Clariton Ltd Financial Analysis & Loan Proposal

This assignment involves a thorough financial analysis of Clariton Ltd to assess its suitability for obtaining a loan from We Finance Ltd. The analysis encompasses key financial ratios, profitability assessments, and an evaluation of the potential impact of the loan on Clariton's financial structure. The report culminates in recommendations regarding whether or not Clariton should accept the financial assistance offered by We Finance.

MFRD

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance for incorporate and unincorporated business..........................................3
1.2 Implications of the sources of finance...................................................................................4
1.3 Identifying the suitable source of finance for business.........................................................5
TASK 2............................................................................................................................................6
2.1 Assessing cost of different source of finance........................................................................6
2.2 Importance of financial planning...........................................................................................7
2.3 Information needed by different stakeholders foe decision making......................................7
2.4 Impact of selected sources of financial statements................................................................7
TASK 3............................................................................................................................................8
3.1 Cash budget and decision making for further improvements................................................8
3.2 Unit cost and pricing decision in the context of Clariton Antiques Ltd..............................10
3.3 Assessing the viability of proposed investment...................................................................10
TASK 4..........................................................................................................................................13
4.1 Presenting the key elements of financial statements ‘.........................................................13
4.2 Comparing the formats of final account presented by Clariton Ltd and sole trader............15
4.3 Interpreting financial statements by doing ratio analysis....................................................17
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
In the present era, growth and success of the firm is highly influences from the decision
taken by manager in relation to the financial aspects. Now, quick changes take place in the
business environment and market trend. In this, manager of the firm is required to take decision
which directly aid in the growth and success of it. Moreover, finance is one of the essential
elements that business unit requires to execute business plan within the suitable times frame. In
this, report is based on Clariton Ltd which offers antique products to UK people. By considering
the existing growth level business unit has taken decision in relation to expansion of area. In
this, report will describe the ways through which company can meet its monetary requirements.
Besides this, report will develop understanding about the financial tools and techniques which in
turn help in making profitable business decisions.
TASK 1
1.1 Sources of finance for incorporate and unincorporated business
Incorporated business:
 Venture Capitalists: Business entities of public and private firm can raise fund through
the means of venture capitalists source. Moreover, now with the aim to generate high
return venture capitalists firm lays emphasis on investing money in the growing business.
Thus, Clariton Ltd can raise fund by taking assistance from venture capitalists.
 Bank loan: Company can also meet its monetary needs and requirements by taking loan
from financial institution. Moreover, banking institutions prefer to give loan to the
venture whose business idea or plan is sound.
 Long term lease: Leasing is the most effective source which enables firm to fulfill
financial needs and requirements ion the best possible way (Caglayan and Demir, 2014).
On the basis of this aspect, by taking fixed assets on lease company can meet monetary
needs.
Unincorporated business

 Sales of assets: Sole traders and partnership firm can enhance money by selling fixed
assets which are not used by them in productive activities and functions.
 European grant: To enhance employment opportunity within the country now European
Union offers monetary support to the business units or entrepreneurs (Dalal-Clayton and
Sadler, 2014). Hence, sole traders can convert their innovative ideas into reality by taking
fund from UK government.
1.2 Implications of the sources of finance
Sources of
finance
Financial Legal Dilution of
control
Bankruptcy
Internal source of finance
Sales of assets For attracting
large number of
potential buyer
business unit has
placed
advertisement.
Transfer of
ownership in a
legal basis.
No No
Government
grant
Interest charged
by government
on loan amount.
In this, company
is required to
present fair
picture of
business idea and
position while
applying for
loan.
Less -
External sources
Bank loan Rate of interest
and loan
repayment
amount or
periodical
For getting loan
business unit has
to comply with
the legal
documentary
Control level of
financial
institution is
moderate in
business
Bank can
demand for loan
amount on prior
basis at the time
of bankruptcy.

