Financial Analysis of Clariton Antiques

This assignment delves into a comprehensive financial analysis of Clariton Antiques Limited. It utilizes a range of financial ratios to assess profitability, liquidity, solvency, and efficiency. The analysis highlights key trends in Clariton's financial performance over two years, drawing conclusions about its strengths and areas for improvement. The assignment also touches upon financing strategies and capital budgeting decisions facing the company.

MANAGING FINANCIAL
RESOURCES &
DECISIONS

INTRODUCTION
In the corporate world, finance plays most important role in any firm for establish as well
as operate. It helps the entrepreneur to deal with different monetary decisions such as allocate
financial resources to each organisational function, derive cost of production and selling prices
etc (Role of Finance in an Organisation, 2017). Higher the availability of financial resources will
help in generating more revenue and expanding the product range. In this context, there are
various tools and techniques used by management for taking highly effective business decisions
to make it more profitable in this segment. In the present case an organisation i.e. Clariton
Antiques limited which is going to expand its firm in Birmingham. Further, for this, it is required
to take loan or finance from Bank as well as Venture capital. It describes different financing
sources which can be used as internal and external sources for raising fund. It shows that how
financial sources affect the profitability and financial statements of Clariton company. Further,
the report focuses on cash budget and numerous types of capital budgeting techniques and tools.
Besides it, at the end of report it describes about financial performance of Clariton using
different financial ratios.
TASK 1
1.1 Identification of source of finance which are accessible for Incorporated and unincorporated
firms
Unincorporated businesses
These type of business does not have separate legal entity. The owner of the business
himself is liable for all. He can be sue or be sued in can of any illegal action takes place
(Kalamova, Kaminker and Johnstone, 2011). Unincorporated businesses include the following:
The sources through which these kinds of businesses can finance are mentioned below:
 Sale of assets- By selling of assets either tangible or intangible, a firm can generate
funds. The assets which are not in use or some unwanted assets can be sold easily. This is
the easiest way to do finance.
 Personal savings- Any unincorporated firm's owner gives first priority to use his
personal savings, because this is the only source of finance where not any kind (interest)
of repayment is required. The owner can take his personal savings to generate funds.
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 Retained earnings- Retained earnings are the ultimate source of raising funds in the
business. Since, firm maintains retained earning out of profits, considering only that if
any kind of need generate for finance in future so that it can easily manage funds out of
retained earnings (Caglayan and Demir, 2014).
Incorporated businesses
These type of business is having separate legal entity. The owners and the
incorporation(also known as corporation) are two separate entity. Only the corporation is liable
to sue or be sued in any case of action or inaction takes place. Incorporated businesses include
the following:
 Private Limited companies
 Limited companies
Clariton Antiques Ltd. is a limited company, so it comes under the category of
incorporated businesses. The sources through which Clariton Antiques Ltd. kind of
incorporations can finance are mentioned below:
 Bank loan- Finance through bank loan is become very common now a days. Company
can take loan easily from the bank on certain interest rate for a specific period of time
(Mann, 2012). It has to kept some collateral security on behalf of loan. At the end of
specific time period the principle amount along with interest has to repay, it is the
obligation for the company. One plus point is there that company can apply for more
amount of loan, if it does higher valuation of the new projects. But also there is a risk that
if company is unable to repay the principle or the loan amount then the has full right to
ceased the property of the company.
 Hire purchase- Hire purchase is a method in which buying of goods on paying the
amount in instalments for a period of time. In this the possession of the goods is to be
transferred to the hire purchaser but not the ownership. The ownership is to be transferred
only when the last and full settlement of instalment has made.
 Venture capital- When the company raise its funds through venture capital firms then it
is termed as venture capital. In this the number of new shareholder has increased along
with the existing shareholders (Serrasqueiro, Maçãs Nunes and Leitão, 2011). The
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company has to pay dividend to both new as well as existing shareholders. Due to
providing more dividend the profit of the company will go down.
1.2 Implications of different sources of finance on Clariton Antiques Limited
Sources of finance Legal implications Financial implications Dilution of control
Financing sources at internal level
Sale of assets There is not any legal
rules and regulations
imposes.
