Business And Service Industries Answers Assessment Answer

Answer:

Introduction

We have decided to open a restaurant in the great city of London. The restaurant will be in nature of fast food takeaway. We have decided to open one such restaurant during first year of operations and we shall expand our business once this restaurant is settled operationally.

Sources of Funds available for Business and Service Industries

According to Brooks (2009), every business and service industry has following sources to finance its business operations:

• Equity Share Capital funds from:
• Friends and Relatives
• Angel Investors
• Loan Funds from:
• Friends and Relatives
• Venture Capital funds
• Small business schemes
• Retained Profit
• Debt Factoring

Equity share capital is the primary source of finance for every business. It is permanent source of finance. Moreover, payment of dividend is no compulsory on equity shares. The company can pay dividend only if it has profits and directors declare dividend. However, as the equity shareholders bear the risk, it is more risky. Moreover, as the dividend is not tax deductible, it also increases cost of equity capital. Equity capital can be raised from existing investors if they are ready to make further investment in the company. It can also be raised from friends and relatives if they are ready to make participation in the ownership of the company. Angel investors are also keen to invest in start up companies with potential to grow big in size and provide huge returns. They can be very good source of finance for start up companies with solid fundamentals (Higgins, 2007).

The company can also finance its operations through debt. Debt capital is more flexible as compared to equity as the company can raise and repay debt as per its requirement. Moreover, cost of debt is lower as compared to equity as interest is tax deductible. The company can increase return of equity shareholders with the help of positive financial leverage. However, debt capital carries more risk as the company has to pay interest on debt even if it does not have profits. If the company is unable to serve interest and principle timely, debt holders can demand liquidation of the company. Therefore, debt capital increases financial risk of company. The company can raise debt from friends and relatives if its requirement is low to medium. However, if the finance requirement is high, the company will have to approach bank and bank will finance the company after completing credit check and document formalities. The company will have to mortgage its assets with bank for the purpose of obtaining debt. The company can also raise long term debt from venture capital funds. These funds provide long term finance with flexible interest rate and repayment schedule to start up companies. The rate of interest can be low during the initial stage to support profitability of the company and interest rate can increase at growth stages. Moreover, moratorium is also provided for repayment of principle (James, 2010).

Retained profit is also very important source of finance for the company. The company can retain the profit in the business instead of distributing it to the owners if it has cash requirement. The company can get this finance without any cost. The owners will also be happy as the company is employing their funds profitably (Yescombe, 2002).

Creditors are also very important source of financing working capital of the company. The company can negotiate with the suppliers for better credit terms and it can also request the suppliers to enhance credit period to support its working capital requirement. The biggest advantage of this source is that it comes without any additional cost if terms are properly negotiated (Yescombe, 2002).

The company can also discount its accounts receivables with the factoring company and get finance against its accounts receivables. This debt can be repaid from proceeds of accounts receivables (Yescombe, 2002).

Thus, it can be said that there are various sources of finance for the business and it can raise finance according to its requirement.

Source of Income

According to Neal & Pike (2009), income generation is very essential for every business to survive and prosper. We have designed a unique business model for our restaurant. Therefore, we would be able to generate income from various sources such as;

-    Sales

-    Commission

-    Sponsorship

-    Grants

The primary source of our revenue will be selling of fast food. We shall target young students and jobbers to sale our food. These customers are always looking for quality food at reasonable price and they are also heath conscious. We believe that we will be able to get good share of these customers as we have kept our prices very reasonable looking to the overall market rates. Moreover, we shall serve best quality food.

We will also sell readymade foods of large retailers. We have already signed long term contract with two such retailers. These retailers already have base of royal customers. We shall utilize the market strength of these retailers and sell their products through our restaurants. We will get commission of 10% on food sell on behalf of them.

We will also accept sponsorship from local companies to market their products. Our restaurant will be situated in the middle of the city. Moreover, we will have regular young and earning customers. Therefore, local companies will be interested in advertising with us.

We are also eligible for local government grants as we are a new enterprise with young entrepreneur. This grant will help us meet our operational expenses during the initial stages.

Financial Analysis

Cost Analysis

Variable Cost per unit of fast food will be as under:

Particulars	Amount
Materials	£5.00
Consumables	£1.00
Labour	£2.00
Total Variable Cost	£8.00

We will purchase best quality materials from the local city area. The material will cost £5.00 per fast food. The material cost is very high because of its quality. This quality is very important for the restaurant as it wants to develop long term royal customers.

