Introduction
This report seeks to offer an evaluation of the Sweet Tooth Ltd. case as the company’s owner, Jeffrey, is planning to expand the business. The report touches on the essentials for business planning, including the purpose of a business plan and a cash flow statement (Epstein 2012). It considers the relationship of the business with its partners, who include suppliers and financial institutions. It also considers the fundamental issues for managing business growth and operations. Moreover, the report highlights the shortcomings of the plan created by Jeffrey on the expansion of Sweet Tooth Ltd to serve the Central London market. The company evaluated in the report is considering an expansion of its factory in Portsmouth to manage an expected increase in the demand for its sweets and chocolate, as well as ice cream, cakes, and desserts that it will make after expanding the factory.
Role of accurate financial information in the decision-making process in Sweet Tooth Ltd
A business must keep accurate and timely records if it wants to make an evaluation of its performance. Accurate financial information will help the business to monitor its success and failures using monetary values as the benchmark for evaluation. Accurate records will make it easier for Sweet Tooth Ltd to know the positive and negative impacts of its decisions for expansion. The essence of running the business is to ensure that all opportunities are captured, strengths are increased, and weaknesses of the businesses are decreased (Lee 2011).
The business will also have to avoid threats in its operating market. Accurate financial information highlights the effects of risks facing the business and provides a rational outlook of opportunities. The business can then make informed decisions about the pros of one choice over its cons. It can become an efficient operator with controlled cash flows, predictable costs of operations, and a sustainable increase in profitability (Epstein 2012).
Discussion and evaluation of benefits to Sweet Tooth of preparing a detailed business plan, cash flow forecasts, and budgets
Sweet Tooth Ltd can use the financial plan to see the bigger picture of its business and the present, as well as future prospects. The business can tell when it is about to face troubling times or when it is enjoying a favorable growth in its market. A financial cash flow forecast and a budget can help a business determine its suitability to expand or shrink its size. The business can go on to make a detailed business plan for achieving this goal. A business plan will enable Sweet Tooth Ltd to manage its finances, especially incomes and expenses, by being able to sustain itself along with an operation strategy that considers the major variations in its operating environment.
Once the business plan is in place, Sweet Tooth Ltd can identify the figures that it needs to track regularly so that it determines its progress according to the goals set in its plan. Such tracking of performance will empower Jeffrey to spot problems with the business and determine whether the business can survive by plowing back its profits and taking a huge debt obligation for its expansion. A cash flow statement is a captured record of a business lifeline. When the cash flow is negative, the business has to find external sources of funds to inject or risk perishing. For Jeffery, the aim should be to increase the cash flow for Sweet Tooth Ltd. If Jeffrey develops a detailed business plan, then Sweet Tooth Ltd will be able to use a sustainable program for drawing money out of business and making purchase commitments at the right time so that its balance sheet and cash flows remain healthy (Pinson 2008).
Problems with financial information prepared by Jeffrey so far
The information prepared by Jeffrey so far relies on assumptions that have no tangible rationale. There is no explanation of why the figures used were chosen as the estimates for sales income. Therefore, the business risks expanding based on a plan that is too ambitious and not reflective of the market. Moreover, the current performance of the business does not guarantee that the sales revenue will increase by the same margin upon expansion. According to the resource-based view theory, a business should concentrate on its most productive resources to realize competitive advantages. In this case, Sweet Tooth Ltd needs to define its core resources before going ahead with the expansion plan. The information given should explain whether a resource is important or not.
Jeffrey did not break down the income to show the number of sales made per period. The breakdown would be useful in evaluating the exact need for expansion and the business capacity to meet the expansion needs. A vague income figure does not tell what range of products is responsible for business growth. The lack of this information makes it hard for the company to follow the right path when expanding. Jeffrey should use figures of the current business performance as benchmarks for estimates presented in the expansion plan. That way, independent analysts can tell whether the expansion forecasts are conservative and realistic, especially concerning the income figures. The current plan fails to provide a cash cycle. When used, the cash cycle should allow the business to conduct its affairs with its partners and customers in ways that ensure that it gets money the soonest after delivering goods (Lee 2011).