Cost of finance is not
there but total assets
reduces when the
Clariton sell its assets.
-
Personal savings - Using personal fund
capital or liabilities
increases.
-
Retained earnings Here the Clariton uses
profit earned in an
accounting year where
not any legal
implications are there.
Using the remaining
profit lead to expand
business and generate
more sales and revenue
(Michalski, 2013).
There is no dilution of
control.
Financing sources at external level
Bank loan The Clariton needs to
complete all the
documentation process
and show its assets and
liabilities and liquidity
position as well.
Bank loan declines net
profit of respective
company because there
are high charges imposes
in terms of interest
amount.
Control on business is
with the entrepreneur
only but in case
Clariton unable to
repay loan then bank
can cease overall firm.
Hire purchase As per the hire purchase
documents such as
agreement is to be
There are no cost of
finance while increases
profit because other
Control not dilutes in
hire purchase.
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signed by both the
parties.
party gives rent on
property or assets.
Venture capital Needs to fulfil
documents legally and
show return on
investment and
profitability ratios
(Megginson, Ullah and
Wei, 2014).
Clariton must give
dividend to stockholders
by which profit reduces.
Control of the firm is
diluted with the
venture capitalist i.e.
We Finance Limited.
1.3 Evaluation of most suitable financing sources for Clariton in order to raise fund
Clariton Antiques Ltd. is having two sources for raising funds i.e. Bank loan and Venture
capital. Now, it has to be decided by the company that either it should go with the bank loan or
go with venture capital or should go with both the sources for raising fund. What will be the
most appropriate way for financing and also the cost will be low.
Bank Loan: - It can be defined as the amount which is borrowed from bank at certain
interest rate for specific period of time in lieu of some collateral security. This is the most
common and popular way of raising capital by the companies. Company is has advantage of
taking more loans from commercial banks or financial institutions, if it has high valuation of the
company and new venture project as well (Van Auken and Carraher, 2013). It also has
disadvantage that Clariton has to repay principle amount with the interest or in case if the
company fails to repay the bank, then it has the right to cease the assets of the firm.
Venture Capital: - The amount which is to be raised through venture capital, then firm's
shareholders of the company will increase. This source of raising fund is helpful in making
strategies in building competitive advantage. The firm has to give dividend to shareholders out of
profit, so the overall profit of the company will be reduced. Clariton Antiques Ltd. should raise
its funds in combination of both bank loan and venture capital. As both are having different
advantages, so the company should take ideal ratio of Debt equity i.e. 0.5:1 in both the cases.
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TASK 2
2.1 Financing cost imposes by bank and venture capitalist on Clariton
A) Dividends: Cost of finance in venture capital is in terms of stake, afterwards it
converts into stockholder of the business entity. Key cost of venture capital is dividend which is
imposes by We Finance Limited in the present case (Braun, Tietz and Harrison, 2013). Here
stake charges are 20% of the whole loan amount in where total cost of £0.5m will be £1000000.
B) Interest: Another source used by the Clariton for expand its company in other country
i.e. Birmingham is bank loan which imposes cost of finance in form of amount of interest. In the
present scenario the bank allow respective organisation at 2% interest rate on annual basis for the
period of 10 years. Here it has to pay cost worth £10000 each year and for the 10 years cost will
be £100000. Along with this brokerage charges are 1% annual for 10 years where amount will be
worth £50000. Further, total cost of bank loan for Clariton is worth of £150000 up to 10 years.
C) Tax: As per the respective cost taxation amount Clariton not required to pay such sum
of money. The reason behind allowing relaxation from taxation policies is that raising fund from
commercial banks. It can be said that bank loan is the most benefited because it provides tax
relaxation to the firm which helps to earn higher profit (Avkiran, 2011).
2.2 Importance of financial planning
Financial planning:- The first and foremost activity which is done by the company before
starting its operational activities and that is financial planning. Company do this because it gives
a proper direction of setting funds for each activity which is going to be done in the future. It can
be said that it is a root map for allocating funds. It plays very important role in a company.
(A) Budgeting:- Preparing budget is not an easy task for any company, because various
things are to be considered for preparing this. Budget shows the estimated figure which is going
to be incurred in the upcoming year. Clariton Antiques Ltd. should focused on forecasting right
things so that it may help in achieving goals and objectives in near future or in the coming year.
