91 - MANAGING FINANCIAL RESOURCES

MFRD
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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
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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.
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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.
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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.
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 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
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