Sweet Tooth Company’s Expansion Projects

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Table of Contents

Introduction
Importance of financial information in the decision-making process
Benefits of a detailed business plan
Evaluation of the current financial information
Problems associated with internal financing
External finance from lenders
Opinion and recommendation
References

Introduction

The paper seeks to analyze the two expansion projects that Sweet Tooth intends to implement. Some of the areas that will be discussed are the importance of financial information on the decision-making process, benefits of a detailed business plan, evaluation of the current financial information, and the problems associated with raising money through debt and internal sources.

Importance of financial information in the decision-making process

At the end of a given financial period, companies are expected to prepare financial statements that provide information on the results for a particular period. The statements need to be accurate, and they should portray a true and fair view of financial performance. The income statement provides information on whether the Sweet Tooth is efficiently making use of the available resources. Further, the statement of financial position gives information on the assets, liabilities, capital, and liquidity of Sweet Tooth. Some of the other basic information that can be obtained from the company is the amount spent on the purchase of trading commodities, purchase of property, plant and equipment, wages, and other costs. Thus, all the information can assist the management of Sweet Tooth in making important business decisions (Clarke 2012).

First, accurate financial information assists the management, making a decision that touches on the cost control. For instance, from the income statement, the management of Sweet Tooth will be able to evaluate the amount spend under each line of expense. With this, the team will be able to determine the areas that require cost reduction or cost increment. Further, the income statement will also reveal whether the sales level or within or off-target.

This will aid management in deciding on the measures that need to be put in place to increase the level of sales. Also, the financial information assists the management in making decisions about the ways of increasing profitability by focusing on the areas the company is not performing well. Further, from the cash flow statement and the statement of financial position, the management of Sweet Tooth can be able to make decisions on when to acquire new items of property, plant, and equipment. The balance sheet also gives information on the remaining useful life of the assets.

Further, accurate financial information of the company enables the company to make a decision on the best source of finance to pursue. The leverage level, liquidity, and the amount required give the management direction on whether to use debt or equity. Finally, since financial information focuses on historical information, the management of Sweet Tooth can be able to compare the performance of the company with those of the competitors and the industry average. This helps the management in making decisions on ways of improving the position of the company in the industry (Wood & Sangster 2008).

Benefits of a detailed business plan

Businesses such as Sweet Tooth are not mandated to prepare business plans. However, the organized business finds it beneficial to prepare a comprehensive business plan before undertaking a new venture. The first benefit of a business plan is that it provides direction to the business. The process of preparing a business plan requires extensive research and a thorough understanding of the operations of the new venture and the industry.

The research enables the business to come up with effective strategies that generate positive results. Secondly, a comprehensive business plan enables Sweet Tooth to benchmark. The plan allows the management to monitor the performance of the new venture and determine whether it is falling into the plan. The management can evaluate whether or not they are achieving their targets by comparing the actual results and the estimates in the plan. This helps in improving performance in areas that have high variations. Thirdly, a business plan enables the management of Sweet Tooth to know the financial requirements of the two projects.

It also gives an indication of the method for raising the required finances. The availability of funds is quite critical when starting a new project. Further, a business plan is vital when entering into contracts. When a business is creating business relations with other players in the industry, it may be required to show evidence of the business idea and forecasts. This information is clearly displayed in a business plan. Further, the business plan can assist in filling an executive position and communicating with other staff members on the goals and objectives of the new venture. For the company to achieve these benefits, it is important to carry out a thorough market survey and market research before developing a plan. This minimizes variations that may arise during implementation (Petty, Martin, Titman, Keown, Martin, Burrow & Nguyen 2012).

Evaluation of the current financial information

The financial information prepared by the management of Sweet Tooth is quite narrow. It only provides a summary of some capital and revenue expenditure for the two projects. It also gives an estimation of the profit and loss expected from the Central London Shop during the first four months of operation. This information may not convince a potential capital provider. Besides, it lacks insight into the potential of the business in order to improve the information provided.

First, the management needs to prepare a summary of the total capital expenditure for each project separately. Further, the management needs to come up with a comprehensive revenue forecast for each product. This should include the price of each product, the targeted number of customers, and the quantity that the customer expected to sell per customer. The values should be supported by recent market trends. Further, the management needs to come up with a breakdown of various expenditures and a justification for these expenses. For instance, the management should prepare a schedule that shows the number of workers, the salary per worker, and the nature of engagement with each worker. In the case of rent, there is a need to create a schedule of an area that will be occupied by the business, duration of a lease, and rent per square feet, among others.

