91 - MANAGING FINANCIAL RESOURCES

MFRD
1

TABLE OF CONTENTS
Table of Contents.............................................................................................................................2
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Identified sources of finance..................................................................................................3
1.2 Assess the implications for using...........................................................................................4
1.3 Evaluating the best source of finance....................................................................................5
Task 2...............................................................................................................................................5
2.1 The cost of two sources of finance........................................................................................5
2.2 Importance of financial planning...........................................................................................6
2.3 Information need for making decision on financing..............................................................7
2.4 Impact of financial statement.................................................................................................8
TASK 3............................................................................................................................................9
3.1 Prepare cash budget and analyze them..................................................................................9
3.2 calculation of cost per unit and pricing................................................................................10
3.3 Assess the viability of the business project.........................................................................11
TASK 4..........................................................................................................................................15
4.1 Different financial statements..............................................................................................15
4.2 Compare financial formats used by sole owner and partnership.........................................17
4.3 Interpretation of ratios.........................................................................................................18
REFERENCES..............................................................................................................................23
2

INTRODUCTION
Managing financial resources is very important for the organization for running all
business activities smoothly. It helps firm in reducing the overall expenses and increase the
revenue of company. Company can properly utilize all its fund by making budget because it
helps organization in understanding where they need to spend and where they need to save
finance. This present report is based on the Clariton antinque limited which want to expand its
business for increasing sale and for earning profit. In this report discussion is done on the various
sources of finance which are available for the business. Along with this. The importance of
financial planning for the business is explained. Apart from this, impact of the sources of finance
on the financial statement of the firm is analyzed.
TASK 1
1.1 Identified sources of finance
A.) Unincorporated business: Unincorporated business is that which does not have any
separate legal identity. In this type of organization, all liabilities are bear by the owner for any
action of business. Further, it may be used for any activity.
Some sources of finance for unincorporated business are as follows:
Bank loan: Clariton Company does not have enough money and so, it can take loan from bank
for short period and long time (Agarwal, Ben-David, and Evanoff, 2015). Bank charges interest
and company needs to repay it within a given time period.
Leasing: It is the best source of finance because company can hire equipment on lease and it
needs to pay rentals to lessor. There are different types of lease that are financial and operating.
B.) Incorporated business: It is a business which has many benefits for the partnership or sole
proprietorship (Leung, Springborn and Brockerhoff, 2014) . It includes additional tax deduction
and liability protection. Along with this, in this type of business, it can be company have right to
issue share for raising fund.
Various sources of finance of incorporated business are as follows:
Equity share: Company can issue shares from its shareholders and in return, it needs to
pay dividend to its shareholder. For the owner of equity ordinary share are issues. Company need
to pay to its shareholder dividend from its profit.
3

Retained earnings: The profit which is remained after paying dividend to its shareholders
is known as retained earning of company (Hiesl, Crandall and Wagner, 2016.). Company can use
this retained profit for expanding its business. It is one of the best suitable sources of finance for
the organization so that it can easily use its own money for expanding its business.
1.2 Assess the implications for using
Implication of internal and external sources of finance
Internal sources Financial
implications
Legal implications Dilution of control
Retained earning It is highly cost
effective.
There is no obligation
for the organization
related to interest and
installment
(Zimmermann, and
Jørgensen, 2015).
Shares are not issued
so, there is no dilution
of ownership.
leasing In this, lessor is
responsible for the
maintenance of assets.
There are some terms
of taking assets on
lease that are needed
to be followed by both
lessor and lessee.
In leasing, there is no
dilution of control.
Bank loan In this, company needs
to pay loan amount in
installment and
including this, it needs
to pay fixed amount of
interest (Capital
Investment Appraisal
Bank can take legal
actions if loan is not
paid on given time.
There is no dilution of
control.
4

