Sole Trader and Partnership Finance

This assignment delves into the financial operations of both sole trader and partnership business structures. Students are tasked with analyzing illustrative financial statements, including income statements and balance sheets, to understand crucial elements such as revenue, expenses, assets, liabilities, and equity. The focus lies on comparing and contrasting the financial reporting practices of these two common small business forms.

Managing Financial Resources and
Decisions

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Sources of finance for unincorporated and incorporated businesses.....................................3
1.2 Implications of internal and external sources........................................................................4
1.3 Appropriate source of finance for Clariton Antiques Ltd......................................................5
Task 2...............................................................................................................................................6
2.1 Cost of financial sources........................................................................................................6
2.2 Economic forecasting and its importance in business...........................................................7
2.3 Information require making effective financial decisions.....................................................8
2.4 Impact on financial statements...............................................................................................8
Task 3...............................................................................................................................................9
3.1 Cash budget............................................................................................................................9
3.2 Unit cost and pricing decisions............................................................................................11
3.3 Investment appraisal techniques for analyzing feasibility of the projects...........................12
Task 4.............................................................................................................................................15
4.1 Key components of financial statements.............................................................................15
4.2 Sole traders and partnership firm and their financial formats..............................................15
4.3 Financial ratios of Clariton..................................................................................................17
Conclusion.....................................................................................................................................20
References......................................................................................................................................21
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INTRODUCTION
To collect amount at minimum cost and o use this money for increasing revenues of the
organization is only possible with the help of financial management. It is the process of making
plan and controlling over funds so that objective of entities can be accomplished. Its main
objective is to prepare financial sustainability for long term period. For the assignment Clariton
Antiques Ltd is being is taken into account. It is a re seller of antiques items and has good image
in London market (Beck and et.al, 2014). Aim of the company is to acquire building in
Birmingham for opening its new branch.
Present report will discuss available source for unincorporated and incorporated business.
Implications of various internal (retained earning and personal saving) and external (Bank loan
and investors) will be described in this report. Dividends, interest and tax cost of finance broker
and venture capitalist will be illustrated in this report. Information that will needed to make
decision on financing will be discussed in this study. Cash budget of Clariton will be prepared
and unit cost calculations will be done so that cited firm can make effective pricing decisions
(Dick and et.al, 2017). At the end of report financial formats of sole trader and partnership firms
will be compared and financial ratios of Clariton will be calculated.
TASK 1
1.1 Sources of finance for unincorporated and incorporated businesses
To run business significantly companies need money, there are many sources of fiance
available for start up firms. Some of them are for short term and others are for long term period
or can be said that they can fulfill long term financial needs of the organizations. It is very
important to opt correct source as per the objective, structure and size of the entity (Haiss and
et.al, 2016).
a) Unincorporated business
A private entity that is owned by one or more partners. Such type of business are not had
legal registration. Owner is liable for unlimited liability of the business, such type of business
have no recognition by the internal revenue service (Kostka, Moslener and Andreas, 2013).
Various sources available for such type of firms:
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 Own saving: Most startup firms use personal saving source to run their business
significantly. It is readily available and cheapest economic source. It is beneficial for the
entities as acquisition costs of this source is minimum and owner needs not to pay interest
like bank loan. On other hand if proprietor does not utilize this fund effectively then it
may harm the economic position of the company. Clariton Antiques Ltd is partnership
firm, all partners can invest their own capital in the firm so that business can be expanded
(Hamdar and Nouayhid, 2017).
 Bank loan: Whenever entities require huge amount then they can go with bank loan
source of finance. Financial institutes grand secured and unsecured loan to startup firms
so that they can run their business significantly. The main advantage of bank loan is that
it is non profit sharing source, interest rates are low and company can get tax benefit on
it. On other hand it increases long term liability, risk of losing collateral security is
associated with it (Ajagbe and et.al, 2015). But it can fulfill long term economic needs of
unincorporated business like Clariton.
b) Incorporated businesses
An enterprise that has followed legal process and owner is protected from company's
liability. Available sources of finance for such type of businesses are as following: Retained earning: Company's profit can be retained for further development of the
organization. Positive connotation is one of the main advantage of this source. It is
cheaper and readily available source of finance. But high opportunity cost is attached
with it.