Consumables will cost £1.00 per unit. This consists of various small items required for the purpose of preparing the food item.

We will employ skilled workers on contract basis. These workers will be paid £2.00 per fast food item prepared by them. These workers already have very long experience of preparing quality food in other restaurants. Therefore, they will ensure quality food with good test.

Fixed Costs per month will be as under:

Particulars	Amount
Rent	£1,000
Salaries	£2,000
Marketing Expenses	£500
Administrative Expenses	£600
Maintenance Expenses	£400
Total Fixed Expenses	£4,500

We will run our restaurant in a rented premises instead of own premises. This will save us from huge investment at the initial stage. We have executed a long term contract with the landlord to use this premises for the purpose of our restaurant with an option to purchase the premises after 5 years. The monthly rent will be £1,000 per month during first year of operations.

We will also hire full time staff for the purpose of smooth running of the restaurant. This includes a restaurant manager to oversee operations of the whole restaurant and helpers to assist the manager. Monthly salary of £2,000 will be paid to these employees.

The promoters believe in the magic of marketing. Therefore, they will spend £500 per month for the purpose of marketing the restaurant. The marketing will be targeted at our target customers so that it is effective and value for money is received. This exercise will help create awareness about the restaurant and build brand of the restaurant in the long run. The restaurant will be able to charge premium price for its brand. Therefore, marketing expense is very essential part of total expenses.

We will also employ one administrative staff for the purpose of day to day administration of the restaurant. Moreover, it will have to incur various administrative expenses such as electricity, stationary, telephone, utility etc. These expenses will add up to £600 per month.

We will also have to incur heavy expenses on maintenance. The regular maintenance of furniture and other items is very essential in restaurant business. Therefore, we will spend £400 per month for this purpose.

Revenue Analysis

We will price our fast food products at £12 per unit. This price has been arrived after evaluating detailed market research carried out by an independent market research firm; price charged by other restaurants for similar products and cost structure of the restaurant.  We firmly believe that we would be able to sell our products at this price. There will be no need to offer discount to customers as the selling price is already competitive.

Break Even Analysis

The selling price of fast food is £12 per unit whereas variable cost per unit is £8. Therefore, contribution margin is calculated as under:

Particulars	Amount
Selling Price	£12
Variable Cost	£8
Contribution	£4
Contribution Margin Ratio	33.33%

Thus, it can be seen from the above table that contribution margin ratio of the restaurant is 33.33%.

The fixed expenses of the restaurants are £4,500 per month. Therefore, breakeven point is calculated as under:

Particulars	Amount
Fixed Expenses	£4,500
Contribution Per Unit	£4
Breakeven units	1,125
Breakeven Revenue	£13,500

Thus, it can be seen from the above calculations that breakeven sales are 1,125 units and breakeven sales revenue is £13,500. The restaurant must generate this revenue to avoid loss.

Profitability Analysis

The management plans to generate after tax profit of £7,000 per month from the fast food business. As the tax rate is 30%, before tax profit required is £10,000 month. The target revenue for this profit is calculated as under:

Particulars	Amount
Fixed Expenses	£4,500
Target before Tax Profit	£10,000
Total Target Contribution	£14,500
Contribution Per Unit	£4
Target Units	3,625
Target Sales Revenue	£43,500

Thus, the restaurant must generate sales revenue of at least £43,500 to generate after tax profit of £7,000 per month.

The restaurant will also get commission of £2,000 for selling products of other retailers and sponsorship revenues are expected to be £500 per month. It has been assumed on conservative side that the restaurant will not get any government grant. Further, simplicity of calculations, it has been assumed that no expenses will be required for the purpose of earning commission and sponsorship.

Projected Profit & Loss Statement

Projected Profit & Loss Statement of the restaurant for first month of operations is as under:

Particulars	Amount
Sales Revenue		£43,500
Cost of Goods Sold:
Material	£18,125
Consumables	£3,625
Labours	£7,250	£29,000
Gross Profit		£14,500
Other Income:
Commission	£2,000
Sponsorship Revenue	£500	£2,500
Fixed Expenses:
Rent	£1,000
Salaries	£2,000
Marketing Expenses	£500
Administrative Expenses	£600
Maintenance Expenses	£400	£4,500
Profit before Tax		£12,500
Tax @ 30%		£3,750
Profit after Tax		£8,750

Thus, it can be seen from the above projections that the restaurant will generate gross profit of £14,500 and net profit of £8,750 per month.