Budget is a layout for a company for allocating funds in every department. There are various
types of budgets prepared by the company, like sales budget, purchase budget, cash budget, etc.
(B) Implications of failure of finance adequately:- Before doing anything like planning
budgeting etc. the first thing which is must for doing any business is finance. Without finance no
one can thought of any kind of business (Stent, Bradbury and Hooks, 2010). The optimum
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utilization of finance is required in any organization. Clariton Antique Ltd. must consider that
always required amount of finance has to be available in the company. The funds neither should
be ideal nor should be short, both the conditions are not good. Though finance is the life and
death for any company, so there must be proper maintenance of finance. It is to be used for
various purpose like payment to creditor, payment of direct expenses, payment of interest,
payment for selling and distribution, purchasing of fixed assets etc.
(C) Over-trading:- In general over-trading means excessive buying and selling of
stocks. This type to situation creates when the broker of the investor does these kind of
transactions for getting more brokerage. Clariton Antique Ltd. should do such kind of financial
planning so that it can help to reduce costs and generate more profits, which is ultimately going
to help sustaining in the future (Adiloglu and Vuran, 2012). Definitely financial planning will
help to achieve its objectives.
2.3 Informations which needed for taking appropriate financing decisions
When any source of finance takes decision for provide financial services to any
organisation then it needs different informations which are described as below:
A) Partners: In the business when new partner comes and give capital for business
expansion then it needs to know that profitability of the firm is up to which extent better. Further,
it has to collect information that current and past trend of the firm is upward or downward. Along
with this as per the profit level partner allow the firm for provide financial resources.
B) Venture capitalist (We Finance Limited): In the present case We Finance Limited is
a VC which allows Clariton in order to increase fund for expand company in Birmingham. We
Finance Limited relies on the return on investment ratio of the firm because higher the ratio lead
to attract more number of shareholders. The venture capital provides fund from the shareholders
hence it must take informations about the profitability, return on investment and financial
position of the Clariton (Brigham and Houston, 2012).
C) Finance Broker: The person who become an intermediary between bank and Clariton
is known as finance broker. For provide financial services by the bank it needs to analyse
financial statements as well as liquidity position of the firm because higher the liquidity ratio
lead to meet with obligations in proper manner. Apart from this bank needs to know valuation of
the company in the industry.
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2.4 Impact of bank loan and venture capitalist on financial statements of Clariton
A) Venture capitalist (We Finance Limited): The venture capitalist taking cost of
finance in terms of stake where Clariton pay dividend to shareholders. Higher the amount of
dividend raises indirect expenses and declines net profit at the end of accounting period in
income statement. It leads to negative impact on the profitability ratios of Clariton. Apart from
this cash collection increases as well as in the liabilities side of B/S total capital is enhances as
well. Hence, it affects in positive way on the statement of financial position.
B) Finance Broker: Moreover, in case of bank loan it imposes cost of finance i.e. 2% of
£0.5m and brokerage charges are 1%. Here indirect expenditures of the Clariton increases by
worth of £150000 which lead to impact on net profit ratio in negative way (Bennouna, Meredith
and Marchant, 2010). Further, cash collection as well as total capital increases by which total
assets and total liabilities raises at the end of accounting year in Balance sheet. Hence, such this
way financial statements of Clariton influences in positive and negative both manner.
Influences on the income statement and balance sheet of Clariton of bank loan and We
Finance Limited is shown below:
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TASK 3
3.1 Cash budget of Clariton, its analysis and suggestions for improve incomes
Cash budget is a significant statement for every company because it helps to finance
manager in order to predict about the future disposals and incomes. In the budgeting process,
there are different kinds of budgets prepared such as cash, purchase, production, material budget
etc. For preparing such budgets, several methods are used by the firm such as zero based,
traditional, modern, incremental budgeting method etc (Cash Budget: Definition & Examples,
2017). In the present case, cash budget is prepared for Clariton from January to June that is
shown and analysed below:
Analysis
From the above prepared cash budget, it can be depicted that in the initial month i.e.
