Introduction
As a new assistant financial director to Cheesecake Factory, Inc, a company that distributes cheesecakes, supplying cakes to retailers,, and operates restaurants in the city, I will write a financial report to the financial director. Our company buy cakes in the wholesale from the manufacturing company and supply it to coffee stores, restaurants, hotels and even to the travelers. The discussion in the paper will elaborate on the sources of finance to a business, the understanding of the implication of finance as a resource to business, make decisions from financial information,, and lastly evaluate the financial performance of the business.
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TASK 1
LO1.1-financial resource/internal and external finance; short and long term finance
According to Williams et al (2009pp 167), the sources of finance for a business can be grouped according to their own sources. The sources of finance can either be from outside or within the business. That is either external or internal sources. The main sources of finance from within the business include the sources from the entrepreneur such as the personal debts, credit cards, cash balances,, and the investments by the entrepreneur (Adams 1977pp 44). Hatten et al (1997pp 109) also pointed out some of the internal sources of finance such as the profits retained in the business from the cash generated in the company after gaining profits in the business. The investor’s amount that has been invested in the business or the share capital is also essential in a sole proprietorship business.
Butler (2006pp198) observed that finance for a business from external sources include the long term or the short term loan capital. The loans can be gotten from banks and other financial institutions. The other external sources of finance include the outsides investors share capital to a business. The share capital can be gotten from the family and the friend’s entrepreneur.
The professional investors to a company referred to as the business angels also form part of the external sources of finance to a business. Venture capital can also be used for an already established business (Awe 2006pp56).
LO1.2 cost implications of the different sources of finance to a chosen business
Funding a business is of greater significance for it to operate well in the industry. However, Burton et al (2001pp276) found out that various financing sources to a business have different implications. The retained profits implications only apply to the operating businesses that are already established. Therefore, the retained profits do not apply to a new business.
According to Zimmerer et al (2008pp 79), if the entrepreneur has limited capital, the share capital may be limited. Furthermore, the entrepreneur’s investments in a business lose the investment to the company, and therefore, ceases to be the owner of the capital invested. The entrepreneur who has invested the capital in the sole proprietorship business can only benefit by receiving the dividends upon making of profits by the company, or when the company is entirely sold, the owner can get the total value of the company (Hillstrom et al 2002pp154).
Bates et al (2003pp 25) pointed out that the loan capital implications are the incurred interest rates that are high. The banks upon giving out loans to business entities always impose high-interest rates, and this eventually results in an increased companies cost of operation. Moreover, the financial institutions require collaterals for the loans to be given out. This impedes the business especially new companies which do not have any securities. According to Buera et al (2012pp 234), the loan capital is not also flexible to the new business as a finance source but can be used as an option to companies that are already established. The bank overdrafts despite their high rates of interest also assist in funding a business.
The funds contributed by the friends and the breast cancer. Ann has been a staunch Christian since childhood just like the rest of her family or the share capital towards a business are good for new businesses. However, tensions escalate amongst the quality of life. Arthur should be educated during the discussion with the doctor and also his family members and the friends, especially if they form part of management, or also shareholders. The venture capitalists and the business angels also act as a source of finance, but the proprietor losses part of the business control (Mancuso 1980pp 356).
LO1.3- Appropriate source of finance-positive and negative sides
The Cheesecake Factory, Inc supplies cakes to the restaurants, coffee stores, hotels,, and retailers in the outskirts of the city required a good amount of capital for its operation. The appropriate sources of capital that have been chosen include borrowing from friends and working environment. The worker needs proper shelter, transport, medical attention, and time for their family and personal savings. These are the internal sources of finance for the business.
To acquire the fixed assets for the company, the company will need long term loans to facilitate the acquisition. Moreover, credits of the short term will also be employed to help until the products will have been sold. Overdrafts from the will also be used.
If the merchant banks and the investment capitals offer to pump in their venture capital into the business, the option will be welcomed. This will enable the business to gain from the expertise and finance of the investors. Furthermore, the business will consider applying for the grants offered by the state and the central governments for its expansion.