 Venture capitalist: No repayment and no need to pay interest are major benefits of this
source. But ownership has to be shared with investors so rights and decisions making
power is being diluted (Miyazaki and Aman, 2015).
1.2 Implications of internal and external sources
a) Internal sources
It is the source of finance which is generated by the firm internally. These are the funds
which are not depended upon the outside capital,m internal money is being used by entities for
further development. Main advantage of this source is that no need to repay it but on other hand
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opportunity cost is attached with it, if firm fails to generate income then financial position of
owner may get harmed (Green, 2014). Retained earning: As it is own capital of firm so if organizations do not generate positive
returns then it may create bankruptcy for the enterprise. Clariton has to utilize retained
earning smartly otherwise partners will lose their money. No economic implication is
associated with this source as own capital can be used by the cited firm and no need to
repay it. Lower dividend rate can create dissatisfaction among shareholders and value of
market share can get affected.
 Sales of assets: Clariton can raise money by selling their assets. But major drawback of
this source is that it reduces assets side of the company (Peris-Ortiz and Sahut, 2015).
Cited firm will have to spend money for giving advertisement regarding sales of
inventories. That would be economic cost and economic implication of this source. Legal
implication of this source is that legal formalities have to be followed by both purchaser
and seller.
b) External source
These are such funds which are borrowed by external environment by the organization.
This amount has to be repaid by the entities after a certain time duration (Siegel, 2016). Bank loan: Interest is the main economic implications of this source as financial institutes
charges annual interest rates from cited firm. Apart from this they have to follow legal
consequences and have to submit all legal formalities in front of banks before taking
loan.
 Venture capitalist: It is another external source in which Clariton has to pay dividend to
the investors that is economic implications. Legal agreement form between both parties
so that they can understand their rights and obligations in the company. Apart from this,
possessions is shared with capitalist that is opportunity cost for the organization (Baeck,
Collins and Zhang, 2014).
1.3 Appropriate source of finance for Clariton Antiques Ltd
Clariton is the partnership startup firm so it is essential for the entity to have sufficient
monetary resources, so that it can run their business significantly. For raising funds in the
organization, cited firm has to chose bank loan as source of finance. As it is easily procured
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source of finance so company can raise it capital easily by borrowing money from financial
institutes. Interest rates are nominal so easily affordable by the Clariton, apart from this bank
loan is tax deductible source so it would be give tax benefit to the entity. As it is non profit
sharing source so ownership does not get diluted (Peneder and Resch, 2014).
Apart from this Clariton can go with retained earning source of finance. As it is cheaper
source as compare to external equity. By choosing this option cited firm will be able to utilize its
funds significantly and will be able to expand its business with minimum acquisition cost.
TASK 2
2.1 Cost of financial sources
It simply means that cost of an equity which is to be paid by entities for raising their
funds. As two main sources are venture capitalist and finance broker. “We Finance limited” is
the capitalist who wants to invest in the Clariton for getting higher income. Apart from this
finance broker is the person who helps the cited firm in selling their assets and in borrowing
money from financial institutions (Subalova, Al-Dajani and Bika, 2015).
a) Dividend
Capitalist provides finance to
the company so that it can
grow and succeed. But as “We
Finance Ltd” is demanding
20% stake in the business
which means Clariton will be
bound to pay 20% dividend to
the firm every year. That
would be cost for the
organization and it will
enhance economic burden of
the cited firm (Cavusgil and
et.al, 2014).
b) interest
It is cost of debt financing, in
which company needs to repay
he borrowed amount but do
not need to share possessions
with banks. Finance brokers
arrange loan for Clariton but
they will change 1% brokerage
that can be cost for the
organization (Lee, Sameen and
Cowling, 2015). In addition,
2% annual interest is charged
by the banks against lend
amount.