Stock and Cash Controls

Stock Controlling Methods

Stock controlling is very essential for safeguarding assets of the company as stock is one of the major inputs for the purpose of making the food. Moreover, as our stock consists of food items, it is even more essential. We will establish following controls for the stock:

• We will set minimum and maximum level of stock for each item of raw material. This will ensure that adequate quantity of material is available for the purpose of making food. Setting minimum level will ensure that we don’t have to miss the sales opportunity in the absence of raw material. The non-availability of raw material will result in loss of customer to the other competitor and loss of image of the company. Similarly, maximum level will ensure that there is no over investment in stock. Out stock is a perishable item and it lost its ingredients and values very quickly. The excess investment will result in wastage and unnecessary carrying cost. Therefore, setting maximum level is very essential (Avis, 2008).
   
• We will also set re-order levels for each item of material after considering its monthly requirement and lead time. This will ensure that material is timely available as and when required and there is no over investment. This will also remove subjectivity of purchase department regarding placing order (Avis, 2008).
   
• We will also set economic order quantities after considering re-order level, ordering cost and carrying cost. This will ensure that inventories are ordered in optimum quantities resulting in lowest ordering and carrying cost (Avis, 2008).
   
• We will also establish system of just in time system to control inventory level as our materials are of perishable nature. We have made long term strategic arrangement with the suppliers. We will place purchase order as per the requirement and suppliers will ensure timely delivery. This will reduce investment in inventory and wastage (Drury, 2007).
   
• We will also establish system of periodical physical verification of inventory. This physical verification will be done by persons other than persons engaged in purchase and stores department. This will ensure that physical inventory matches with inventory as per books and this will also reduce theft of material (Drury, 2007).
   
• We shall also verify slow moving and non moving items periodically. These items will be recorded and stored separately from regular items. This system will ensure that slow moving and non moving items are disposed off timely and there is no loss because of holding these inventories (Rose, 2008).
   
• We shall also conduct constant quality review of our suppliers. We shall establish system of quality check for each of our purchase. This will help us identifying goo quality and inferior quality suppliers. We will reduce business with inferior quality suppliers with the help of this analysis (Rose, 2008).

Cash Controlling Methods

Cash is also very important component of current assets of the company and it is prone to theft and fraud in the absence of adequate internal control systems. We will establish following systems to control cash:

• We will segregate cash collection and billing function between different employees. This will ensure that the person collecting cash from customer does not have access to customer ledger and the person maintaining customer ledger does not collect cash (Delena, 2013).
   
• We will make policy to deposit daily cash collection in our bank account. This will ensure that excessive cash does not remain with the cashier (Delena, 2013).
   
• We shall conduct background check of cashier before employing him. Moreover, he will be required to deposit security amount with us (Tracy, 2013).
   
• The cash will be stored in safe locker and security will be provided to it. This security person will also accompany the cashier when the cashier goes to bank for cash deposit (Tracy, 2013).
   
• We will periodically verify physical cash with cash balance as per books. This verification will be done on surprise without any prior notice (Tracy, 2013).
   
• We will periodically obtain balance confirmation from the customers to ensure that cash collections are correctly accounted (Tracy, 2013).

Thus, it can be seen from the above discussion that stock and cash can be controlled with effective internal control systems.

Conclusion

 It is clear from the above discussion that our restaurant has very good potential to grow big in size. We have already acquired the premises on long term lease and we have also hired skilled labours. We have also secured selling contracts from the leading retailers. There is large market for our products at our price. This will ensure that we earn profit from the first month of starting the business.

References

Avis J., 2008, Management Accounting Decision Management, 2008-2009 Edition, Oxford: CIMA Publishing.

Brooks R., 2009, Financial Management: Core Concepts, 1st edition, Pearson Education

Delena S., 2013, Fraud Analysis: Strategic and Methods for Detection and Prevention, London: Wiley

Drury C., Management & Cost Accounting, Business Press Thomson Learning

Higgins R., 2007, SE edition. Analysis for Financial Management,McGraw-Hill Education

James S., 2010, Essentials of Working Capital Management, Wiley

Neale B. & Pike R., 2009, 6th edition, Corporate Finance and Investment Decisions and Strategies, Prentice Hall

Rose H., 2008, Internal Control Policies and Procedures, London: Wiley

Tracy J., 2013, Accounting For Dummies, For Dummies

Yescombe E.,2002, Principals of Project Finance, Massachuettes: Academic Press