Financial Decision Making
Executive Summary
The business report in this assignment of Roast Ltd is being prepared to calculate that whether the company is doing efficient operations or not, that can be measured through the techniques of financial ratios, ARR, NPV and financial statements by comparing the growth of the company from the year 2017 to year 2018 to ascertain that whether it would be a good decision for the Starbucks to acquire Roast Ltd. To analyse the growth and the operations, risk measurement tools are also reflected in this assignment making a keen analysis on the financial statements and forecasting the growth of the company in future.
Table of Contents
Industry Analysis of Roast Ltd.. 5
Roast Ltd Business Performance. 5
Statements of Profit and Loss A/Cs (in £000) 5
Roast Ltd Financial Position (in £000) 9
Roast Ltd Cash Flow Analysis. 12
Roast Ltd Inventory Turnover’s (in £000) 14
Roast Ltd Dividend Policy Measures. 14
Roast Ltd Investment Appraisal. 15
Forecast of Management Techniques (in £000) 15
Introduction
Analysis and presentation of report is being prepared so that analysis can be produced in front of Chief Financial Officer, so that informed decision can be taken by the Starbucks company that whether the acquisition of Roast Ltd is a correct decision or not, because Roast Ltd is a start-up company which has started in the year 2017, whose financial statements of P/L , cash flow statements are look after also looking into consideration the computations of Pay back periods and NPV calculations which reflects that whether profits are achieved or not.
Industry Analysis of Roast Ltd
As studied by Petkovic (2018) Starting with the establishment of a local caffeine and running its operations in the year 2017, Roast Ltd has gained customer support and popularity till the end of 2018, because of the rich and high Italian culture, providing the accessibility support of Wi-Fi and also providing the rich quality of coffee to the customers, which stands to be the satisfied reason for them at affordable prices.
| ROAST LTD | ||
| KEY PLAYERS OF ROAST Ltd | Roast Ltd was a small and independent in its activities, that was the most strong point of it and it served the best qualities by using the Italian culture which was strong factor of liking coffee. | Starting its operations in 2017, it has expanded itself in a good manner, keeping the years of its working to be sustainable by planning expansions in Romania in the year 2019. |
| CHALLENGES FACED BY ROAST Ltd | Faces a huge competition from the emerging players, and local caffeine’s also whose brand image is strong as contradicted by (Bradley et al., 2018) | In the year 2017 the demand and customers were very few, that resulted in low sales and a good start for company. |
Roast Ltd Business Performance
Statements of Profit and Loss A/Cs
Company started its operations in the year 2017, but was successful in gaining good revenue in the year 2018 that boosted the growth and sales as a whole from revenue of £2022 in the year 2017, it directly aimed to revenue of £2534 in the year 2018, which results that demand for coffee and customers both are increased. To keep the consistency, different expenses for the better efficiency of the operations were also incurred, in the year 2017 there were no operating expenses but in the year 2018 operating expenses of £60 were incurred to maintain the effective balance between growth and daily requirements. Financial ratios like gross profit ratio, operating profit ratios helps to compare the growth by making a comparison between the year 2017 and 2018 as opined by (Grewatsch et al.,2017)
Calculation of Gross Profit Ratio
Figure- Computation of Gross Profit Ratio
(Source- Excel)
The above graph ascertains that the profits that were generated by Roast ltd were higher in the year 2018, and the revenues that were generated were inclusive of the revenues that were generated by the operations from both United Kingdom and Romania. From Romania it earned a revenue of £350, and from United Kingdom revenue of £2184. All the expenses that were related to legal cost were paid off in the year 2017 of the amount £28.7 which was a good step taken by the company because it was not affordable by the company to bear all the expenses in the year 2018 as studied by Crain (2019) Legal charges were ascertained more in the year 2017 because it had made new investments into the properties also and in Romania also that was indirectly a good step for the company, because from the operations there it fetched a good revenue in the year 2018. With the balance of its investments and legal charges, it reduced its expenses of legal formalities in the year 2018 to £3.6.
With the generation of more revenues and profit in the year 2018, the tax structures to pay has also increased. In the year 2018 the tax expenses were computed to £20 whereas in the year 2017 the tax was only £9, which shows the major difference. With the payments of tax structures company’s revenue model can be analysed effectively. To maintain day to day activities everyday storage costs are also incurred to look after the environment due to which the expenses made were of £44.6 to give the ambience the most perfect look in the locality as being the coffee bar the main aim stands to be this. Promotional activities to expand and grab the attention of the local customers also resulted in marketing expenses of £20.1 so to result in more sustainable production.