Given that the business does not have many machineries and motor vehicles, the company will consider other financing sources such as getting expensive equipment through leases from the companies that lease their equipment. Moreover, the business will also incorporate trade credit by obtaining the raw material for the company and paying later after selling the goods.
TASK 2
LO2.1 Analyze the costs of different sources of finance
Various finance sources have different interest or costs. According to the National Executive of Small Business Agencies (Australia) et al (2005pp14), the type of finance that a business adopts depends on the nature and type of business. Savings as a financing source for a business is good for a business cost-wise. Savings incurred no interest rates because the cash belongs to the entrepreneur. Similarly, obtaining funds from the families and friends is important in financing a new business because of of friends and family member’s loans the entrepreneur cash interest-free in most cases.
Confederation of British Industry (1974pp 25), however, observed that loans obtained from the banks and other financial institutions always have higher rates of interest on the capital loaned. This raises their costs. Similarly, bank overdrafts also possess high rates of interest and they are important in cash flow management. This raises their costs and interest when compared to other finance sources for funding a business.
Use of the creditors in a business offers a low cost. This is where a business agrees with the suppliers to take credits from the suppliers for a short term, and will pay back after making sales. This method offers low cost because the business can sell more goods than when it had goods acquired only through purchasing by the limited funds (Bodie et al 2000pp79).
Use of the guardian angels, grants and venture capital also offers minimal financing cost to the business. This is because they make investments in the business and helps it to expand without including any high rates of interest. They expand the business making it get more profits. Application of the credit cards as a source of finance enhances the quickness of getting cash but it has a high cost during the transaction process (Williams et al 2009pp 187).
LO2.2 Explain the importance of financial planning of the business organization you have chosen
It is of great importance to make financial planning to the business of supplying cakes to the hotels, restaurants, coffee stores,, and the neighborhoods of the city suburbs. The first importance of financial case study in Los Angeles. Los Angeles: School of Architecture and Urban planning is to assist inthe efficient management of the income. Adams (1977pp 324) observed that the making of budgets to the expenditure and the income is the most efficient way of income management.
Financial service delivery and policy making. The experience, capabilities and thinking of makers of policy, and those individuals who have liability for planning also helps in increasing the flow of cash and spending habits. Planning of the finance helps in determining the things that need to be attended for cash to be generated and investment to be made (Hatten et al 1997pp98).
Furthermore, for the long term capital base of a business to be built and to make a shape to the business financial future, financial planning is needed (Butler 2006pp 160). Awe (2006pp270) noted that financial planning assists in the identification of the investment opportunities that are relevant to the situation of the business. This will enable the change of the goals of the company to the desired realities from the business dreams.
According to Burton et al (2001pp28), planning of the finance also helps in the understanding the finance by making the entrepreneur budget for the business and gaining over control of the financial lifestyle of the business. Moreover, financial planning helps in saving which can assist the business by proving the emergency fund for the business during the hour of need.
Financial planning according to Zimmerer et al (2008pp303) helps the business of supplying cakes to the restaurants, hotels,, and other retail shops in liabilities cancellation and insuring assets accumulation to maximize the wealth of the company. Lastly, it assists the proprietor to realize the main objective of mastery and security of the finance. This is because the planning of finance gives meanings and directions to the financial decisions of the entrepreneur.
LO2.3- Assess the information needs of different decision-makers in your chosen business
The business of supplying cakes to the restaurants, hotels, retail shops,, and the clientele in the city outskirts will be managed by many managers who are the decision-makers of the business. Moreover, the business has employed many workers who assist in running, and they are also free to make decisions when there is a need or in cases of emergency. This has created flexibility in management and decision making.
However, in situations where an investment specialist or a guardian angel intends to make an investment in the business and expand it, they will be entitled to right of making decisions that are important to the business.
According to Hillstrom et al (2002), it is very important to make decisions in a business. Therefore, for a good decision to be made, possessing some experience and having good information in information interpretation is important to the entrepreneur, the investors,, and the employees. The workers consult their supervisors and managers in most cases. The general manager; however, seeks expertise and professional views.
