MGBBT1FBF Fundamentals of Business Finance Assignment

Introduction of MGBBT1FBF Fundamentals of Business Finance Assignment

Financial information is related to the financial performance and activities of the business. Statement of cash flow, profit and loss and balance sheet are examples of financial statements, reflects information about equity balances, liabilities and assets of business. This information offers snapshot about financial position of business at particular time, such as at the end of year or quarter. The aim of this report is to analyse and interpret financial information of 7 seas buffet restaurant through its key financial statements. The objective of this report is to explain the key purpose of financial information of business with analysis and interpretation of financial statements. In addition, this essay discusses about motives of different stakeholders based on the financial information of 7 seas restaurant. Characteristics and purpose of good financial information is explained along with the calculation of different ratios.

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Stakeholder’s Motives

Multiple stakeholders have different motives based on the financial information of 7 Seas restaurant, which are as follows:

Government (HMRC)

Financial information allows HMRC to access documents and information of business organizations as it is needed to check the position of tax payer. Furthermore, HMRC is obliged for attribution of imposed tax liabilities (Weetman, 2019). The financial information provided by 7 Seas restaurant is utilized for the calculation of exact tax liability amount.

DFDS Seaways

DFDS is considered as one of the biggest partner of 7 Seas restaurant. Therefore, motive behind gaining financial information is to evaluate financial stability of the 7 seas restaurant. This financial information is applied by the DFDS to analyse the timely payments, attendance level towards contract agreements and reflects chances of sustainable business relationships (Atrill and McLaney, 2018).

Suppliers of raw materials

Raw material suppliers fears about payment defaults, time sensitivity and other non-compliance with the obligations. In that case, review of financial statements of 7 seas restaurant provides opportunity to suppliers to evaluate risk, helps in establishment of fair conditions of supply agreements.

Potential Investors

Financial information accomplishes the motive of potential investors by offering guidance towards strategic decision making (Atmadja et al, 2021). Investors assess financial status of 7 seas by its financial information to analyse its profitability, direction of growth and its financial position, which is prerequisite for investors before investment. Financial information helps investors to calculate the financial indicators such as return on investment (ROI), liquidity ratio and profitability ratio to evaluate the suitability of investment as a profitable opportunity for investors.

Banks and Financial Institutions

Financial institutions and banks utilize 7 seas financial information for the assessment of credit worthiness on the occurrence of special conditions like credit facilities extension and loan application. These specialists examine balance sheet, debt levels and liquidity ratios to analyse the possibilities of money lending and to determine the terms and conditions accordingly (Sitinjak et al, 2023).

Characterstics and Purpose of Financial Information

A good financial report serves multiple functions and comprises of numerous characteristics to satisfy the needs of divers segments of stakeholders, such as business partners, government, suppliers, potential investors, banks and financial institutions.

Key purpose:

Well-informed decision making:

Good financial information offers effective and accurate facts to the stakeholders that assist them in the formation of well-informed decision making (Kimmel et al, 2020). Government agencies like HMRC determine the liabilities of tax and further inspect the strategic compliance with the financial information. On contrary, DFDS seaways formulate the financial assessment to determine the financial stability of 7 seas restaurant. Also, it formulates the financial decisions on the basis of financial figures reflects in the financial statement of the restaurant.

Performance Evaluation:

Stakeholders use the financial information to determine the profitability or financial performance (Santos et al, 2022). Investors analyses the future prospectus of growth and organization’s financial health from the financial statement. In addition, ratios such as return on equity (ROE) and return on investment (ROI) helps stakeholders to evaluate the chances of future success and growth. Stakeholders such as banks and financial institutions checks debts and liquidity ratio prior to grant money lending to organisations by assesses risks related to credit.

Assessment of Risk:

Financial information assists stakeholders to determine control on financial resources and helps to prioritise them as per the priorities and risks. This guides stakeholders about strategic evaluation of risks possessed by 7 seas restaurant, leads to assist potential investors and business partner before making financial investment (Akther and Xu, 2020). Moreover, financial information analyses key points to the stakeholders, results in determination of future risks and its potential impact on growth and success of organisation.

Characteristics

Timeliness:

It is one of the most significant characteristic of financial information, helps stakeholders to formulate well-informed decision making in time (Retolaza and San-Jose, 2020). Financial statements, such as profit and loss statement or balance sheet reflects the expenses, profit, assists and liability of the 7 seas restaurant on timely manner such as quarterly or yearly. This assists stakeholders to use the accounting information in the process of decision making.