Calculation of Operating Profit Ratio
Operating Profit Ratio= Operating Profit/Net sales*100
Figure- Computation of Operating Profit Ratio
(Source- Excel)
As contradicted by De Oliveira (2019) The above graph ascertains that operating profit ration in the year 2018 is 5.01% whereas in the year 2017 it was 2.52%, that states the growth of the operating profit by a good amount as in the year 2017 operating profits were of £51, whereas in the span of one year it witnessed the profit of £127 in the year 2018 which it has gained through the rich cultural heritage. Supply costs has also been increased as the activities to trade coffee beans from Italy costs high, but still Roast Ltd serves to aim the coffee of the best heritage culture due to which suppliers cost were increased up to £29.2 in the year 2018. Company aims in the retention of employees and does not hire the new ones because then it would cost an extra expenditure of additional salary, making the one-time investment on the trainings of employees. In the year 2017 the employee expenses due to training costs to £269.9 whereas in the year 2018 the employee expenses were restricted to £227.2 which reflects the stability model of Roast Ltd in which both the employees are happy with the company and are serving for long.
Roast Ltd Financial Position
Financial statements are prepared to check that whether the company holding state of assets and liabilities is in a good state or not. Different assets in the form of coffee machines were used in the Roast Ltd to deliver high yield service with best technology aid to rend fast services to the end customers. From the financial statements it is reflected that in the year 2018 acquisition of assets is of £996, whereas in the year 2017 less acquisition of assets were made due to low demand of £670. The purchase of the assets incurs high cost and these purchases were made from the retained earnings that were saved by the company to meet the future expenditures in the time of purchases or emergencies. Strong reserves in the form of retained earning assures that companies are not liable to the payment of debts to the external parties as counter argued by (Herath et al., 2017)
With more demand in the coffee, more demand for stock is also mandatory due to which the valuation of stock was also increased in the year 2018 by £299, resulting to no purchase of stock in the year 2017. This decisional framework reflects the stability model of the company as it did not waste any stock in the year 2017 because they were known of the fact that in the initial year’s demand may be low, and purchases of stocks may act as a loss. Financial ratios of liquidity like Current ratio, Assets Turnover ratios helps to determine the transparent stage of a company by drawing a comparison.
Calculation of Current ratio
Figure- Computation of Current Ratio
(Source- Excel)
The above graph ascertains that acquisition of current assets in the year 2018 is more in comparison to that of 2017, which reflects the effective and stable position of company to acquire more assets. Company despite of low generation of revenues in the year 2017, aimed to save the money by maintain the retained earnings of £579, from which the purchase of assets was made. In the year 2018, expenses were incurred but still company aims to make reserve of retained earnings every year and in the year 2018 it created up to £660.
As studied by Sahu et al., (2017) Valuation of stock was also increased which is an important element of assets, due to demand in customers and services. In the year 2017 assets were less with the company as no stock was purchased in that year, but with increase in revenues stock was also increased with a valuation of £299. Liabilities have also taken an increase in the year 2018 with more operations creating a debt of £275, but still Roast Ltd aimed to not increase the figure of liabilities by a huge amount and these amount of debts can be paid off easily with the revenue generations.
Calculation of Quick Ratio
s
The above calculations give the ratio analysis being greater in the year 2018 with 1.84 times, whereas in the year 2017 it was 0.48 times which reflects the growth and more acquisition power.
Liabilities were also increased because in the year 2018 the value of payments to trade payables stands to be £235, whereas in the year liabilities to be paid off in the year 2017 were only £138 which reflects that there is not a major difference in the debts that are taken by the company and can be easily paid off in the calendar year. To make the expansions year by year sources of finance are required due to which long term borrowings are made by the companies, but to avail the debts companies should aim to increase more retained earnings by saving and aiming to expand the reserves by £700, so that any future emergencies at the time of operations can be met.
Calculation of Asset Turnover Ratio
Figure- Assets Turnover Ratio
(Source- Excel)
The above trend line in the graph signifies the growth at which the company is growing maintain its liquidity state to be strong and efficient that can be reflected according to the financial positions.
Roast Ltd Cash Flow Analysis
As opined by (ANIL et al., 2019) Cash operations reflects that Roast ltd has paid higher amounts of tax, because the operations aim that revenues were generated high in the year 2018. Taxes were paid of £20, an increase in the valuation of £11 from the year 2017 to 2018. Injections of cash were also generated of the amount £175, and creditors received the amount of £97 which results that the profits are yield at a good rate with the pouring of money due to effective operations. Expenditures on the oil and heat were also made by less by the Roast Ltd to restrict the expenses by operating the expenses in a less cost effective manner to aim high profit results.
| Cash Cycles of Operating Profit Inventory Period Accounts Receivable Period Cash Cycle period | 2018
182.5 days 0.012 (182.5+0.012)=182.51 days |
The main aim of the Roast Ltd in the year 2018 aims to enhance the wealth of the shareholders, and did not hire new employees as then the cash operations will be increased due to additional salaries that would have to be paid off, keeping the vision high to save money as to create more money in the reserves of retained earnings. To achieve the transparency and flexibility the inventory period was also changed from 30 to 90 days so that effective operations can be aimed and less cost practices can be adopted. Investments in the training of employees were made in the year 2017, making the policies of retention of employees to be high serving and looking after all the necessary areas by maintaining stable cash operations.
