Managing Financial Resources and Decisions in Clariton Antiques Ltd - Assignment
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Added on 2020-01-23
Managing Financial Resources and Decisions in Clariton Antiques Ltd - Assignment
Added on 2020-01-23
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Managing Financial Resources andDecisions
TABLE OF CONTENTSIntroduction......................................................................................................................................3Task 1...............................................................................................................................................31.1 Sources of finance for unincorporated and incorporated businesses.....................................31.2 Implications of internal and external sources........................................................................41.3 Appropriate source of finance for Clariton Antiques Ltd......................................................5Task 2...............................................................................................................................................62.1 Cost of financial sources........................................................................................................62.2 Economic forecasting and its importance in business...........................................................72.3 Information require making effective financial decisions.....................................................82.4 Impact on financial statements...............................................................................................8Task 3...............................................................................................................................................93.1 Cash budget............................................................................................................................93.2 Unit cost and pricing decisions............................................................................................113.3 Investment appraisal techniques for analyzing feasibility of the projects...........................12Task 4.............................................................................................................................................154.1 Key components of financial statements.............................................................................154.2 Sole traders and partnership firm and their financial formats..............................................154.3 Financial ratios of Clariton..................................................................................................17Conclusion.....................................................................................................................................20References......................................................................................................................................212
INTRODUCTIONTo collect amount at minimum cost and o use this money for increasing revenues of theorganization is only possible with the help of financial management. It is the process of makingplan and controlling over funds so that objective of entities can be accomplished. Its mainobjective is to prepare financial sustainability for long term period. For the assignment ClaritonAntiques Ltd is being is taken into account. It is a re seller of antiques items and has good imagein London market (Beck and et.al, 2014). Aim of the company is to acquire building inBirmingham 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 loanand investors) will be described in this report. Dividends, interest and tax cost of finance brokerand venture capitalist will be illustrated in this report. Information that will needed to makedecision on financing will be discussed in this study. Cash budget of Clariton will be preparedand 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 firmswill be compared and financial ratios of Clariton will be calculated. TASK 11.1 Sources of finance for unincorporated and incorporated businessesTo run business significantly companies need money, there are many sources of fianceavailable for start up firms. Some of them are for short term and others are for long term periodor can be said that they can fulfill long term financial needs of the organizations. It is veryimportant to opt correct source as per the objective, structure and size of the entity (Haiss andet.al, 2016).a) Unincorporated businessA private entity that is owned by one or more partners. Such type of business are not hadlegal registration. Owner is liable for unlimited liability of the business, such type of businesshave no recognition by the internal revenue service (Kostka, Moslener and Andreas, 2013).Various sources available for such type of firms:3
Own saving: Most startup firms use personal saving source to run their businesssignificantly. It is readily available and cheapest economic source. It is beneficial for theentities as acquisition costs of this source is minimum and owner needs not to pay interestlike bank loan. On other hand if proprietor does not utilize this fund effectively then itmay harm the economic position of the company. Clariton Antiques Ltd is partnershipfirm, 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 loansource of finance. Financial institutes grand secured and unsecured loan to startup firmsso that they can run their business significantly. The main advantage of bank loan is thatit is non profit sharing source, interest rates are low and company can get tax benefit onit. On other hand it increases long term liability, risk of losing collateral security isassociated with it (Ajagbe and et.al, 2015). But it can fulfill long term economic needs ofunincorporated business like Clariton.b) Incorporated businessesAn enterprise that has followed legal process and owner is protected from company'sliability. Available sources of finance for such type of businesses are as following:Retained earning: Company's profit can be retained for further development of theorganization. Positive connotation is one of the main advantage of this source. It ischeaper and readily available source of finance. But high opportunity cost is attachedwith it. Venture capitalist: No repayment and no need to pay interest are major benefits of thissource. But ownership has to be shared with investors so rights and decisions makingpower is being diluted (Miyazaki and Aman, 2015). 1.2 Implications of internal and external sourcesa) Internal sourcesIt is the source of finance which is generated by the firm internally. These are the fundswhich are not depended upon the outside capital,m internal money is being used by entities forfurther development. Main advantage of this source is that no need to repay it but on other hand4
opportunity cost is attached with it, if firm fails to generate income then financial position ofowner may get harmed (Green, 2014). Retained earning: As it is own capital of firm so if organizations do not generate positivereturns then it may create bankruptcy for the enterprise. Clariton has to utilize retainedearning smartly otherwise partners will lose their money. No economic implication isassociated with this source as own capital can be used by the cited firm and no need torepay it. Lower dividend rate can create dissatisfaction among shareholders and value ofmarket share can get affected. Sales of assets: Clariton can raise money by selling their assets. But major drawback ofthis 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 ofinventories. That would be economic cost and economic implication of this source. Legalimplication of this source is that legal formalities have to be followed by both purchaserand seller. b) External sourceThese 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 institutescharges annual interest rates from cited firm. Apart from this they have to follow legalconsequences and have to submit all legal formalities in front of banks before takingloan. Venture capitalist: It is another external source in which Clariton has to pay dividend tothe investors that is economic implications. Legal agreement form between both partiesso 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 LtdClariton is the partnership startup firm so it is essential for the entity to have sufficientmonetary resources, so that it can run their business significantly. For raising funds in theorganization, cited firm has to chose bank loan as source of finance. As it is easily procured5
source of finance so company can raise it capital easily by borrowing money from financialinstitutes. Interest rates are nominal so easily affordable by the Clariton, apart from this bankloan is tax deductible source so it would be give tax benefit to the entity. As it is non profitsharing 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 cheapersource as compare to external equity. By choosing this option cited firm will be able to utilize itsfunds significantly and will be able to expand its business with minimum acquisition cost. TASK 22.1 Cost of financial sourcesIt simply means that cost of an equity which is to be paid by entities for raising theirfunds. As two main sources are venture capitalist and finance broker. “We Finance limited” isthe capitalist who wants to invest in the Clariton for getting higher income. Apart from thisfinance broker is the person who helps the cited firm in selling their assets and in borrowingmoney from financial institutions (Subalova, Al-Dajani and Bika, 2015). a) DividendCapitalist provides finance tothe company so that it cangrow and succeed. But as “WeFinance Ltd” is demanding20% stake in the businesswhich means Clariton will bebound to pay 20% dividend tothe firm every year. Thatwould be cost for theorganization and it willenhance economic burden ofthe cited firm (Cavusgil andet.al, 2014). b) interestIt is cost of debt financing, inwhich company needs to repayhe borrowed amount but donot need to share possessionswith banks. Finance brokersarrange loan for Clariton butthey will change 1% brokeragethat can be cost for theorganization (Lee, Sameen andCowling, 2015). In addition,2% annual interest is chargedby the banks against lendamount. Cost of interest can be c) taxIt is another cost of financialsources which is related withfinance broker and venturecapitalist (Brooks, 2014). Asmoney collected by bothsource are used for generatingprofit. And cited firm has topay corporate tax on totalearned income. Cost of tax canbe explained as below:Forinstance corporate tax rate is20% then:=2%*(1-0.2)*£10,00,000=16000+ 1% admin fees6
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