Techniques. 2015).
Issue of share The cost on issue of
share is incurred by
owner.
There is provision of
law on which
company needs to
comply.
In exchange of
financial statement,
there is dilution of
control.
1.3 Evaluating the best source of finance
Most appropriate sources of finance for Clariton Company is Bank loan because it wants
£0.5 in which bank charges 2% interest and broker will charge 1% fee on the amount secured
and interest for loan which is payable over the 10 years. It is the best source of finance because
company needs to pay a fixed amount of interest on the loan amount. There are some legal
formalities which company needs to fulfill at the time of taking load from bank (Leung,
Springborn and Brockerhoff, 2014). Along with this, company needs to keep some security for
taking loan and so, in any case, if it is not able to pay loan on time, then bank can repay it by
security. On the other hand, company is approached by “We finance limited” that is a venture
capital of organization. It offers the full amount of loan £0.5m for 20% stake in the business.
When Clariton takes loan from venture capital then it turns into shareholders. It is also the best
mode for raising fund which is available for Clariton. There are different type of sources of
finance available for the business, but those discuss above are the appropriate sources of finance
TASK 2
2.1 The cost of two sources of finance
According to the given scenario, Clariton antique limited approaches by We finance
limited and in alternative it can use the services of finance broker.
There are some cost associated with this finance which are as follows:
 a) Dividends: Clariton antique limited raise fund from the We finance limited where
stake is 20% for the business ((Agarwal, Ben-David, and Evanoff, 2015)). At the time of
taking loan from company it is required to pay dividend from its profit to venture capital.
5

 b) Interest: Clariton antique limited is taking loan from bank where it need to pay 2% of
interest amount on loan amount. Along with this it also needs to pay 1% of fee over the
loan amount to finance broker. It is the cost which is associated with the bank loan
amount.
 c) Tax: At the time if company take loan from bank then it need to pay fixed amount of
interest. If firm take loan from bank then it give tax relaxation to the Clariton antique
limited (Capital Investment Appraisal Techniques. 2015). According to the given
scenario, company take loan from bank for expanding its business. Bank not take any
taxation from organization for giving them loan.
2.2 Importance of financial planning
Planning is very important for the organization so that it can carry out all its business
activity in systematic manner. It is necessary for the organization to planned all the financial
activities so that it not face trouble in future related to availability of finance. Apart from this
financial planning help company in reducing unnecessary expenses and increase the overall
company profitability. If proper financial planning is done then company can easily expand its
business in new geographical area. There are some financial planning method which are
discussed below;
a) Budgeting; Budgeting is the best method for managing the financial resources. If company
make effective budget for its company then it can easily reduce the unnecessary expenses and
increase the revenue (Leung, Springborn and Brockerhoff, 2014). Along with this by making
budget company ensure that where it wants to spend money and how much.. Clariton antique
limited can make effective budget for its for making its company financial stable.
b) Implications of failure to finance adequately; If company is unable to manage its finance
then is suffer a lot. Adequate finance help company in running its business smoothly and
systematically. Along with this if company not have adequate balance then it can impact the
organization in negative way. Company cannot operates its business activities because it have
insufficient amount.
c) Overtrading: Over trading take place when company expand its operating activities quickly
and this negatively impact the overall business. If company is over traded then it face liquidity
problem and run out of working capital (Hiesl, Crandall and Wagner, 2016.). Clariton antique
6

limited need to make sure that it can manage resources by using the the resources effectively. If
financial plan is better then company can avoid the over trading activities. Apart from this, if
there is more production as compare to the available resources then overall business activities
will be negatively impacted.
2.3 Information need for making decision on financing
Clariton antique limited is a partnership firm which is run by four partners. Now this
company want to expand its business in new geographical area. So Clariton antique limited is
raising fund from different sources, for this purpose it need to collect some information and share
information with its partners. It is necessary for the organization to collect information which
help them in making appropriate decision. Company can collect various information which are
given below
a) The partners: For taking fiance from partner it need to collect various information. In
the business it is necessary for the firm to know how much proportion of capital is given to each
partner. All the partners in business must know rules and regulation so that it all the business
activities can be carried out smoothly. All the profit and loss shared equally between partner so it
is necessary that all information share with them before raising fund from the different sources.
b) Venture capitalist (We Finance Limited); Clariton antique limited have opportunity to
take loan from We finance limited for expanding its business. For this purpose, company can
collect information regarding divided which firm need to pay to its shareholder for raising fund
from them. As per the given scenario, Clariton antique limited taking loan £0.5 m on which 20%
is the stake which company need to pay. On the other hand, venture capital need to take
information from the Clariton antique limited that is return on investment. It also need to look
the financial position of the organization so that it can make decision that it need to give fund or
not.
c.) Finance broker; Finance broker is that who play role as intermediaries between bank
and organization. Along with this, company pay interest amount to the fiance broker for taking
loan from the bank. As per the given scenario, company is raising fund from the bank loan in
which it need to pay interest amount 2% to bank in 10 years. For raising fund form bank
company need to know the fee charged by the broker.
7