Cost of interest can be
c) tax
It is another cost of financial
sources which is related with
finance broker and venture
capitalist (Brooks, 2014). As
money collected by both
source are used for generating
profit. And cited firm has to
pay corporate tax on total
earned income. Cost of tax can
be explained as below:For
instance corporate tax rate is
20% then:
=2%*(1-0.2)*£10,00,000
=16000+ 1% admin fees
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explained by using
calculations: For instance cited
firm wants to take loan of
£10,00,000:-
=£10,00,000*2%+
£10,00,000*1%
=£20000+ £10000
=£30000
=16000+10000
=£26000
2.2 Economic forecasting and its importance in business
It is an ongoing process that direct owner in taking sensible decisions for the achievement
of objective of the organization. It is very important for running business successfully as it
provides procedures which can help in making economic decisions. Uncertainties related to
funds can be minimized with the help of economic forecasting. With the help of sound planning
organizations can make balance between cash inflow and outflow (Finney, 2014).
a) Budgeting:
It is an invaluable tool which supports in creating plan of spending and in managing
funds of the organization. For example as if Clariton wants tom open its new branch so by
making budget cited firm can prioritize its funds and can reduce unnecessary expenditures
accordingly. If organization do not follow financial planning and do not prepare budget then it
may face huge lose in the future (Penrose, 2013). Economic forecasting will help in knowing the
actual variance between budgeted and actual figure so it would be able to manage its business
accordingly.
b) Implications of failure to finance adequately:
Financial planning is very important and with proper planning Clariton would be able to
reduce circumstances of failure. With the help of economic forecasting cited firm would be able
to ensure adequacy of funds thus better utilization of funds can be done in the organization
(Žižlavský, 2014). That can help in reducing situation of inadequate funds thus cited firm will be
able to run their business significantly and can get good profit.
c) Over-trading:
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It is the situation in which company expand its business so quickly without having
sufficient resources to support it. It can be occurred when entities like Clariton sales too many
items on credit and customers do not pay for it on time. By this way profit margin of the
company will get reduced. By making financial planning cited firm will be able to know how
much financial resources they require and they will be able to find suitable solutions to face
future uncertainties (Alexakis and Tsolas, 2015).
2.3 Information require making effective financial decisions
Several stakeholder need various detail before making their economic decisions.
a) Partners
For the partnership firm, it is important that all partners know full internal information
about the company. As Clariton is founded by four partners, it may be possible that they would
have to invest their own capital in the business for expansion so they need information like total
number of customers, sales revenues, net profit history, how many partners are in the
organization, number of employees those who are working in the cited firm and litigation history
of the company (Almujamed, Fifield and Power, 2013). Litigation history will support partners
in knowing whether enity is associated with any illegal activity or not.
b) Venture Capitalist
As “We Finance Limited” wants to be shareholder and partner in the Clariton, so before
investing in the cited firm they will need information related to potential of the organization such
as profit history, future expected income, expansion plan, Dividend policy, cash management
strategies, solvency ratio, total liabilities etc. These all details can give huge benefit to venture
capitalist and individual will be able to take its investment decisions (Aliakbari Nouri, Khalili
Esbouei and Antucheviciene, 2015).
c)Finance broker:
Broker need information like financial performance of the organization, total liquidity,
total assets, repay capacity, solvency ratio of the organization etc. It would help them in making
suitable financial decisions related to investments.
2.4 Impact on financial statements
All financial sources impact on the financial statements to great extent (Cash Budget,
2013).
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a) Venture Capitalist
As id “We Finance Ltd” invest money in the Clariton then cash will go up, share capital
will get increased. It will impact on the balance sheet of the company. But 20% stake means 20%
dividend to investors that will reflect in the income statement of the organization and will
increase expenditure of the cited firm. Cash flow statement will also get affected by these
sources as cash balance will get enhanced. By this way it can be said that venture capitalist
impact on the all three financial statements (Unincorporated associations, 2017).
b) Finance broker
They support in taking loan from financial institutions and in selling assets of the
organization. So by this way cash will go up and it will impact on the balance sheet of the
Clariton. But it will also increase liability of the cited firm for long term period so it will impact
on the balance sheet as well. But this amount can be used for development and growth so entity
can generate good profit by utilizing this fund effectively. That generated profit will impact on
the income statement and it will make financial position of the firm more strong. But interest
cost is associated with it so that will be count as expenses for the corporation and that will impact
on the profit and loss account of the company (Alexakis and Tsolas, 2015).
TASK 3
3.1 Cash budget
Cash budget is the estimated figure of cash input and outputs which can be earned or
spend by the entities over a period of time (Cash Budget, 2013). It defines the availability of
economic sources in the organization and by this way managers can know whether entity will
generate income or not. By preparing this budget corporation prepare a summary of revenues,
expenditures.
