Diverse Sources of Finance in Business : Report
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Added on 2020-01-16
Diverse Sources of Finance in Business : Report
Added on 2020-01-16
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TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3TASK 1............................................................................................................................................31.1 Different sources of finance ..................................................................................................31.2 Implication of sources of finance ..........................................................................................41.3 Appropriate sources of finance .............................................................................................4TASK 2............................................................................................................................................52.1 Cost of two sources of finance ..............................................................................................52.2 Importance of financial planning ..........................................................................................52.3 Assessment of information for taking financial statements .................................................62.4 Effect on the Financial statements of Clariton Antiques limited company..........................7TASK 3............................................................................................................................................73.1 Cash budget analysis .............................................................................................................73.2 Calculations for unit cost ......................................................................................................93.3 Investment appraisal technique .............................................................................................9TASK 4 .........................................................................................................................................134.1 Key component of financial statements ..............................................................................134.2 Comparison of financial format ..........................................................................................134.3 Interpretation of financial statements ..................................................................................13CONCLUSION..............................................................................................................................16REFERENCES .............................................................................................................................162
INTRODUCTIONOrganizations working in different industries need to manage their financial resources forcarrying out business activities in effective manner. Proper and effective strategies supports incarrying out required business functions in sequential and systematic manner (Shenming andet.al., 2011). It is vital that financial planning should be done in the enterprise for runningbusiness activities in effective way. Present report describes about diverse sources of finance thatcan be used in the company for starting financial operations. The report describes aboutappropriate sources of finance that can be used in the enterprise for carrying out businessfunctions. Moreover, cost of different sources of finance and significance of financial planningalso have been described in the report. TASK 11.1 Different sources of finance Clariton Antiques limited company is looking for funding different operations. There aremany sources of finance that can be used for funding the business activities. These are followingsources for the organization :-Unincorporated business :- Business which do not have any legal identity are considered in thiscategory (Shepherd, 2015). Owner deserves all the liabilities and responsibilities of his debt.Company can adopt method of selling the assets of the organization and it will provide a mediumfor funding the operational activities of the entity. Unused goods and services are sold by makinguse of this method and it provides a method for raising funds to carry out business activities(Thompson, 2012). In addition to that profits and personal savings of the enterprise can also beused for raising funds to carry out business activities. Organization can adopt method of sellingthe stocks and internal stock of the company can be sold in market. Other than this owner'sinvestment can be used which will help for funding the financial activities of the enterprise. Inthis method no cost is needed to be paid and due to that profitability of business does notdecrease and financial performance does not get affected. Incorporated business :- These types of firms have legal identity and rules and norms areimposed on it. These business gets benefited by taxation rules and it supports for carrying outbusiness activities. Bank loan and Bank overdraft can be taken for funding the business activities3
and it will aid for financing the business functions (Claxton and et. al., 2011). It is assertive thatspecific interest rates charged by banks should be paid on due time. In addition to that equityshares can also be used as a method for funding business operations. By making use of thismethod firms can raise funds by issuing shares. Venture capital is an external source of financethat can be used by business and it provides finance to the companies for expanding operationsof the enterprise. It also imposes financing cost in terms of stake on the business which alsocreates financial burden on the company. 1.2 Implication of sources of finance It is assertive that Clariton Antiques limited company should assess and evaluateimplication of different sources of finance. Implications of various sources of finance is asdescribed :- Sources of finance Financial implications Legal implications Dilution of control Internal sources offinance Sale of assets Assets of theorganization reduces No any legalimplication -Investment of owner No financial impact isobserved on thecompany --External sources Venture capital Company is requiredto give financing costin terms of stake Company need toprovide financialposition along withreturn on investment Owner losses controlon his firm Internal sources :- Organization can choose method of selling the assets and when anorganization adopts this method than impacts are observed on the financial position andperformance of the organization (Doğan, 2013). It is not required by company to pay any type ofcost for raising funds by making use of this method. In addition to that legal implication is alsoobserved and it is not required to follow any legal rules. When personal savings are used by theenterprise than past profits are used by the company and no cost occur by the firm for making4
use of this method (Fadare, 2011). Legal formalities are not used and vary low dilutions ofcontrol occurs. There is very low dilution of control in this method. External sources :- Equity is a method in which shares are sold by the organization for raisingfunds to carry out business activities. It is required that dividends should be paid to theshareholders and due to that overall financial performance of the enterprise gets influenced. It isrequired that company should be listed in stock market and high dilution of control occursbecause there are interference among stakeholders (Baker and Ricciardi, 2014). In addition tothat Bank loans are also an medium for raising funds for carrying out business activities. It isrequired that interest amount should be paid to brokerage and due to it financial performance ofthe enterprise gets affected. 1.3 Appropriate sources of finance Clariton Antiques limited company uses bank loans as a source of finance and due to thatit becomes possible for raising funds for carrying out business activities. There are manyadvantages of using bank loans as a source of finance and it is required that advantages anddisadvantages of this method are as mentioned :- Advantages :- It provides a method for enhancing profit of the organization by providing amedium for making investments in business activities. It also helps for making improvements infinancial performance of the enterprise. Company need not to loose after raising funds forcarrying out business activities (Bandarchuk, and Hilscher, 2013). Disadvantages :- It becomes difficult for the firm to pay bank loans and to raise finance frombanks loans are most typical source of finance (Bierman and Smidt, 2012). It is required thatparticular interest rates charged by the firm should be paid on due time and due to that financialperformance of the enterprise gets affected. Other than that company can adopt followingsources :- Venture capital :- Clariton organization can use this method for raising finance for theorganization. This source provides proper and better financial services. Financial charges arelower than compared to another sources. However, it is required that high amount of dividendshould be paid due to which profitability of the business gets affected. 5
TASK 22.1 Cost of two sources of finance Clariton Antiques limited company need to raise funds for executing required businessactivities. The company is raising funds through bank loans and equity shares and it is requiredthat cost of different sources of finance is as follows :- (a) Dividends :- Venture capital is a method through which funds are raised by organizations forcarrying out business activities (Brigham & Ehrhardt, 2013). It is required that dividends shouldbe paid to shareholders and it gives impact on the overall financial performance of theorganization. Cited firm require to give dividends against the invested money and it is a cost forthe company. We finance is needing 20% stake which is too much high for the company. (b) Interest and taxes :- It is required that interest and taxes should be paid on bank overdraft andbank loans that are taken by banks. Assistance from brokers is taken by banks and it helps forfinancing the operations of the enterprise (Chandra, 2011). Company needs to pay annual payrate of 2% for next 10 years and it will help for financing the operations of the entity in effectiveway. It is cost for the organization and due to that liability is increases for longer duration.Financial brokers arrange loan for the organization and they charge money which is 1 % due towhich it becomes cost for the organization. (c)Tax :- is a type of deduction that is given by banks for company for financing its operationalactivities (Davies And Crawford, 2011). In addition to that banks are giving relaxations on taxburden and it is helping for making increments in financial revenues earned by the entity. Taxbenefits are attached which is good for the organization. 2.2 Importance of financial planning (a) Budgeting :- Financial planning supports for running the operational activities of ClaritonAntiques limited company in effective way. Different functions including human resourcemanagement, financial, operational and marketing related functions can be accomplished inbetter way by making use of appropriate financial planning (Cumming, 2007). Two major waysfor which financial planning is important includes Budgeting in which plans related to futurefinancial activities are made. Plans are made for cash inflows and cash outflows and incomes andexpenditures are also estimated by making use of financial planning (Arnold, 2014). Company6
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