Accuracy:

It is another characteristic of financial information that is to make exact and accurate financial predictions. This ensures the stakeholders of 7 seas restaurant about the verifiability of financial information with the use of standard principles of financial accounting. In addition, accuracy involves the correct record of financial transactions of business, without any scope of misrepresentation or error (Hu et al, 2020). As a result, stakeholders used this financial information to analyse exact financial position and competitiveness of the organization. 

Comparability:

Stakeholders use the financial information to compare financial information of 7 seas restaurant over time. This enables the stakeholders to understand the company’s finances in better manner and is termed as crucial for making decision for investment (Marantika et al, 2020). Besides that, this characteristic helps stakeholders to analyse current financial and industrial trends to enhance comparability.

Calcultaion of Ratio

Gross Profit Ratio

This ratio measures profitability of business with division of its gross profit by net sales. In 2019, Gross profit ratio was measured at -9.05%, whereas it accounted for 56.21% respectively at the end of year 2023. This reflects the efficiency of the 7 seas restaurant towards profit maximization from its business operations. In order to improve fluctuating trend and maximizing profitability firm should focus on using benchmarking technique which assists in finding deviations and taking corrective measures on time for performance enhancement (Olayinka, 2022). 

Operating profit Ratio (OPR)

Operating profit indicates organization’s profitability generated before paying tax as a percentage of sales. In 2023, OPR of & seas accounted for 33.68% which was increased from past years. It defines the management efficiency of the 7 seas restaurant in terms of managing its overall operating expenses to maximize profitability. There is a significant development in this ratio over past few years, reflects effective operational management of the organization (Palepu et al, 2020).

Net profit Ratio

This ratio reveals the actual profit of business after deduction of costs and income tax. In 2022 and 2023, NP ratio of the firm was 24.56% and 23.57% significantly which found lower than previous year. Irrespective of incline in sales company’s profitability was decreased. Thus, firm should emphasis on undertaking budgetary control tools & techniques which help in controlling expenditures and thereby maximizes profitability.

Return on Investment (ROI)

ROI is defined as the profitable return arises from investment. Financial information revealed that 7 seas restaurant has 57.65% rate of ROI in 2023. Its development serves as a benchmark for the management and investors to shape financial strategies to maximize ROI and overall profitability of the business (Thakur, 2024).

Return on Equity (ROE)

ROI provides insights to investors about efficiency and streamlined management of company in terms of its business operations. It reflects the financial performance of 7 seas restaurant and defines ideal position of business buy assisting it towards formulation of effective marketing and business management strategies.

Assets turnover Ratio

This ratio is calculated to identify revenue or sales value in relation to its assets. Assets turnover ratio determines optimum utilization of assets of 7 seas restaurant to accomplish its objective of revenue generation.

Current Ratio

This ratio reflects liquidity of business in terms of its ability towards payment of debts. It indicates higher assets than liabilities of 7 seas restaurant, measured at 1.75 in 2023. This ratio was developed from past years, showcases richness and efficiency of the business (Kadim et al, 2020).

Quick Ratio

Quick ratio defines position of business on the basis of short term liquidity along with the reflection of its liquid assets. Increased ratio reflects the higher availability of liquid assets with organisation and its impending debts. With adoption of appropriate source of finance, 7 seas enhance its ability to meet short term obligations.

Equity Ratio

This ratio determines the shareholder’s contribution towards resources funding, outlines proportion of asset’s funded by investors or proprietors (Kimmel et al, 2020). Development in this ratio showcases reduced debt of the organisation, measured at 0.36 in 2023. 7 seas restaurant took initiative to enhance shareholders contribution to enhance business funding and resources.

Debt Ratio

This ratio defines overall debt of business in terms of availability of total assets. It indicates the acquired risks of the 7 seas restaurant, calculated at 0.09 in 2023. This ratio outlines independency and reliance of business over borrowed funds to minimize liabilities of business.

Limitations of Ratio Analysis

Limitations of ratio analysis lead to impact the investment decision of stakeholders in adverse manner. Some of the ratio analysis limitations are listed below:

Historical information: Ratio analysis is based on the past results of the organization. Therefore, metrics of ratio analysis does not necessarily represent the future financial performance of the 7 seas restaurant. This has a negative impact on the potential investors, banks and other stakeholders as they are not able to correctly analyse the future financial predictions of the organisation (CFI Team, 2024).

