(DOC) Managing Financial Resources & Decisions

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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