Calculation of Inventory Period
Roast Ltd Inventory Turnover’s (in £000)
Figure- Roast Ltd Inventory Turnover Period
(Source- Excel)
Roast Ltd Accounts Receivable Period (£000)
The above figure can be referred from the Appendix (Figure 1) which represents the inventory turnover period of Roast Ltd in the year 2018.
Figure- Roast Ltd Accounts Receivable Period
(Source- Excel)
The above figure can be referred from the Appendix (Figure 2) that represents the computation of Accounts Receivable turnover period in the year 2018.
Roast Ltd Dividend Policy Measures
Company aimed to pay off its dividends in the year 2017, which was the correct step to aim and paid off the amount of £30 from the retained earnings as studied by Pinto et al., (2019) It took the right aim to clear off the dividends in the year 2017, because the pressure to bear the rest expenses were less and dividends could easily be paid off, With the help of dividends being paid off last year, company can incur the other varied expenditures in the year 2018 like installation of machines, paying off the storage and administrative expenses, clearing off the payments of debts to the liable parties. The dividends in a manner that were being paid reflects the flexibility model of business approach that is executed by Roast Ltd which aims to plan and spend its further earnings before hand only that helps the company to gain the sustainable position in the longer run. With the planning’s and expenditure model it can easily forecast the risk measurement areas that it may receive during the growing years of its coffee house production and can take correct steps to correct it.
Roast Ltd Investment Appraisal
Forecast of Management Techniques (in £000)
Figure- Management Forecast Techniques of Roast Ltd
(Source- Case Study)
As studied by Wallis et al., (2019) Management Forecast Techniques are used to measure that if investments would be made of £500 million would it be a correct decision or not. To forecast the growth in which the value would be generated on the invested amount these measures are applied to calculate the number of years. From the above figure, it can be ascertained that revenues of roast Ltd from the year 2017 is showing a boosting sales and by the end of the fifth year it would be generating an effective revenue of the amount £1120 million which portrays that if investments of £500 million is being made then the return would be generated within the second year itself only.
The variable costs are also given to make a comparison between the variable costs and the revenue generations every year, because if any year turns to be where variable cost is greater than revenues then it would turn to be a loss for the company. But in the case of Roast Ltd, forecast reflects that with each year growing of revenues, variable cot is limited and is less in every year that depicts the good performance of the Roast ltd that it would be aiming to reach to complete the targets and reach more revenues year by year. So, if the investments are being made under the Management Forecast then it would be a s successful approach to head.
Appraisal Techniques
Analysis of Pay Back Period
Figure- Payback Period
(Source- Case Study)
These are the measures that are used to calculate the number of years in which the value on the invested amount would return. The money if invested into the project that stand to be £500 million will be returned by the 4rth year as per the calculations of payback period. It is necessary to check that how many years will be taken to receive the return on investment which aid the stake holders and investors to decide that whether the investment should be made or not, or if made whether it would be successful or not. Time of four years is stable because £500 million is a huge investment and if the value returns by the end of the fourth year, it would aim to reach the project to the right direction. Corporate companies compute the payback period so as to analyse the difference between varied projects and the project which yields to take less amount to return the value, because the revenues would be increasing year after year stakeholders invest into that projects only as contradicted by (Bin et al., 2019)
To compute the payback’s period, it is important to check the management forecast that calculates the amount of revenues that would be generated by Roast Ltd every year. And, from the management analysis revenues are increasing from the year 2017 which yields that the payback period calculations would be precise to meet and the return on investments would be gained at the end of fourth year.
Analysis of Accounting Rate of Return
Figure- Accounting Rate of Return
(Source- Excel)
As portrayed by Miles et al., (2019) Accounting rate of return is the measure that does not depend upon the number of years that would be taken to yield the profits, but it depends upon the rate at which the profits would be generated. 10% is the rate at which the average annual profits would be yield of an amount £44.8 million. The rate of ARR which is compute is 18% which reflects that if the investments are made into this project then it would be successful with an average asset valuation of £250 million. This measures that 18% is a much higher rate in comparison to the 10%, and the investments would yield great return every year.