2.4 Impact of financial statement
There are different type of financial statements is prepared by the firm such as balance
sheet, income statement and cash flow statements. If company raise fund from different sources
then it has great impact on the financial statement which are discusses below:
Venture capitalist (We finance limited): if company take loan from the venture capitalist
then it need to pay cost in term of stake. Clariton antique limited pay dividend to its stakeholder
from its profit amount (Dorfman and Cather, 2012). According to the given scenario, Clariton
antique limited is partnership firm so it need to prepare income statements. In income statements
this sources of fund show that expense increase so the profit and loss statement affects. Along
with this capital liabilities of the firm is increase so it impacts positively in the balance sheet.
Finance broker: Broker charge fee from the organization, so it is expenses for the
organization which reflect in the profit and loss statement of the income statement (Agarwal,
Ben-David and Evanoff, 2015.). Along with this it goes to loss side, at the financial statement.
On the other hand it is treated in liabilities side of balance sheet. Its impact on balance sheet is
positive while on the income statements it is negative.
8

TASK 3
3.1 Prepare cash budget and analyze them
Particulars January February March April May June
Receipts
Received in same
month 15000 22500 30000 15000 15000 3750
Received in one
month 120000 240000 360000 480000 240000 240000
Received in two
month 22500 22500 45000 67500 90000 45000
Total receipts 157500 285000 435000 562500 345000 288750
Payments
Payment to suppliers 807250 137250 119750 437250 227250 219750
Shortage/Surplus -649750 147750 315250 125250 117750 69000
Opening cash
balance 110000 -539750 -392000 -76750 48500 166250
Closing cash
balance -539750 -392000 -76750 48500 166250 235250
Interpretations
Cash budget has prepared by the clariton antique Ltd in order to ascertain the movement
of cash inflow and outflow into and out of the current business (Cantillon, Maître and Watson,
2016). This statement is also regarded as one of the important financial statements in
determining the financial performance of an entity as this will lead an entity towards the deficit
or surplus.
9

Receipts- This is regarded as basic flow of income to be generated by an enterprise from trade
receivables in various percentages. The initial amount of receipts is lower which further gets
increased with the passage of several months.
Payments- The pressure of payment is higher in the initial month that reduces over the month
which helps in enhancing the cash inflow to be incurred by the business. After initial quarter the
clariton has generated higher amount of surplus generated in the business.
Months November December
Janu
ary February March April May June July
Sales 150000 150000
3000
00 450000 600000 300000 300000 75000
15000
0
Received in
same month
1500
0 22500 30000 15000 15000 3750
Received in
one month
1200
00 240000 360000 480000 240000 240000
Received in
two months
2250
0 22500 45000 67500 90000 45000
3.2 calculation of cost per unit and pricing
Operating and running cost Total cost Units Per unit
Depreciation(Charge on machines) 5000 4000 1.25
Fuel and lubricant oil 2500 4000 0.625
Supervisor wages 500 4000 0.125
Repairs and Maintenance
Repairs 800 4000 0.2
Overhead 1000 4000 0.25
Petty expenses 250 4000 0.0625
10