The workers of the business in the positions of the management have been given proper training on decision-making mechanisms. The business also has made an environment that is supportive where the management or the worker’s body are not be unfairly criticized in case they make wrong decisions. It is always expected that the managers make tactical decisions, and the workers to decide on their conduct, response to the customers,, and the improvement of the business practice (Bates et al 2003pp68).
LO2.4 Explain the impact on the financial statement of your chosen business
For reporting the financial statements, events of the business are categorized into three types; investing, financial events,, and operating (Buera et al 2012pp 296). Investing in the funds on the business assets assists in running the business operations.
According to Mancuso (1980pp35),, the business creditors and the owners may periodically need to know the business financial information to help in the management and decision making. The creditors need the business financial information to evaluate the ‘sbusiness’s ability to repay the loan.
The income statement of a business reports the expenses and the revenue of the business that took place during the reporting on the financial period. The balance sheet, on the other hand, reports on the business assets, the owner’s equity,, and the company’s liability. The report on the cash flow statement shows the inflows and the outflows of the funds from the financing and investing events of the reporting financial period (Bodie et al 2000pp79).
National Executive of Small Business Agencies (Australia) et al (1995pp12) pointed out that the financial statements of a business portray a reflection of the business economic events. When the company makes asset investments like the inventory or the equipment, payments will be done on the purchase. However, if the cash was used in buying the assets, the report will be made in the balance sheet.
TASK 3
LO3.1 Analyze budgets and make appropriate decisions
For the past six months Cheesecake Factory, Inc has made big sales in the financial period that will end on December 31st,, 2015. In the profits and loss account, the sales are shown to be £35,880. The sales costs on the products is £18, 875 giving Cheesecake Factory, Inc £16,952 as its gross profit. Form the financial statements; the company obtains most of its profits from the sales. This positions it in a good area of increasing its income. The gross profits can be further be increased if the cost of sales is reduced. This is because of the cost of sales which is high and derails the company’s profits that the company could have gained.
Moreover, the business can gain extra profits from the disposal of some of its equipment it does not need. This can be realized by employing a mechanism that is efficient and advanced technologically in its operations. Confederation of British Industry (1974pp32) pointed out that this will eventually reduce the company’s cost of sales to maximize its profits from the disposal of the equipment.
The expenses of the Cheesecake Factory, Inc can be reduced by reducing the administrative costs and reducing also the improve its customer service to its clients. The associates or the employees of the company that is redundant, to remain with a small group of employees that are efficient and does most duties. The high cost of the distribution for the company can be reduced by removing the middlemen in the distribution channel. Furthermore, Williams et al (2009pp221) noted that it is important for the company to directly deal with their clients to help them improve and get their customer’s feedback.
Cheesecake Factory, Inc operates on high-interest loans, which further increases their expenses. The company should apply cheap ways of reducing their expenses such as equipment leasing and obtaining credits from their suppliers and making payments upon making of the sales of their goods.
LO3.2 Explain the calculation of unit costs and make pricing decisions
According to Adams (1977pp79), the cost a business incurs in the production, storage,, and selling of one of its products is the unit cost. The unit costs include fixed costs such as the plant and the variable costs like the involved labor in the production. In making the calculation of the variable costs, the incurred fixed and variable costs in the production process are divided by the produced unit’s number.
For instance, the Cheesecake Factory, Inc is expected to make, and supply cakes and make sales for six months of 650,036 cheesecakes and cakes. The selling price of the goods is expected to be reduced from the current £55.12 per unit by 10%. This will result in a new selling price of £49.61 per unit. This will be expected ultimately to make the sales increase by 20%. Furthermore, the cost of sales will rise by 20% with the other remaining costs being constant.
The reduction on the unit cost by 10% ultimately leads to profits increase. In price decision making, the selling costs of the products should also be reduced to get a competitive edge in the industry and increase their profits (Hatten et al 1997pp70).