Analysis of Net Present Value
Figure- Net Present Value
(Source- Excel)
This method of calculation is dependent on the time at which the profits will be yield just like the payback period. It measures the regular intervals in which the cash would be generated. It considers both the operations of cash outflows and cash inflows that would be of the coffee house production as studied by (Benamraoui, et al 2017) The internal factors of the Roast Ltd would be taken into consideration for the span of five years at a discount rate of 5%, which will calculate that whether the investment would be successful or not. The above table shows the difference in the valuations of cash flow activities and valuation of present flow activities which reflects that the operations of Roast Ltd is stable enough to meet the required rate of return on investments. This method is considered important for valuation because other factors ignores the internal factors that may act as a constraint in the profits, but it takes into consideration all the internal factors and then produces the results as contradicted by (Willigers, et al., 2017)
Sources of Finance
As studied by (Cumming et al.,2019) To build the further expansions Roast ltd needs an amount of £400000, from a reliable financial source to open its production house in Italy so that more revenues can be generated in future by providing the rich cultural heritage of Italy aiming to reach more high expansions.
| Benefits from Financial Sources | |
| To build strong Brand image | If Roast Ltd takes an help from the financial source like investors or external parties, then the promotional activities would be increased more because the investing party would also now seek an interest into the shares of Roast Ltd, and generation of more revenues will act as a beneficial way for them as contradicted by (Boronczyk, et al., 2019) |
| Allocating funds from external parties or venture capitals | As studied by (Huertas-García et al., 2017) Small scale ventures are usually supported by the guidance of external parties or venture parties in which the ownership is divided between both the parties in an equal manner. So, if Roast Ltd is taking help from the venture parties then they both are liable to allocate funds together for the expansion reducing the risk of burden to finance for the entire amount all alone, with the aid of external parties all the financial funds would be allocated and they would be reliable to depend upon as they would also be sharing same shares of the company. |
| Drawbacks from Financial Sources | |
| Rights of ownership will be shared | If the external parties invest their money into the investment, then they would also demand for the ownership rights in Roast Ltd, and hence the rights of sole-ownership would be lost forever as studied by Olaisen et al., (2017) Every decision would have to be then combined decision of both the parties, leading to the loss of self-brand image of the coffee house production leading to give rights of control and supervision into some other hands. |
| Rights of legalities will be shared | As opined by Boyd et al., (2016) With the transfer of ownership, the invested party will also look after the legal decisions related to prices, expansions, decisions that would act as a constraint of the Roast Ltd as a whole due to cultural differences and perspectives that may become a challenge for both of them to run in future. As contradicted by () Legal decisions related to changes, any damages or expansions will be shift causing change in opinions later. |
| Benefits from Financial Sources | |
| Governments supervision to aid in projects | As studied by Safarov (2019) Governments can aid into the projects if they found it to be meaningful in the object that serves the for the country welfare as a whole. If under the government supervision, financial aid of £400000 is given then the risk of trust will be minimized, as it may be more in the case of external parties or venture capital because many a times, the other parties aim to break their promises shifting their areas of interest and project investments that aids them with high return. |
| Expansion under the supervision of Government | If government grants a permission to aid into the projects, then future projects expanded by Roast Ltd will be under the guidance and supervision of Government that will aid them to head towards the right direction of growth to achieve the results more fast and will help the company in the expansion of future projects. |
| Drawbacks from Financial Sources | |
| Emerging Competitors | As opined by Panibratov (2017) Very few projects for the funding from the Government are selected to be invested, due to high competitors that are emerging themselves to get the acceptance from the side of Government. It may turn time consuming for Roast Ltd because the company’s need to make expansions fast. |
| Lot of complex procedures to be met. | Different parameters of formalities and risk are there to get the project approved, it is a very lengthy process that may even take years for the approval to be granted as lot of legal formalities are lined up as contradicted by (Todorov et al., 2018) |
Recommendations
As opined by Webb et al., (2018) Different recommendations can be aimed from the financial statements of Roast Ltd-
- It should not transfer the rights of ownership to any other investor or stakeholders as it may impact the growth that it has gained solely.
- Expansions should be made on the scale of smaller areas, not investing the money into the larger project that may turn up to losses for the new start-up company.
- Venture capitals should be avoided, and more reserve for retained earnings should be planned to meet the future financial aids.
- It should follow the steps by aspiring the big brand sunder coffee production, and not only focus on the Italian culture. It should keep itself changing according to preference of customers.
Conclusion
It can be concluded from the above business report, that the stability model of Roast Ltd is effective enough to churn good turnovers of revenue in the coming future years. The decisions related to dividend policies and expenditures are the planned steps implemented by the company to forecast future goals with higher aims of sustainability model and an effective approach to give a boost to the start-up company to emerge as one of the fastest driving players in the coffee house production.
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Appendix
Figure 1- Inventory Turnover of Roast Ltd
Figure 2- Accounts Receivable Period of Roast Ltd