installment process or
aspects (Fraser,
Bhaumik and
Wright, 2015).
activities.
Venture
capitalists
Such investors
employ money
with the aim to
generate high
return. In this,
dividend has
financial
obligation for the
firm.
They act as
equity investors
so according to
legal aspect
company is
required to give
shareholding
rights to them.
Do interference
in the decision
making aspect
and thereby
affects freedom
of business
entity.
Last priority in
getting payment.
Leasing Rent on leased
assets having
monetary
implications for
the firm.
Laws obliged
business entity to
return asset to
the real owner
after the
stipulated time
frame.
Lesser control is
limited to the
asset provided by
them.
At the time of
bankruptcy,
company is
required to return
back asset to the
real owner.
1.3 Identifying the suitable source of finance for business
From several internal and external sources of finance Clariton Ltd should meet
monetary needs by using the following means are:
Source Advantages Disadvantages
Venture capitalists We Finance Limited By raising fund from
venture capitalists firm
Clariton Ltd can take
benefits of monetary
and non-monetary
Loss of control is one
of the main drawbacks
of venture capitalists
source.

assistance. Moreover,
they provide
information to the
business unit about
market trend and
growth etc. In this way,
by using such
information company
can develop highly
competent policy
framework (Oh, Chang
and Cheng, 2016).
Bank loan Financial institution Tax exemption or
deduction on interest
amount is one the main
benefits which Clariton
Ltd will enjoy by
taking fund from
financial institutions.
Under bank loan,
business unit has
obligation to repay the
amount of loan with
interest after the specific
time frame. This in turn
imposes financial
obligation in front of
firm and thereby
negatively affects
working capital position.
TASK 2
2.1 Assessing cost of different source of finance
 Dividend: Usually, companies offer dividend to the shareholders when they sufficient
profit. Hence, to maintain faith of investors and attract more investors Clariton Ltd offers

dividend to the shareholders which in turn impose cost in front of them (Pearlson,
Saunders and Galletta, 2016).
 Interest: In bank loan, interest is the major aspect which in turn imposes monetary cost
in front of the firm and thereby affects net profit margin.
 Tax: According to Income Tax Act, interest which is paid by bank on loan amount is the
subject of tax concession or deductions. In this way, tax liability can be reduced by firm
to a great extent.
2.2 Importance of financial planning
 Budgeting: Clariton ltd frames budget by making proper forecast of income and
expenditure. Budgeting is highly significant which in turn enables firm to take corrective
measure or action by assessing deviations and its causes (Budgeting and its importance,
2017). In this way, by using budgeting technique company can assess the performance
level of each department.
 Implications in relation to failure of finance adequately: If business unit failed to make
proper allocation of resources then it directly places negative impact on the smooth
functioning of operations. The rationale behind this, without having adequate finance
business entity faces difficulty in the execution of plan.
 Overtrading: This situation occurs when business unit takes decision about expansion
more frequently. Moreover, overtrading may result into high interest expense which in
turn highly influences working capital aspect of firm.
2.3 Information needed by different stakeholders foe decision making
 Partners: In Clariton, partners require information about financial position and
performance of an organization. Moreover, they prefer to invest high amount only when
business venture is keep growing.
 Venture capitalists: Before taking investment decision venture capitalists make in-depth
evaluation of business idea and plan (Peltier, 2016). Hence, after assessing viability
venture capitalists take decision about investment.
 Finance broker: To prepare competent plan for the purpose of bank presentation broker
requires appropriate information firm’s liquidity as well as business ideas and concept.

2.4 Impact of selected sources of financial statements
When business unit raises finance from venture capitalists and bank loan source then
financial statements of firm are affected significantly in the following way:
Income statement
Debit side Credit side
Particulars Amount Particulars Amount
To dividend to
venture capitalists a/c
xxx
To Interest on bank
loan a/c (2%)
xxx
To brokerage charges
a/c (1%)
xxx
Balance Sheet
Liabilities Amount Assets Amount
Venture Capitalists xxx Bank (Venture
capitalists + bank
loan)
xxx
Bank loan xxx
The above mentioned table presents interest, brokerage and interest amount are the
expenses which in turn directly affects profit margin of firm. Further, Venture capitalists and
bank loan is liability for the firm which it has to repay after the specified time frame (Rubin,
2016). Meanwhile, amount of bank also significantly increased with the fund provided by
venture capitalists and banking institution.
TASK 3
3.1 Cash budget and decision making for further improvements
Cash budget of Clariton Ltd from January to Junes is as follows:

Interpretation and decision making: The above mentioned cash budget presents that receipts of
Clariton Ltd is increasing from January to April. Thereafter, receipts of firm are showing
decreasing trend from £345000 to £288750. Such decreasing trend is not good for the financial
health and position of company. Thus, Clariton Ltd needs to make focus on promotional aspects
which in turn helps it in enhancing cash receipts significantly. Besides this, supplier’s payment
aspect also shows fluctuating trend which in turn has direct impact on the position of cash deficit
or surplus. In the month of January, deficit of £649750 occur which is not good for the business
unit. Along with this, in the initial three months closing cash balance is negative which in turn
directly hampers the position and performance of firm. Thus, Clariton Ltd is required to make
changes in the existing strategic and policy framework which in turn helps it in attaining success.