From the profit and loss budget, the various costs are (amounts in € 000)
Fixed costs (amount in € 000)
Loan interest: 500
Corporation tax; 2299
Administration costs; 3075
Variable costs
Costs of sales; 18878
Total costs = 24752
At the initial price point the price per unit cost =
Hence from the initial 55.12- 38.08 = 17.04 was the profit per unit
However with the new projections
Projected sales 120% of 35880 = 43056
Projected reduction to 90% 0f 55.12 = 49.6 per unit
The projected cost of sales 22654
Total costs will be
Fixed costs
Loan interest: 500
Corporation tax; 2299
Administration costs; 3075
Variable costs
Cost of sales; 22654
Total costs 28528
Total costs/ total output = unit per cost
28528/650.036= 43.9
Whereas the projected prices will be 49.6
The company will make a profit per unit of 49.6-43.9 = 3
LO3.3 Assess the viability of a project using at least two investment appraisal techniques
In measuring the impact of the investment on the accounting profits, the AAR is used. Admittedly, the method is used as the main factor in the determination of the worth of an investment in which the level of profitability may be achieved.
ARR = average profit after depreciation/ average of capital investment ×100
Average capital of investment = (
From the business (amount in 000) initial outlay = 8000
Year 1 2000
Year 2 2800
Year 3 3200
Year 4 1200
Year 5 800
Year 6 500
Residual value = 400
ARR = average profit over 6 years = (2000+2800+3200+1200+800+500) = = 1750
Average capital investment = initial investment + residual outlay/2
=
Hence ARR = × 100 = 41.67%
Net present value
Year cash flow discounting present value10% present value 15%
10% 15%
1 1333.33 0.909 0.870 1212 1160
2 1333.33 0.826 0.756 1101 1008
3 1333.33 0.751 0.658 1001 877
4 1333.33 0.683 0.572 911 763
5 1333.33 0.621 0.497 828 663
6 1333.33 0.564 0.432 752 576
Total present value 5805 5047
Initial investment =- 8000 + 5805 = (2195)
Initial investment = -8000 + 5047 = (2953)
Both investments are yielding a negative value hence the investment should not be undertaken
Cheesecake Factory, Inc cannot sustain the project given that the estimated cost of capital of £8,000 is far more beyond the reality in year one. Moreover, the subsequent years portrays a reduction in capital costs as the company gets itself established in the market. This could be because of market competition, fixed goods that do not move easily,, or product irrelevancy. Furthermore, the plans of the company to give up to 15% discount with the gloomy cost of capital and sales.
TASK 4
LO4.1 Discuss the main financial statements (the discussion should focus on the basic form and purpose of main financial statements)
According to Butler (2006pp90), there exist three types of financial statements; the cash flow, balance sheet,, and the income statement. The income statement outlines all the expense and income of of business items. Moreover, it also portrays a reflection of the particular time period. The income statement as observed by Awe (2006pp158) is also known as a profit and loss account. The less expense in income is the bottom line in the sheet of profit and loss account. If the income is more than the expense, the business realizes a net profit. However, in a situation where the expense exceeds the income, the business realizes a loss.
Burton et al (2001pp120) noted that the balance sheet shows the business health from the first day of the writing of the balance sheet. It always reports on the late date of the reporting period.
The cash flow statements of a business show the business ins and outs of the cash during the reporting period. It incorporates the balance sheet aspects and income statement and compounds them together to portray the cash sources and their uses for the period of reporting.
LO4.2 Compare appropriate formats of financial statements for different types of business
According to Zimmerer et al (2008pp402), there exist various formats of financial statements. Despite the differences in the formats applied, the results will always be the same. There is no permanently prescribed format in the preparation of the income statement. Therefore, the business should choose the format it wishes to make a presentation of its expenses by either nature or function. This can either be encouraged on the face of the income statement or in the notes.
Hillstrom et al (2002pp189) observed that there are standards of accounting like the International Financial Reporting Standards (IFRS) and the generally accepted accounting principles (GAAP) whose practices are universally accepted worldwide.
Different types of businesses use various formats of financial statements. For instance, a sole proprietor would choose to apply a simple profit and loss account. However, a big company like the public limited company may apply the financial statements based on the GAAP or IFRS. Bates et al (2003pp46) observed that when preparing the financial statements and disregarding the standards, it becomes a great problem when comparing with the other organizations. Some businesses prepare single format income statements where expenses are classified to function and deduction made finally from the overall income to give an income of the business before taxation is made.