Changes in policies of accounts: another limitation is related to changes in policies and procedures of accounting adopted by the company. This has an adverse effect on the financial reporting of 7 seas restart, leads to represent inaccurate financial information to the stakeholders (Sitinjak et al, 2023). Moreover, it does not allow the stakeholders to analyse the competitiveness of the firm based on the past or current financial performance due to changes made in accounting procedure and policies.

Manipulation in financial statements: Ratio analysis is primarily based on the facts and information reported in the financial statement of the organisation. This financial information can be altered or manipulated by the management of the organization’s management to revel better results and financial performance than its actual performance (Atmadja et al, 2021). Therefore, ratio analysis does not reflect the accurate and true nature of the organization, as misrepresentation in facts and figures, as misrepresentation of facts and figures of finances does not detect through simple analysis.

Operational changes: changes in operational structure of organization also emerge as a limitation of ratio analysis as it has an adverse impact on the strategic comparison. Based on the financial metrics after and before operational changes can leads to inaccurate or misleading conclusion about future prospectus or performance of 7 seas restaurant (Atrill and McLaney, 2018).

Conclusion

It has been concluded that financial information was related to financial performance and activities of the business. This report analysed and interpreted financial information of 7 Seas on-board buffet restaurant with the help of its key financial statements. Motives of the stakeholders of the 7 Seas restaurant were identified to understand the actual financial performance, competitiveness and growth prospectus of the company. Timeliness, accuracy and comparability were outlines as characteristics of good financial information. Key Purpose of financial information was to provide assistance in formulation of well-informed decisions, helped in performance evaluation and assessment of risks of 7 Seas restaurant. Historical information, changes in policies of accounts, manipulation in financial statements and operational changes were reflected as limitations of ratio analysis.

REFERENCES

Books and Journals

• Akther, T. and Xu, F., 2020. Existence of the audit expectation gap and its impact on stakeholders’ confidence: The moderating role of the financial reporting council. International Journal of Financial Studies, 8(1), p.4.
• Atmadja, A.T., Saputra, K.A.K., Tama, G.M. and Paranoan, S., 2021. Influence of human resources, financial attitudes, and coordination on cooperative financial management. The Journal of Asian Finance, Economics and Business, 8(2), pp.563-570.
• Atrill, Peter and McLaney, E. J., 2018. Financial accounting for decision makers. 9th ed. Harlow: Pearson.
• Hu, M., Zhu, J. and Kong, D., 2020. Voluntary financial disclosure to downward stakeholders: An empirical examination of Chinese nonprofits. Public Performance & Management Review, 43(1), pp.180-205.
• Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial ratios, intellectual capital and dividend policy. Accounting, 6(5), pp.859-870.
• Kimmel, P.D., Weygandt, J.J. and Kieso, D.E., 2020. Financial accounting: Tools for business decision making. John Wiley & Sons.
• Marantika, A., Rathod, H.S., Chauhan, R., Putri, L.T. and Maseleno, A., 2020. Ethics in Finance, Financial Globalization and Stakeholder Responsibility: New Concept of Corporate Finance. International Journal of Psychosocial Rehabilitation, 24(1), pp.1556-1563.
• Olayinka, A.A., 2022. Financial statement analysis as a tool for investment decisions and assessment of companies’ performance. International Journal of Financial, Accounting, and Management, 4(1), pp.49-66.
• Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis and valuation: Using financial statements. Cengage AU.
• Retolaza, J.L. and San-Jose, L., 2020. Stakeholder accounting for sustainability applied to nonfinancial information in banking. Handbook on Ethics in Finance, pp.1-22.
• Santos, P.G.D., Albuquerque, F., Rodrigues, M.A.B. and Morais, A.I., 2022. The views of stakeholders on mandatory or voluntary use of a simplified standard on non-financial information for SMEs in the European Union. Sustainability, 14(5), p.2816.
• Sitinjak, C., Johanna, A., Avinash, B. and Bevoor, B., 2023. Financial Management: A System of Relations for Optimizing Enterprise Finances–a Review. Journal Markcount Finance, 1(3), pp.160-170.
• Weetman, P., 2019. Financial accounting. 8th ed. Harlow: Pearson.
• Online
• CFI Team, (2024). Limitations of Ratio Analysis. Online. Available through: <https://corporatefinanceinstitute.com/resources/accounting/limitations-ratio-analysis/>. 
• Thakur, M., (2024). Ratio Analysis Formula. Online. Available through: <https://www.educba.com/ratio-analysis-formula/>. 

Author Bio

William Chalmers   5 years | MBA

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