3.2 Unit cost and pricing decision in the context of Clariton Antiques Ltd
Clariton Ltd offers antique products to the customers by sourcing them from various
suppliers. Hence, business unit has incurred following expenses with the aim to provide
customers with high quality products and services are:
Particulars
Amoun
t
Electricity expenses 1200
Miscellaneous expenditure 1500
Travel 1000
Fuel 2500
Depreciation 1200
Maintenance 2000
other expenses 2500
Salaries of personnel 12000
Promotional expenses 2000
Total cost 25900
Unit cost 86.33
Profit % 20
Profit (in amount) 17.27
price per unit 103.60
The above mentioned table presents that Clariton Ltd wants to attain 20% profit margin
by selling each antique product to the customers. On the basis of this aspect, Clariton Ltd
requires to charge £103.60 from each customer. By this, business unit would become able to earn
enough amounts of profit margin (Singh and Wasdani, 2016).
3.3 Assessing the viability of proposed investment
On the basis of give case situation, manager of Clariton can make value addition in the
money by investing money in proposed investment alternative such as option 1 & 2. In this, to
assess project viability investment appraisal tools have been applied by manager of the firm in
the following way:’

Payback period
Investment option 1 3 + (8.6 – 7.8) / 3.6
= 3.2 years
Investment option 2 3 + (4.4 – 4.2) / 2.4
= 3.08 or approximately 3.1 years

Recommendations: It is advised to Clariton Ltd to employ money in investment option 2 which
in turn offers high level of financial benefits to it. Moreover, payback period of option 2 is 3.1
which is lower than project A. Besides this, ARR of project A and B is 37.98% & 43.56 which
entails that option B will offer higher benefit to firm. On the other side, NPV of project A is £3.4
million which is higher than option B. Initial investment of both such proposal are highly
differing from each other. In this, it is highly difficulty for the firm to compare proposals with
different initial investment (Van der Stede, 2016). Thus, by considering the overall trend or
aspect it can be said that investment option B will prove to be more beneficial for Clariton Ltd.
In such proposal, business unit will get opportunity to earn high return by investing fewer funds
at initial level.

TASK 4
4.1 Presenting the key elements of financial statements ‘
 Income statement: Expenditure and income is the main components of profitability
statement. This in turn helps company in assessing the profit attained by it during the
time frame (Income statement, 2017). Besides this, it also provides deeper insight about
the expenses incurred by firm during the stipulated time frame. Elements of income
statement includes following aspects:
 Cash flow statement: This statement is prepared by the firm with the motive to assess
cash position and performance at the end of accounting period. Operating, investing and
financing activities are the main part of such statement which presents information about
inflow and outflow.
 Balance sheet: Statement of financial position (SOFP) summarizes the position of assets
and liabilities at the end of accounting year. Clariton Ltd prepares such statement with the
aim to assess liquidity and solvency aspect by including the below mentioned elements:

 Statement of changes in equity: Clariton Ltd prepares statement of changes in equity
with the motive to get information about dividend paid; changes take place in reserve etc
(Law and Singh, 2014). Hence, by considering this, company can take decision about
future aspects in relation to the issuance of shares and debt.

