotted to them. They are the service provide who perform the major task to achieve customer’s satisfaction and loyalty (Sabău, 2013). The employees must be provided with monetary and non-monetary incentives so as to boost their confidence.

Impact of the sources of finance

As Sweet menu restaurant has decided to issue shares and bank loan as a form of loan term loan. The company must make sure to ensure that it is in a position to return the banks amount on the time period allotted to the business (White, 2006). By issuing share companies capital will increase but the financial position of the company will not look as attractive as it should be. By raising shares companies liabilities will increase which is considered as a debt which the company is entitled to pay. Bank loan also raises liability if the company as well as adds cost in terms of interest amount. Purchasing machinery from hire purchase also will hamper the goodwill of the company. This is not considered as an ideal situation for the business. The cash outflow of the business will also be disrupted as the company will have to pay a token amount to person providing hire purchase facility to the business. A disrupted cash flow is not considered ideal for the business it is due to the fact that net profit decrease due to high amount of cash outflow (Stolowy and Lebas, 2006). Trade credit will also raise debtors of the company which will further increase liability of the restaurant. In total the impact of the above selected sources will also result in increasing the liability of the business.

Analysing budget and proposing recommendations

Budget analysis enables thee manger in creating a budget for the goals and objectives of the business. The process of the budget analysis includes formulating, estimating and report making of the proposed budget of the company (Sources of finance, 2012). In the case study it present financial statement of the Blue Island restaurant were presented. From these statements it was identified that the restaurant is expensing more and earning less. It is also reducing company’s profitability. Although cash and credit sales of the company are good but the expenses re very high in comparison. The balance between earning and expenses is clearly not maintained which is depicting a poor financial condition. Restaurant is not able to make god revenue due to the same issue. In the month of November and December specifically the sales are low in comparison with the high number of expenses. There is a negative net balance which shows that company must make improvements in the present situation. The restaurant must make strategies and reduce resources that are increasing cost of the company’s services (Mason, 2007). The management must try to reduce prices of the services so as to attract higher number of customers . Apart from this un-necessary expense must also be analysed and removed immediately.

Assessment through investment appraisal technique

The investment appraisal technique is used to identify the feasibility and profitability of a certain project created by the manager (Palepu and Healy, 2007). The initial investment for first proposal is £1200 and for second proposal it is £1200. Net present value and payback period are the techniques used under investment appraisal.

Financial statements

Financial statements are used to record all the financial transactions of the business. The Blue Island restaurant presents information about business financial position in the following statements.

Balance Sheet- The restaurant prepares balance sheet to identify its financial position. The assets and liabilities are calculated to calculate the profit and revenue earned by the company (White, 2006). The balance sheet also depicts the balance which is created between assets and liability so as to maintain the financial position for the business.

Cash Flow statement- All the information about the inflow and outflow of cash is represented in the cash flow statement (Management accounting, 2014). Cash received or earned and cash paid in any expense or investment activity is noted in this statement. This is helpful for the business in identify the position of cash in the business.

Income statement- The profit and loss earned by the business is mentioned in the income statement (Drake and Fabozzi, 2012). The income statement basically depicts the income earned by the business and is useful in identifying the net profit of the business.

Conclusion

From the above research it is clear that financial management plays a vital role for an organisation. The Sweet menu restaurant was able to evaluate the appropriate sources of finances from the available sources. It could be done with the help of financial management only. This is evident that Blue Island restaurant was able to understand its financial position with the analysis of financial statement presented in the case study. Thus it is evident the financial manager must understand aspect of companies finances so as to identify its financial capacity . Financial management plays an important role in management of finances and decision making related to companies monetary activities.

References

  • Keller, A., 2013. Finance and financial management. GRIN Verlag
  • Kil,C., 2013.Solutions from the Experts who Do it Every Day. Atlantic Publishing Company.
  • Mason, C. M., 2007. Informal sources of venture finance. InThe life cycle of entrepreneurial ventures. Springer US.
  • Palepu, K. and Healy, P., 2007.Business analysis and valuation: Using financial statements. Cengage Learning.
  • Reid, H. and et. al., 2008. Manage Budgets and Financial Plans: Managing Finance. 4th ed. Pearson Education Australia
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