Particulars January February March April May June
£ £ £ £ £ £
Cash
revenue
Sales on
cash
15000 22500 300000 15000 15000 3750
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Collection
on credit
142500 262500 405000 547500 330000 285000
Total cash
income
157500 285000 435000 562500 345000 288750
Cash
payments
Total
payments
807250 137250 119750 437250 227250 219750
Total
payments of
cash
807250 137250 119750 437250 227250 219750
Net cash
balance
(Total
inflow- total
outflow of
cash)
-649750 147750 315250 125250 117750 69000
Opening
cash balance
110000 -539750 -392000 -76750 48500 166250
Closing
cash balance
-539750 -392000 -76750 48500 166250 235250
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From the above calculations it can be said that Clariton is not managing its working
capital well. In the January month its cash inflow was lower than cash outflow. In the next
months its improved cash management strategies can be seen in the figures. As in Feb, March,
April cited firm is able to manage its expenditures and in these months it can generate high profit
(Peneder and Resch, 2014). For raising capital or cash inflow in the organization Clariton has to
make effective strategy like it can offer trade discounts. This strategy will help in attracting
customers and by his way sales income of the company will get high.
3.2 Unit cost and pricing decisions
Expenditures of company to produce on unit is called as unit cost. Clariton is not engaged
in production as it resales the antiques to end users. So for reselling incurred expenditures of the
cited firm is unit cost of the company (Penrose, 2013). For the cited firm expenditures are fixed
and variables. Fixed expenses like salaries which are necessary to pay by the organization
whether it generates profit or not. Same as rent of premises is fixed, apart from this there are
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some variable spending which get affected by the total demand of antiques. Such as
transportation cost and electricity bills (Siegel, 2016).
For instance: Clariton expenses are salaries £25000, rent £15000, transportation cost £30000 and
electricity bills £10000. If cited firm wants to produce 10000 units then unit cost would be:
Unit cost= Fixed and variable disbursement/ total produced units
Unit cost= £(25000+15000+30000+10000)/10000
Unit cost= £80000/10000
Cost per unit= £8
Unit costs play significant role in making pricing decisions in the organization. For
instance if Clariton wants 25% profit on its invested amount then calculations of pricing
decisions will be done following below maintain method:
Selling price= unit cost+ unit cost* desired profit percentage
Selling price= £8+ £8*25%
Selling price= £8+ £2
Selling price= £10
Hence, it can be said that with the help of unit cost organizations can take their pricing
decisions significantly and can earn desired profit percentage (Haiss and et.al, 2016).
3.3 Investment appraisal techniques for analyzing feasibility of the projects
Investment appraisals methods are those tools which suggest organizations where and
how much is to be invested. It helps to identify feasible projects out of many available projects.
Accounting Rate of return
It is the technique which calculate and compare the profit on projects which can be
earned by the entities. Main advantage of this tool is that by this way actual return can be known
by the firms (Siegel, 2016). But this method ignores the risk and time factor due to this some
time decisions may get opposite results. Formula of calculating ARR is :
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Investment 1 Investment 2
£m £m
Initial investment 8.6 4.4
1 1.6 0.8
2 2.8 1.4
3 3.4 2
4 3.6 2.4
5 4 2.3
6 4.2 2.6
Total 19.6 11.5
Average 3.26 1.9166
ARR 37.98% 43.56%
From the above calculations it can be said that ARR value of project1 is 37.98% and
project2 is 43.56%. So it can be interpreted that both are giving higher returns Clariton
expectation. As it is assuming to get 35% profit and both are giving good returns. Hence, both
are viable but it should go with project2 as in this it can get higher profit (Baeck, Collins and
Zhang, 2014).
Net present value
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It is another method which defines the difference cash outflow income and future
revenues. If variance is too high that means investment would not be good for the organization.
Formula of NPV is :
Investment 1 PV @ 14% Present value Investment 2
PV @
14%
Present
value
£m £m £m £m
Initial
investment 8.6 4.4
1 1.6 0.877 1 0.8 0.877 1
2 2.8 0.769 2 1.4 0.769 1
3 3.4 0.675 2 2 0.675 1
4 3.6 0.592 2 2.4 0.592 1
5 4 0.519 2 2.3 0.519 1
6 4.2 0.456 2 2.6 0.456 1
Total 12 7
NPV 3.38 2.53
From the above calculations it can be said that both are good investment projects, as in
project1 Clariton is able to start earning within 3.38 whereas in project2 it is able to generate
income within 2.53 (Cavusgil and et.al, 2014). Both are viable for cited firm but entity should
go with project2 as feasibility of project 2 is very high as compare to 1.