January Clariton was not able to generate cash balance. In this period, the company earned
negative cash balance i.e. -£649750 due to increasing disposals and reducing cash collection or
incomes in the month of January. Among the overall six months, at the end of March the
business entity generated the highest cash flow worth £315250 compare to other months which
shows that in March it was able to increase sales and incomes. Here, cash inflow is at the higher
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and disposals are at the lowest level worth of £435000 and £119750 respectively which lead to
enhance cash balance at the end of March. At the end of June, Clariton's cash balance was very
low worth £69000; reason for the lower net cash balance is firm has high bank overdarft. Further
due to the bank overdrafts cash collection is only 5% in the same month.
Suggestions in order to improve net cash balance
For enhancing net cash balance, policymakers of Clariton are required to make changes
and improve their policies for selling antique item in the market. Along with this, they need to
offer different types of schemes and discounts which lead to increase attraction of customers for
consuming goods and services of Clariton (Maroyi and van de r Poll, 2012). It can be suggested
to the management that it should adopt cost control methods and increase inventories by using
TQM, lean production and Kaizen approach in the firm.
3.2 Methods for assessing cost and selling prices of each antique item
In order to determine cost of production and services produce by the firm there are all the
expenses such as prime cost, direct and indirect costs as well as various overhead expenditures.
In the present case, Clariton is a service based industry where production costs is not incurred. In
this, only non- production costs are to be added for determining the cost of every antique item
which is shown below:
Particulars Amount (£'000) Amount (£'000)
Direct expenses:
 Labour costs 50
 Cost of material purchase 80
 Other expenses 20
Prime costs:
Overheads cost of production 70
Total cost of production 220
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Non production expenditures:
 Administrative expenses 90
 Distribution and selling costs 50
 Cost of maintenance 63
 Advertising expenses 26
 Rent of the property 14
 Insurance amount 25
 Tax 12
Total non production expenditures 280
Total costs 500
Number of items 10
Cost of each unit will be total cost / number of units = 500/10 = £50
Furthermore, being a service based firm for determine cost of each unit only non
production expenditures are considers which is as follows:
Cost per unit = total non production expenditures / number of items = 280/10 = £28.
Apart from this, for deriving selling price per item, cost plus pricing method is to be used
in which percentage of profit is added in cost which is given as below:
Cost of each item £28
Profit 20%
Selling prices = 28 + 20%
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= £33.6
From the above example it can be said that Clariton will sell every item at price of £33.6
in the market.
3.3 Assessing viability of project with help of financial tools
It is important for every business organisation for assess viability of project when there
are two or more mutually exclusive investment criterias. For this various types of techniques and
methods are available like as Payback period, IRR, NPV, ARR, profitability index etc (Gitman
and Maxwell, 2011). In the present scenario Clariton uses PP, ARR as well as NPV which is
shown below:
Payback period (PP)
NPV
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ARR
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Suggesting to the Clariton for undertake one project among two on the basis of below
stated table of comparison:
Looking at the above table it can be analysed that project two is better because it provides
lower payback period that is 3 year compares than one i.e. 3.2 years. Further, as pee the average
rate of return also project two is better as it has 43.56% which able to meet with benchmark i.e.
35% and 2.5 years. Apart from this on the basis of net present value project one provides higher
future value at the end of six year which is £3.37m and meet with the Peter's criteria i.e. £2m. In
the financial tools NPV is the most reliable method and gives proper information. Along with
this it considers time value of money as well as PV factor (Hise and Strawser, 2013). Hence, it
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can be recommended to Clariton that it should adopt project one for make an investment and get
better return.
TASK 4
4.1 Various key components of different financial statements
Clariton Antiques Ltd. maintains the following financial statements. It includes:
 Income statement- Income statement shows the income and expenses of the company.
Key elements it includes are as under-
1. Gross profit
2. Indirect expenses
3. Indirect incomes
4. Net profit
 Statement of cash flows- Cash flow statement (CFS) is to be prepared by the Clariton
Antiques Ltd. to know the availability of the cash in the company. This statement shows
the net inflow and outflow of cash (Baker and English, 2011). It includes three activities
which are as follows:
1. Operating activities
2. Investing activities
3. Financing activities
 Statement of changes in equity and gains- The statement which shows the changes which
has to be made in the equity and the retained earnings in the balance sheet is termed as
Statement of changes in equity and gains.