 Supporting notes: Accounting rules such UK GAAP and IASB mentioned by Clariton
Ltd while preparing final accounts. This in turn develops better understanding among
users of final accounts.
4.2 Comparing the formats of final account presented by Clariton Ltd and sole trader
Formats of Private limited company

Partnership firm: Such firm prepares all the financial statements which are mentioned
above. However, it prepares one additional account called as partnership which entails
information regarding the financial activities performed by partners during the year.
Sole trader: Business entity prepares income statement with the aim to get information
about profitability and expense level (Park and Kim, 2014). Hence, they are not obliged to follow
specific guidelines and publish accounts at the end of accounting year.
4.3 Interpreting financial statements by doing ratio analysis
Ratio analysis may be served as a tool of financial statement analysis which in turn helps
in presenting the clear picture of firm’s position in monetary terms. Hence, for the formulation of
highly strategic and competent framework ratio analysis has been conducted by Clariton Ltd.
Ratio analysis of Clariton Ltd is as follows:
 Profitability ratios: From financial statement analysis, it has been assessed that
profitability aspect or position of Clariton Ltd was not sound. In 2016, slow growth has
taken place in gross and net margin of firm. During 2016, NP ratio was only 3% that is
not good indicator. Hence, company is required to make focus on promotional aspects
which in turn helps in maximizing the profit level.
 Liquidity ratios: In the year of 2015, current and quick ratio of Clariton Ltd increased
significantly as compared to the recent past. Current ratio of Clariton Ltd increased
from .23 to .33. Besides this, increasing trend of quick ratio also shows that company’s
ability in relation to fulfilling the obligations increased significantly (Semrau and van
Oudenaarden, 2015). Thus, by considering this, it can be said that liquidity position of
Clariton Ltd was not sound in FY 2014 & 2015.
 Solvency ratios: Ratio analysis reveals that in 2015, debt-equity aspect of firm decreased
from 1.12 to 1.05. It shows that during the period of 2015 company has made payment to
debt holders. However, for developing highly suitable financial structure Clariton Ltd is
required to maintain ideal ratio such as .5:1. For this purpose, business unit is needed to
reduce dependency level from debt instruments.
 Efficiency ratios: Below mentioned table of efficiency ratio analysis clearly presents
that, in the year of 2015, Clariton Ltd has made optimum use of its assets. In FY 2015,

asset turnover ratio increased from 1.55 to 1.60. In addition to this, inventory turnover
ratio also inclined from 22.71 to 22.91 which in turn show that stock is sold and replaced
more quickly.

CONCLUSION
By summing up this project report, it has been concluded that Clariton Ltd should take
financial assistance from We Finance ltd. Further, by taking loan from financial institution
business organization can develop highly optimal financial structure. It can be revealed from the
report that by financial planning helps in reducing the negative implications to a great extent.
From ratio analysis, it has been articulated that profitability and liquidity position of business
organization is not sound. Thus, by taking strategic measures or actions business unit can
enhance profitability aspect to the significant level.

REFERENCES
Books and Journals
Caglayan, M. and Demir, F., 2014. Firm Productivity, Exchange Rate Movements, Sources of
Finance, and Export Orientation. World Development. 54. pp. 204-219.
Dalal-Clayton, B. and Sadler, B., 2014. Sustainability appraisal: a sourcebook and reference
guide to international experience. Routledge.
Fraser, S., Bhaumik, S. K. and Wright, M., 2015. What do we know about entrepreneurial
finance and its relationship with growth?. International Small Business Journal. 33(1).
pp. 70-88.
Law, S. H. and Singh, N., 2014. Does too much finance harm economic growth?. Journal of
Banking & Finance. 41. pp.36-44.
Oh, W. Y., Chang, Y. K. and Cheng, Z., 2016. When CEO career horizon problems matter for
corporate social responsibility: The moderating roles of industry-level discretion and
blockholder ownership. Journal of Business Ethics. 133(2). pp.279-291.
Park, K. I. and Kim, D., 2014. Sources of momentum profits in international stock markets.
Accounting & Finance. 54(2). pp.567-589.
Pearlson, K. E., Saunders, C. S. and Galletta, D. F., 2016. Managing and Using Information
Systems, Binder Ready Version: A Strategic Approach. John Wiley & Sons.
Peltier, T. R., 2016. Information Security Policies, Procedures, and Standards: guidelines for
effective information security management. CRC Press.
Rubin, I. S., 2016. The politics of public budgeting: Getting and spending, borrowing and
balancing. CQ Press.
Semrau, S. and van Oudenaarden, A., 2015. Studying lineage decision-making in vitro: emerging
concepts and novel tools. Annual review of cell and developmental biology. 31. pp.317-345.
Singh, C. and Wasdani, K.P., 2016. Finance for MSMEs in India: Sources and
Challenges. SMEs. p.270.