Further, there is a need to list down all the assumptions used in the preparations. This should include the method of depreciation, the useful life of the assets, tax rate, and interest rate, among others. With the information above, there is a need to prepare an opening statement of financial position, cash flow statement, income statement, and a closing statement of financial position. These financial statements should show the monthly, quarterly, and annual results.

Problems associated with internal financing

Internal financing arises when the company makes use of the accumulated profit to raise capital for the new ventures. This source of financing is the least expensive mode of raising funds as compared to the other approaches. This can be attributed to the fact that there are no costs or tax implications that are associated with raising it. There are several ways that a company can use to raise capital internally without seeking external funds. Examples are growing the reserves, increasing the balance of retained earnings, and asset swaps, among others (Williams, Haka, Bettner & Carcello 2010).

Despite being readily available and easy to raise, this source of financing has a number of problems. First, it is associated with a lack of capital growth in the business. Growth in the business should go hand in hand with the increase in assets and capital. This shows that the business will be stagnant. Further, this source of financing is limited. If the financial requirements of the two projects exceed the available internal funds, then the company will not be able to pursue these projects because of limited funds.

This shows that it is not as flexible as external sources. Further, if funds are generated internally, then it becomes accessible to lack discipline. The company may become less efficient unless the project is closely monitored. Such strict monitoring usually occurs if funds are obtained externally. Finally, there are tax benefits that arise if funds are raised externally. Examples are interest expenses. Thus, the Sweet Tooth Limited will not be able to enjoy such benefits if funds are raised internally (Abraham, Glynn, Murphy & Wilkinson 2010).

External finance from lenders

Despite the fact that the company will be able to raise a large sum of money through debt, which is about £2,100,000, there are several problems that are associated with the use of debt. First, the company may face difficulties in making the monthly payments that comprise of the interest and the principal amount. Considering that it is a new venture, the company may have cash flow problems as a result of these payments.

Further, the use of a high amount of debt will deter possible future investors because they will consider the business to be of high risk. This lowers the ability of the company to raise more capital through equity and other external sources. Further, the business may face the risk of losing assets that are held as collateral in case it fails to make the repayments. This usually occurs when the business is facing difficulties, such as when the revenue slows down or during a meltdown of the economy. Finally, the business may take longer to break-even and grow due to the periodic repayments (Weygandt, Kimmel & Kieso 2012).

Opinion and recommendation

The first problem that the business may encounter is the lack of a clearly defined scope. This arises if a business realizes that the needs of the customers differ from the original scope of the project. This arises if a proper feasibility study is not carried out. The change in range can also arise if the business makes changes in the production line. The company may be forced to change the line of products it offers to the customers. This may interfere with the initial plan of the project. Another problem that the company may experience is the lack of proper project management. The company may face challenges in managing the two projects. This can be as a result of a lack of adequate staff members. The final problem is the inability to raise adequate funds.

Sweet Tooth Limited should not continue with the expansion project. This decision is based on the fact there is no evidence that the company has done extensive research and feasibility study on the two projects. The company needs to survey the market thoroughly and come up with a proper feasibility study on the viability of the two projects. This report should include both the financial and non-financial aspects of the projects.

References

Abraham, A, Glynn, J, Murphy, M & Wilkinson, B 2010, Accounting for managers, South-Western Cengage Learning, USA. Web.

Clarke, E 2012, Accounting: An introduction to principles and practice, Cengage Learning, USA. Web.

Petty, J, Titman, S, Keown, A, Martin, J, Martin, P, Burrow, M & Nguyen, H 2012, Financial management: principles and applications, Pearson Australia, NSW. Web.

Weygandt, J, Kimmel, P & Kieso, D 2012, Financial accounting, John Wiley & Sons, USA. Web.

Williams, J, Haka, S, Bettner, M & Carcello, J 2010, Financial & managerial accounting: The basis for business decisions, Mc Graw-Hill, USA. Web.

Wood, F & Sangster, A 2008, Frank wood’s business accounting 1, Financial Times/Prentice Hall, United States. Web.

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