 Statement of financial position- Statement which shows the financial position of the
Clariton Antiques Ltd. is the balance sheet of the company. It comprises two sides Assets
side and the Liabilities side.
Assets side- Fixed assets
Current assets
Liabilities side- Equity capital
Long term loans
Short term loans
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Current liabilities
 Notes to the financial statement- Whatever disclosure has to be made by the company
below the balance sheet is to be called as notes to the financial statements (Maditinos and
et.al., 2011). These disclosures are to be used for the further references.
4.2 Differentiation of financial statements among sole proprietor and Clariton Antiques Ltd.
Basis of difference Sole proprietor Clariton Antiques Limited
Necessary financial
statements
Those firms which not requires to
make all the statements but to
understand their financial position
in industry it prepares following
statements:
 Profit and loss account
 Balance sheet
For such type of partnership
organisations it is very necessary to
prepare different financial statements
in legal manner. Statements which
needs to prepare are such as follows:
 Statement of profit and loss
 Statement of comprehensive
income (SOCI)
 Cash flow statement
 Explanatory disclosure
 Shareholder's equity and gains
statement
Balance sheet In the B/S capital account is only
one because there is only one
owner of business (Chen and
et.al., 2011).
Here in the B/S capital accounts are
prepared on the basis of number of
partners.
Amount of tax In the SOCI amount of tax is not
includes by the sole proprietors.
For the Clariton it is necessary to add
taxation amount in SOCI.
Requirement of
auditing
Not need to follow rules and
regulations of the audit.
For the business of partnership the
company must complete auditing
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process in the legal way.
Publishing Not requires to publish any
document of the firm whether it is
financial or non- financials.
Being a partnership company Clariton
must publish all the financial and non-
financial documents in form of annual
report (McGuire, Omer and Sharp,
2011).
Accounting
standards and laws
There is no requirement to follows
such rules and standards.
While preparing financial statements,
CA of Clariton must use all the
standards and theories such as IFRS,
UK standards, GAAP theory etc.
Formate of SOCI and B/S of sole trader and Clariton is as follows:
Sole trader Clariton
Income statement
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Balance sheet
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4.3 Interpretation of financial statements of Clariton by financial ratios
In the accounting and financing world there are various kinds of measurements are
available for interpret financial statements and performance of an organisation. One of the
widely used and most reliable measurement is financial ratios which are shown below for
Clariton Antiques Limited:
Profitability ratios
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Liquidity ratios
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Solvency ratio
Efficiency ratios
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Analysis of financial ratios
Above carried out all the financial ratios shows that the Clariton business entity it able to
earn higher net profit at the end of financial year 2016. NP ratio increases from 1.89% to 2.63%
which indicate that it has lower indirect expenses and debt amount at the end of FY 2016. Apart
from this liquidity position of the company is also better in next year because current and quick
ratio are 0.33:1 and 0.19:1 which are improves from 0.23:1 and 0.08:1 in the FY 2015 (Epstein
and Jermakowicz, 2010). Hence, it can be identified that Clariton is more able to meet with its
debt obligations. It can be identified that position of the firm in terms of debt to equity is better
because respective ratio reduces from 0.51:1 to 0.47:1 which is lower than the ideal debt equity
ratio i.e. 0.50:1. According to the efficiency ratios the management utilizes total and fixed assets
as well as stock which it has in the firm in proper and effective manner. It helps to enhance the
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level of efficiency ratios such as inventory, fixed and total assets turnover ratios. Overall ratios
indicates that the Clariton is able to perform well at the end of next accounting period.
CONCLUSION
From the above analysis it can be depicted that financial resources are the most important
assets for Clariton and financial planning as well which helps in smooth functioning of the
business. There are the most suitable financing sources are like as bank loan and venture capital
which allows to provide fund for expanding business at Birmingham. It can be recommended to
Clariton that it needs to update policies and formulate new strategies for increase customers by
which it able to reduce negative cash balance. It can be suggested that management needs to
adopt project one which has higher net present value compare to project two. On the basis of
financial ratios performance of Clariton in its industry is well.
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