Standing charges
Salary of manager 3000 4000
Insurance 1500 4000
Rent of premises 2100 4000
Motor vehicle 5800 4000
General expenses 4200 4000
Interest 1800 4000
Total standing cost 15400 4000 3.85
Total Cost per unit 6.3625
Add profit@20% 1.27
Add Service taxation @16% 0.2032
Selling price 7.83
Cost plus pricing- The fixed and variable cost will be included in the prices developed by an
entity owner for various products along with the specific amount of profit percentage included in
the prices set buy an individual.
Absorption- it is that kid of pricing technique which helps in enhancing the overall market
position of the business as this stresses on enclosing all kinds of costs to be incurred by an entity
with little profit amount. The competitive fight will be provided by the clariton as they will not
added specific amount of profit percentages to attract wide number of customers towards their
business.
3.3 Assess the viability of the business project
Years Project A Cumulative cash flows
0 8.6 -8.6
1 1.6 -7
11

2 2.8 -4.2
3 3.4 -0.8
4 3.6 2.8
5 4 6.8
6 4.2 11
Calculation of payback period
= 3+0.8/3.6
=3+0.22
=3.22 years
Table 1: Payback of Project B
Years Project B Cumulative cash flows
0 4.4 -4.4
1 0.8 -3.6
2 1.4 -2.2
3 2 -0.2
4 2.4 2.2
5 2.3 4.5
6 2.6 7.1
Calculation of payback period
3+0.2/2.4
=3.08 years
Interpretations
Traditional form of capital budgeting emphasizes o the concept of time value of money in
which cash flows are evaluated in order to determine time period (Finkler, Smith, Calabrese and
12

Purtell, 2016). The time period has identified in which higher amount of returns will be produces
by an enterprise. Both the projects have met the criteria of selection. The selection criteria has
determined by the entity owner after assessing various facts and figures in order make important
decisions on the future position of the business entity. Project B will be considered by an
enterprise has this resulted into lower time period.
Years Project A Pv@14% Present value
0 8.6
1 1.6 0.8771929825 1.4035087719
2 2.8 0.7694675285 2.1545090797
3 3.4 0.6749715162 2.2949031551
4 3.6 0.5920802774 2.1314889985
5 4 0.5193686644 2.0774746574
6 4.2 0.4555865477 1.9134635003
Total 11.975348163
NPV 3.375348163
Table 2: NPV of Project B
Years Project B Pv@14% Present value
0 4.4
1 0.8 0.8771929825 0.701754386
2 1.4 0.7694675285 1.0772545399
3 2 0.6749715162 1.3499430324
4 2.4 0.5920802774 1.4209926657
5 2.3 0.5193686644 1.194547928
13

6 2.6 0.4555865477 1.184525024
Total 6.9290175759
NPV 2.5290175759
Interpretations
Modernized version of capital budgeting technique has utilizes the concept of time value
of money. This tool helps in enhancing the performance of the available business proposals held
by an entity which generates cash flow (Renz, 2016). The discounting factor rate has uses which
evaluate the proposals. The net present value of the projects is assessed that generated higher
amount of returns in the near future. Future conditions of the business are evaluated in advance
in order to meet the needs and the expectations of the business. The requirements of an entity
will be met by accomplishing their higher expectations by generating higher amount of returns.
The determination of discounting rate is regarded as important factor in this particular approach
as wrong selection of rate will lead to the deflating returns generated by the business in the near
future. Clariton Antique Ltd is required to assess their existing information in order to produce
higher results in its upcoming years. The selection criteria set by an entity is of 2 million which
have met by both the proposals. The best suitable project which will be taken into account is
Project B.
ARR
Year Project A Project B
0 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
14

