Managing Financial Resources

Managing financial
resources
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INTRODUCTION
Financial planning is very important for the organization because it help company
utilizing it all financial resources effectively and efficiently. Company can manage it finances by
preparing budget which help in reducing the expenses and increasing the revenue. The present
report is based on Clariton antique limited which is running by 4 partners, this company is
earning high profit and already had two branches in London. The present report covers, the key
component of financial statements is discussed. Along with this, the viability of project using
investment appraisals techniques can be assessed. Apart from this, the cost of two sources of
finance is analyzed.
TASK 1
1.1 Sources of finance
As per the given scenario, there are various type of sources of finance which are available
for the unincorporated and incorporated business. All the sources of finance are beneficial for the
organization for raising fund for the purpose of expanding business in new geographical area.
Some sources of finance available for business is discusses below:
 Unincorporated business: The organization who have separate legal identity from its
owner then business is known as unincorporated business (Locatelli, Invernizzi and
Mancini, 2016.). In this type of business whatever action is taken by business then only
owner is liable and it can be sued for the business activity.
Sources of finance for the unincorporated business are as follows:
 Retained profit; Profit is that which company earned by selling its product and services.
Company can use its own profit for expanding a business (Hodler, Luechinger and
Stutzer, 2015). Hence, it is the best sources of finance because company not need to pay
any type of interest or dividend for raising fund from retained profit. For example,
company can use its own profit without fulfilling any legal formalities and it doesn't
require taking permission from its shareholder.
 Sale of assets; Company can sale its own assets which are not longer in use. Along with
this fixed assets are those such as equipment and machine b y selling this company can
raise fund for expanding the business. For example, Clariton antique limited can sale its
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assets which are less or not in use and use that money for acquiring the building at
Birmingham. Firm not need to pay any interest for selling its own assets.
 Incorporated business: Organization who run its business by fulfilling all legal
formalities is known as incorporated business (Crosby and Henneberry, 2016). Company
who are running its under the incorporated business is legally declared as the corporate
entity.
Some sources of finance for incorporated business are as follows:
 Issue of share: shareholder who invest money in their business for the ownership and
therefore company can use those moneys for expanding business (Locatelli, Invernizzi,
and Mancini, 2016.). This is long term sources of finance for the Clariton antique limited.
If company raise fund from issue of share then it not required to paying back shareholder
their initial investment. Instead of it company need to pay only dividend to its
shareholder from its profit.
 Bank loan: Company can take loan from bank by fulfilling some legal formalities. It is a
long term source of finance for business (Geng, Bose and Chen, 2015). Apart from this
company need to pay fixed amount of interest with loan amount. For example, if
company take loan from bank then it need to keep security, so that in case if business
unable to pay loan amount then Bank repay it from security amount.
1.2 Implication of internal and external sources of finance
Internal sources of finance
Sources of
finance
Financial
implication
Legal implication Bankruptcy Dilution of
control
Retained profit If company raise
fund from
retained profit
them it not needs
to face any
financial
implication.
There is no need
to pay interest or
dividend because
company is using
its own money.
There is also no
legal implication
for using own
money. Company
not required to
fulfill any legal
formalities
(Greenbaum,
Thakor and Boot
2015.).
In case if
company unable
earn profit from
its new project
then it can suffer
from high loss.
There is no
dilution of
control.
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Sale of assets If organization
sale its own assets
then it not
required to face
any type of
financial issue.
There is no legal
formalities need
to fulfill because
company is using
it selling its own
assets
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External sources of finance
Sources of
finance
Financial
implication
Legal implication Bankruptcy Dilution of
control
Bank loan There are some
financial
implication which
company need to
face because
company is taking
loan from bank.
There is fixed
amount of interest
which company
need to pay to
bank and it also
need to keep
some security
before taking loan
from bank.
Bank only give
loan to
Organization after
seeing its
financial position.
There are little
legal formalities
which need to
fulfill (Iyer, da-
Rocha-Lopes and
Schoar, 2014).
If company
unable to pay
loan amount then
Bank sale its
security for
repaying the loan
amount.
Less dilution of
control
Issue of share Firm need to pay
dividend from its
profit to
shareholder. It
impacts the
company profit.
There are some
legal formalities
such as company
need to listed
itself in share
market for issuing
share from
shareholder.
There is less
dilution of control
and it is in
Shareholder hand.
1.3 Suitable sources of finance for Clariton antique limited
There are some internal and external sources of finance which are appropriate for the
Clariton antique limited. Clariton antique limited want to expand its business in Birmingham by
acquiring the building (Mina, Lahr and Hughes, 2013.). For this purpose it need to raise fund
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from the different sources of finance which are benefited for its new business and not cause any
financial implication. Therefore, Clariton antique limited can raise fund by issuing share from its
shareholder. In this company only required to listed itself at in market so that it can easily raise
fund from its shareholder. Along with this company need to pay dividend to its shareholder from
its profit. Further, company can easily raise fund from its retained profit because Clariton antique
limited not required to pay any interest or there is no opportunity cost charges at the time of
using own money (Bierman and Smidt, 2012.). However, for raising fund from the retained
profit company need to have enough profit. But it is a suitable source of finance for the Clariton
antique limited. Company can also take loan from bank if it required for longer period. It is so
because company need to pay interest loan and also need to keep some security. Bank only
charged fixed amount of interest on loan every month. This bank loan make easier for company
to make a systematic budget plan. Apart from this there is only little formalities which company
need to fulfill and then it can easily get money.
TASK 2
2.1 Cost of sources of finance
There are different type of cost which are associated with the different sources of finance.
According to the given scenario it is clear that company is using different sources of finance such
as venture capital and bank loan. There are some cost which is associated which are discussed
below:
a) Dividends; Clariton antique limited raise fund from venture capital that is We finance
limited. In this company need to pay dividend from its profit. Along with this cost of fund which
is company offering is a prefer stock that is changes afterward into a shareholder (Weil,
Schipper and Francis, 2013). So company purchase share and every stake holder take dividend
from Clariton antique limited. Apart from this it also impact the overall profitability of business
because dividend is distributed from profit. In this 'We finance limited take 20% of stake from
the business overall profit.
b) Interest: Clariton antique limited also raise fund from bank loan on which some cost
is associated that is interest rate (Bierman and Smidt, 2012.). At the time taking loan from bank
company also need to keep some security and pay specific amount of interest to the bank. Along
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