The multi-step format is where the cost of sales is subtracted from the sales to show the gross profit. Moreover, other expenses and income are presented to show the business income taxation. Buera et al (2012) observed that the difference between the two formats are that the multi-step shows margin by grouping the indirect and direct cost while the single step does not.
In a balance sheet of a company, some business types do the matching of the liability and equity. The liabilities and the equities represent the amount invested and the borrowing of the lenders and the creditors.
LO4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external using the data given below
The Gross margin of WM Morrison supermarkets showed a decline from 6.97% to 6.89 % in the year 2010 to 2011. This has also been replicated in J Sainsbury PLC. This shows good business performance in both companies (Mancuso 1980pp76)
The turnover of WM Morrison increased over the years. This is similar to the turnover of J Sainsbury PLC for the financial years. Furthermore, The percentage of the returned to the shareholders was quite high in WM Morrison supermarkets in both years compared to the other company although both recorded a high percentage of returns to the shareholders.
As much both companies registering high return on the capital invested, the percentage return of capital invested in WM Morrison supermarkets was high. This shows a large volume of sale as observed by (Bodie et al 2002pp98)
Similarly, both companies showed a decline in stock turnover in the two consecutive years with J Sainsbury PLC performing well in stock turnover. This is an indication of the good use of their raw materials.
Conclusion
In summary, the very integral and key part of the business when it is being set up is finance. Getting to understand the financing of business importance is good for smooth business operations. There are many finance sources for a business, however, their implications must be considered before using any source of finance. Moreover, planning of the finance and the information is significant and should be followed by the entrepreneur for smooth business operations. The information needs of the business decision-makers are important in a business. Moreover, the financial impact on different financial statements should be considered in a business.
Reference List
Adams, C. R. (1977) Appraising the information needs of decision-makers. San Francisco: Jossey-Bass.
Awe, S. C. (2006) The entrepreneur’s information sourcebook: charting the path to small business success. Westport, Conn: Libraries Unlimited.
Bates, M. E., & Basch, R. (2003) Building & running a successful research business: a guide for the independent information professional. Medford, N.J: CyberAge Books.
Bodie, Z., & Merton, R. C. (2000) Finance. Upper Saddle River, NJ: Prentice-Hall.
Buera, F. J., & Moll, B. (2012) Aggregate implications of a credit crunch. Cambridge: Mass, National Bureau of Economic Research. Retrieved from http://papers.nber.org/papers/w17775.
Burton, E. J., Bragg, S. M., & Burton, E. J. (2001) Accounting and finance for your small business. New York: Wiley.
Butler, D. (2006) Enterprise planning and development small business start-up, survival,, and development. Amsterdam, Elsevier/Butterworth-Heinemann. Retrieved from http://www.sciencedirect.com/science/book/9780750680646.
Confederation of British Industry. (1974) Sources of finance for industry and commerce; characteristics, advantages,, and disadvantages of the main forms and sources. London: Confederation of British Industry
Hatten, T. S., & Coulter, M. K. (1997) Small Business: entrepreneurship and beyond. Upper Saddle River, N.J: Prentice-Hall.
Hillstrom, K., & Hillstrom, L. C. (2002) Encyclopedia of small business. Detroit: MI, Gale Group.
Mancuso, J. (1980) The small business survival guide: sources of help for entrepreneurs. Englewood Cliffs, N.J: Prentice-Hall.
National Executive of Small Business Agencies (Australia), & National Industry Extension Service (Australia). (1995) Sources of finance for small businesses. Canberra, A.G.P.S.
Williams, T. M., Samset, K., & SunnevåG, K. J. (2009) Making essential choices with scant information: front-end decision making in major projects. Basingstoke: Palgrave Macmillan.
Zimmerer, T., Scarborough, N. M., & Wilson, D. (2008) Essentials of entrepreneurship and small business management. Upper Saddle River, N.J: Pearson/Prentice Hall.
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