Pay back period
PBP is another tool that helps to know the viability of investment projects. It is simple
calculative method which suggests that Clariton should go with early return getting projects.
Investment 1 £m Investment 2 £m
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Initial investment -8.6 -4.4
1 1.6 -7 0.8 -3.6
2 2.8 -4.2 1.4 -2.2
3 3.4 -0.8 2 -0.2
4 3.6 2.8 2.4 2.2
5 4 6.8 2.3 4.5
6 4.2 11 2.6 7.1
Pay back period 3.22 3.08
So it can be said that investment in project 2 would be effective decision, as in this
Clariton will be able to recover its cash outflow amount soon.
TASK 4
4.1 Key components of financial statements Income statements: It is one of the main accounting record that support in knowing the
economic growth and performance of the firm. Two main components are profit and loss.
Expenditures defines the cash management of the company and total cash revenues is
shown in the profit side.
 Cash flow statements: it has two key components cash inflow and outflow. By this way
over all management of cash can be measured by the entities (Brooks, 2014). Statement of changes in equity and gains: Two main elements of this statement are
retained earning and share equity. Balance sheet: Assets, liability and equity are main three key components of the balance
sheet account. Financial position can be measured with the help of this tool.
 Notes to financial statements: Notes are disclosure that can define the internal working of
the company. It is the beneficial tool and help in making effective investment decisions
(Finney, 2014).
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4.2 Sole traders and partnership firm and their financial formats
Sole traders are separate entities those do not follow internal accounting norms. They
prepare statements as per their own convenient. Income statement has only two sides income and
expenditures, they do not include earned profit of partners. As partners are not associated so no
need to include partners capital side in this account (Alexakis and Tsolas, 2015). Apart from this
equity is also needed not to include because they do not market their shares. Whereas partnership
has to include partners capital in the balance sheet. Amount of all partners which has been
invested by them is included in this account. Profit share of all partners are also shown in the
income statement (Peneder and Resch, 2014).
Illustration 1: Income statement of sole trader
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Il
lustration 2: income statement of partnership firm
Illustration 3: balance sheet of partner sheet firm
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Illustration 4: Balance sheet of sole traders
4.3 Financial ratios of Clariton
Growth and profit can be measured by calculating financial ratios of the organization.
Profitability ratio: It is the main important aspect to knowing firm's performance (Ajagbe and
et.al, 2015). Operating margin ratio, gross profit ratios are main ratios through which company
can measure its performance.
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From the calculations it can be said that Clariton is working well and it is continuously
growing. Net marginal ratio of cited firm is in 2015, 1.89% and in 2016 it is 2.63%. Operating
margin ratio in 2015 is 3.77% and in 2016 it is 4.54%. Gross margin ratio has decreased from
14.34% to 14.18%.
Liquidity Ratio
To identify liquidity position of cited firm it is used (Green, 2014.).
It is analyzed that Clariton is able to manage its obligations. As in 2015 current ratio was
2.41 whereas in 2016 it has defiantly grown that and reached to 2.48. Quick ratio was in 2015,
2.27 and in 2016 it was 2.33. So it is able to manage its liabilities and can repay it on time.
Gearing ratio
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As Clariton is able to manage its debt, as in 2015 it was 0.16 and in 2016 it has enhanced
to 0.19.
So it can be said that overall financial performance of Clariton is quit well and it is
completely able to generate high profit in its new branch as well.
CONCLUSION
From the above report it can be articulated that to expand business and to grow well
companies have to ensure is financial management activities. Proper planning and effective
economic decisions can help in increasing revenues of the organization, As overall report was
based on the Clariton Antiques Ltd, from the findings it can be summarize that cited firm can
manage its liabilities well and can develop good position in the market. Both projects are viable
but it can be interpreted that investment in project 2 can give good returns to the entity. Bank
loan can be appropriate source of finance for Clariton, as in this cited firm will be able to bear its
interest cost and profit need not to be shared by any investors.
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