6 4.2 2.6
Total 19.6 11.5
Average 3.67 1.67
ARR 37.98% 43.56%
Interpretations
Average rate of return is that technique of capital budgeting which stresses on analyzing
the existing facts and figures of the business (Burger, Kaufman and Atkinson, 2015). The major
role played by this technique in determining the profitability if both the projects evaluated by
applying this particular technique. The current results has shown that both the business proposals
has produces higher rate of return but the highest rate among both the business proposals is
Project B.
TASK 4
4.1 Different financial statements
Income statement- The basic objective of every business is to earn profit by making higher
amount of sales and the revenue (Greene, Brush and Brown, 2015). The assessment of profit is
done through this particular statement which helps in analyzing the profit of the business
enterprise. The sales and other sources of income are evaluated by excluding various expenses
from the main figure of sales incurred by an entity. The income statement has various names for
different entities of business such as profit and loss account, profit and loss appropriation.
Particulars Amount Particulars Amount
To purchases XXX By sales XXX
To wages XXX By closing stock XXX
To GP XXX
Particulars Amount Particulars Amount
To depreciation XXX By GP brought down XXX
To PBD XXX By commission XXX
15

received
To NP XXX
Balance sheet- The financial position of an entity will be determined by assessing the internal
capabilities of the business. Assets and liabilities is that important element which needs to be
evaluated by the firm as good financial position will be strengthened by using their existing
financial resources. It can be prepared at every specific point of time.
Equity and liabilities Amount
Shareholder’s fund
Share capital XX
Reserves and surplus XX
Non-current liabilities
Long term debt XXX
Current liabilities
Trade payable XXX
Total liability XXX
Assets
Non-current assets
Plant and machinery XXX
Current liabilities
Cash XX
Inventory XX
Trade debtors XX
Total assets XXX
Cash flow statement- The movement of cash inflow and outflow will be ascertained by
analyzing the internal capabilities in order to pay off their short term market obligations incurred
in the business. It has various segments such as operating, investing and financing activities.
Cash flow statement
16

Net profit XXX
Operating activities XXX
Investing activities XXX
Financing activities XXX
Opening cash XXX
Closing cash XXX
Changes in equity- The opening and closing values of the equity shareholders incurred in the
business are included along with the dividend incurred in an enterprise. The amount of equity
shares will be changes along with the passage of time.
Particulars Amount
Opening share capital XXX
Retained earnings XXX
- Dividend XXX
Closing share capital XXX
4.2 Compare financial formats used by sole owner and partnership
Sole trader- The owner of the business is not registered in the eyes of law as they have
established their business on their own support without any legal existence in the external
business world. There is no burden of following specific rules and regulations on the preparation
of financial statements according to the companies act and legal entity (Kaplan and Atkinson,
2015). Capital raised by an individual through venture capital mode will increases the existing
amount of capital in the business enterprise which should be recorded in the balance sheet. The
amount raised by the business using this source of finance as major approach to fund the
business requirements is included in the capital of an entity. On the other hand, it also affects the
profitability of the corporation as the amount paid by the clariton the capitalist in form of interest
will reduces the profit earned by the business enterprise.
Particulars Amount
Profit XXX
17

(-) Interest XXX
Particulars Amount
Equity and liability
Equity
Shareholder’s fund
Share capital XXX
Partnerships- This is regarded as another important business operated by two or more than
partners collectively by bringing investment in order to fund their business (Honore, 2016). The
format has changed in this form of business in which profit and loss statement will transform into
profit and loss appropriation which divides overall share of profit into various categories among
different partners. The interest charged b the bank owner and brokerage fees charged by the
broker will in turn decreases the profit.
Particulars Amount
Profit XXX
(-) Interest on loan XXX
(-) Brokerage XXX
Particulars Amount
Long term debt
Bank loan XXX
4.3 Interpretation of ratios
Particulars Formula 2015 2016
Profitability ratios
Revenue 1220 1255
GP 175 178
18

GP ratio Gross profit/Net sales*100 14.34% 14.18%
NP 33 23
NP ratio Net profit/Net sales*100 2.70% 1.83%
Operating profit 46 57
Operating profit ratio Operating profit/Net sales*100 3.77% 4.54%
Liquidity ratios
Current assets 71 105
Current liabilities 161 167
Inventory 46 47
Quick asset Current assets-inventory 25 58
Current ratio Current assets/Current liabilities 0.44 0.62
Quick ratio Quick asset/Current liabilities 0.15 0.34
Interpretations
This amount of profit is regarded as fundamental basis in order to earn net profit which
has greater importance in the external market. The profit has generated after excluding the cost
19

of sales from the main profit to be earned by an entity. The ratio has decreases which the shows
the deficiency of an enterprise.
Interpretations
The profit produces after deducting operating expenses from the gross profit will results
into the generation of this kind of profit. The amount of profit has increases from previous year
to the next year due to lesser imposition of administration expenses.
Interpretation
20

