Financial Decision Making Assignment (GC01354)

Executive Summary

The finding of this paper shows that Cordon Bleu plc increased 5.82% of its revenue in 2018 in comparison with the revenue of 2017, but gross profits of this company decreased by 12.56% (£15932,000) in 2018 in comparison to the year of 2017. However, the operating cost of this business increased by 8.4% (£2354,000) from £28010,000 in 2017 to £30364,000 in 2018. Although the operating costs of Cordon Bleu plc increased by 8.40% (£2354,000) from £28010,000 in 2017 to £30364,000 in 2018, the operating profit increased by 2.90% (£2864) from £98880,000 in 2017 to £101744,000 in 2018. Overall, in terms of profitability (including gross profit, operating profit, and return on capital employed) Cordon Bleu plc performed poorly in 2018 in comparison to the year 2017. Gross profit and net margin increased in the Value market by 4.4%  and 10.5% respectively in 2018.  That is why Cordon Blue plc decided to invest £120,000,000 in this Value market in 2017. In the Value segment of Cordon Blue plc, the Payback period is about 4 years and 3 months.

This means Cordon Blue plc can proceed with this investment but need to be concerned regarding strategy development, its operations and functions. The actual rate of ARR is 11.2% for the project of Cordon Blue plc in its Value segment that exceeds the target of 10%. That is why Cordon Blue plc can proceed with this investment. the project of Cordon Blue plc in its Value market shows 16% of net present value, where the cost of capital is 3% and it has an investment target criterion of 12%. Thus, it can proceed with this investment. Two main sources of finance can be suggested for Cordon Blue plc to arrange £100 million to a food delivery business from 2019 that is a loan from financial institutions, and share capital/equity finance. As Cordon Blue plc is planning to invest for a long time in the food delivery business, this is the right decision to attract financial institutions and shareholders to invest in. Along with the right choice of financial sources, the board of directors of Cordon Blue plc should enough knowledge on legal requirements, requirements of shareholders and financial institutions, and should develop a good relationship with them.

Table of Contents

Executive Summary.

Part 1: Business Performance Analysis.

1.1 Statement of Profit or Loss.

1.2 Statement of Financial Position.

1.3 Statement of Cash Flows.

1.4 Segmental analysis.

2.0 Investment appraisal.

2.1 Management forecast

2.2 Investment appraisal techniques.

2.3 Sources of Finance.

2.4 Non-financial factors.

References.

Appendix A: Cordon Bleu plc Financial Ratios.

Part 1: Business Performance Analysis

1.1 Statement of Profit or Loss

Revenue increased in 2018

The revenue of Cordon Blue plc increased by 5.82% (£25331,000) from 435381,000 in 2017 to £460712,000 in 2018. This increase in revenue can be due to effective market research, marketing and promotional strategies, offering quality products at competitive and reasonable prices by Cordon Bleu plc.  However, Cordon Bleu plc should develop more effective strategies, mainly marketing and selling strategies, to attract target and potential customers.

Gross profit decreased in 2018

The statement of profit or loss for Cordon Bleu plc shows that gross profits of this company decreased by 12.56% (£15932,000) in 2018 in comparison to the year 2017.

The main cause of this decrease in gross profit is to increase the cost of sales, where the cost of sales increased by 13.38% (£41263,000) from £308491,000 in 2017 to £349753,000 in 2018.

Therefore, Cordon Bleu plc should develop more effective strategies to reduce its costs of sales. In this case, it can make its supply chain and inventory system more effective and efficient. In addition, it can found out cheaper suppliers of quality products and raw materials reduce its costs of sales.

Operating and net profit increased in 2018

The case study of Cordon Bleu plc shows that the operating cost of this business increased by 8.4% (£2354,000) from £28010,000 in 2017 to £30364,000 in 2018. The main causes of this increase are the increase in staff costs, market research costs, directors’ salaries, IT and maintenance costs, legal costs, selling and marketing costs.  The staff costs increased by 33.67% (£893,000) from £2652,000 in 2017 to £3545,000 in 2018. Market research costs increased by 12.39% (£311,000) from £2510,000 in 2017 to £2821,000 in 2018. Directors’ salary increased by 7.49% (£210,000) from £2802,000 in 2017 to £3012,000 in 2018. IT costs increased by 19.62% (£124,000) from £632,000 in 2017 to £756,000 in 2018. Maintenance costs increased by 7.99% (£212,000) from £2653,000 in 2017 to £2865,000 in 2018. Selling and marketing costs increased by 7.19% (£533,000) from £7418,000 in 2017 to £7951,000 in 2018. Legal cost increased by 30.63% (£959,000) from £3131,000 in 2017 to £4090,000. This is because the company did acquisitions with two existing chains of restaurants and had to re-brand itself under one new name within the Cordon Bleu organization that cost a lot to meet legal requirements. Therefore, it is essential for Cordon Bleu plc to develop more effective strategies to decrease its operational costs (mainly in the legal sector, depreciation, and staffing costs) and increase operating profits.

Although the operating costs of Cordon Bleu plc increased by 8.40% (£2354,000) from £28010,000 in 2017 to £30364,000 in 2018, the operating profit increased by 2.90% (£2864) from £98880,000 in 2017 to £101744,000 in 2018. The key reason behind this increase in operating profit is £21150,000 profit arising from sales of PPE in 2018. This means, in fact, the Cordon Bleu plc could not increase its genuine operating income. Rather, operational profit decreased due to an increase in operational costs in all sectors except depreciation in 2018 in comparison to the year 2017. On the other hand, net profit increased by 6.1% (£4798,000) from £78793,000 in 2017 to £83591,000 in 2018. There are two specific reasons behind the increase in this net profit. The first one is the decrease of interest/finance costs by 2.58% (£55,000) from £2128,000 in 2018 to £2073,000 in 2018. The second one is the decrease of taxation by 10.46% (£1879,000) from £17959,000 in 2017 to £16080,000 in 2018. However, if Cordon Bleu plc faces high taxation and interest in the future, it will be difficult to gain an expected level of net profit………………………..

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