Suggestion for further information needed
The business requires information that would be captured by relevant financial information tools. These tools include a profit and loss account statement, a balance sheet, a cash flow forecast, and business activity statements. The profit and loss account will tell the owner of Sweet Tooth Ltd, where income from the business is coming from, and what the sources of expenses are. The owner can then opt to stay with some expense sources, as long as they facilitate maintenance of an increase in income levels of the business. On the other hand, he should minimize or eliminate all other expenses that are not important for the business.
The plan must provide support for the stability or seasonality of the business. It must also provide current records of the business to act as benchmarks for evaluation. In addition, it should describe in figures the plan for managing cash flow with stock, creditors, and debtors because they have a significant impact on short-term profits. Additional information is needed as the basis for drawing a plan of the business for expansion. The plan should provide financial ratios that tell the reader the health of the business when it opts to follow the plan in its operations.
Identification and discussion of problems that Sweet Tooth might have when raising internal finance and external finance
Based on the current plan, there is an indication that the business will have a negative cash flow for a while before being able to sustain itself. Therefore, it is unlikely that financial lenders will be willing to put in their money in the business when there is no guarantee of returns. Negative cash flows as part of the prediction by Jeffery cast doubt on overall business performance. For example, if the business has to allocate funds to new expenses emerging due to changes in its operating environment, it will not be able to do so. Lenders will consider such scenarios when evaluating the health of a business. Such evaluations on the current plan of Sweet Tooth Ltd will reveal the lack of contingency plans and a financial buffer to offset deviations in business performance from the predictions made by Jeffrey.
Another obstacle that Jeffrey will face when looking for financial assistance from banks will be the lack of a breakdown of how the business is going to use the funds. Although there is the plan that Jeffrey is working with, there is a need for a detailed breakdown of expenses, based on the measured performance of the business. It is difficult for lenders to place an accurate evaluation of the plan because Jeffrey does not have an elaborate business plan that analyses various market parameters. Many of them will dismiss it as vague. The current plan does not provide Jeffrey with timing for the business on its management of funds. The plan does not describe how and why the business is going to hold on funds, inventory, and obligations to ensure that it retains as much money as possible at any given time to avoid succumbing to a negative cash flow situation (Day 2012).
Although Jeffrey hopes to obtain funds from internal sources to expand, there will be no funds to borrow if the predictions are correct. The business has allocated too many funds in the short-term expansion, leaving no money for operations. There is a high likelihood of the business surpassing its budget. If it does this, then there will be no funds for borrowing to expand. The sources of problems that could hinder Jeffrey’s plan to borrow internally include unexpected tax bills, market onslaught activities by rivals that will negatively affect revenue prospects of the company, and delays in receivables for the operations that compel it to rely on the existing funds to meet short term obligations (Barrow, Barrow & Brown 2012).
Other problems that Sweet Tooth Ltd might have with the development of new projects
Once the projects are complete, the business may realize that it has excess capacity when the predicted sales figures are significantly lower than expected. Excess capacity for manufacturing can also cause the business to have additional expenses that do not have a direct impact on profitability and sales revenue.
Conclusion
The business should first develop a comprehensive business plan that can offer correct information about its expansion strategy. That way, it will be possible to judge the merit of the expansion plan.
Reference List
Barrow, C, Barrow, P & Brown, R 2012, The business plan workbook, Kogan Page, London, UK. Web.
Day, AL 2012, Mastering cash flow and valuation modeling, Pearson Financial Times/Prentice Hall, New York, NY. Web.
Epstein, L 2012, The business owner’s guide to reading and understanding financial statements, Wiley, Hoboken, NJ. Web.
Lee, J 2011, The right-brain business plan: A creative, visual map for success, New World Library, Novato, CA. Web.
Pinson, L 2008, Anatomy of a business plan, 7th edn, Out of your mind.and into the marketplace publishers, Tustin, CA. Web.