The complete profit earned by an enterprise while conducting their business operation
will lead an entity towards the production of net profit. The amount o ratio has reduces due to
higher taxation effect.
Interpretations
The major objective of this kind of ratio is to judge the liquidity of an enterprise which is
essential by assessing the internal capabilities in order to meet short term obligations. The
current ratio assesses the current liabilities incurred in the business in relation to the current
liabilities imposes in the business.
21

Interpretations
Quick ratio is another important ratio of liquidity used to evaluate the current assets
currently hold by an entity for short term period (Renz, 2016). The inventory are excluded from
the current assets as his will not convert easily in form of cash. This ratio has decreasing as their
current assets are strong in order to handle the heavy amount of liabilities incurred in the firm.
22

REFERENCES
Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S. and Evanoff, D.D., 2015.
Financial literacy and financial planning: Evidence from India. Journal of Housing
Economics, 27, pp.4-21.
Leung, B., Springborn, M.R., Turner, J.A. and Brockerhoff, E.G., 2014. Pathway‐level risk
analysis: the net present value of an invasive species policy in the US. Frontiers in Ecology
and the Environment. 12(5). pp.273-279.
Dorfman, M. S. and Cather, D. A., 2012. Introduction to risk management and insurance.
Pearson Higher Ed.
Hiesl, P., Crandall, M. S., and Wagner, R.G., 2016. Evaluating the long-term influence of
alternative commercial thinning regimes and harvesting systems on projected net present
value of precommercially thinned spruce–fir stands in northern Maine. Canadian Journal of
Forest Research. 47(999). pp.203-214.
Zimmermann, F. and Jørgensen, C., 2015. Bioeconomic consequences of fishing-induced
evolution: a model predicts limited impact on net present value. Canadian Journal of
Fisheries and Aquatic Sciences. 72(4). pp.612-624.
Capital Investment Appraisal Techniques. 2015. Online. [Available through: <
http://www.capital-investment.co.uk/capital-investment-appraisal.php>. [Accessed on
10nd January 2017].
Finkler, S. A., Smith, D. L., Calabrese, T. D. and Purtell, R. M., 2016. Financial management for
public, health, and not-for-profit organizations. CQ Press.
Cantillon, S., Maître, B. and Watson, D., 2016. Family financial management and individual
deprivation. Journal of Family and Economic Issues. 37(3). pp.461-473.
Grant, R. M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
Sharma, E. and Keller, P. A., 2017. A Penny Saved Is Not a Penny Earned: When Decisions to
Earn and Save Compete for Consumer Resources. Journal of the Association for Consumer
Research. 2(1). pp.000-000.
Honore, P., 2016. An Examination of Public Health Financial Management System
Accreditation. Journal of Health Care Finance. 43(2).
23

Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Greene, P. G., Brush, C. G. and Brown, T. E., 2015. Resources in small firms: an exploratory
study. Journal of Small Business Strategy. 8(2). pp.25-40.
Wicker, P. and Breuer, C., 2015. How the economic and financial situation of the community
affects sport clubs’ resources: Evidence from multi-level models. International Journal of
Financial Studies. 3(1). pp.31-48.
Burger, R. H., Kaufman, P. T. and Atkinson, A. L., 2015. Disturbingly weak: The current state of
financial management education in library and information science curricula. Journal of
Education for Library and Information Science. 56(3). p.190.
Dicko, S. and El Ibrami, H., 2013. Directors’ connections, financial resources and performance:
An in-depth analysis of Canadian companies. International Journal of Business and
Management. 8(10). pp.1-14.
24