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MFR (Managing Financial Resources) Individual

   

Added on  2020-01-07

21 Pages5686 Words209 Views
Managing financial resources & decisions1

Table of ContentsINTRODUCTION................................................................................................................................3TASK 1.................................................................................................................................................31.1 Identifying the sources of finance that are available to CAL.....................................................31.2 Assessing the impact and influence of variety of sources available to Clariton.........................41.3 Choosing the appropriate source of finance...............................................................................5TASK 2.................................................................................................................................................52.1 Comparing the cost of equity versus debt financing..................................................................52.2 Explaining the importance of financial planning........................................................................62.3 Describing the information needs of different types of decision-makers...................................62.4 Evaluating the impact of finance sources on the final accounts.................................................7TASK 3.................................................................................................................................................83.1 Making budget & its interpretation for appropriate decisions....................................................83.2 Calculating the cost per antique item and making pricing decisions..........................................93.3 Assessing the commercial viability of the various investment projects...................................10TASK 4...............................................................................................................................................124.1 Explaining the purpose of financial statements........................................................................124.2 Comparing appropriate formats of financial statements for variety of businesses...................124.3 Interpreting the findings of the final accounts for Clariton Antiques.......................................14CONCLUSION..................................................................................................................................16REFERENCES...................................................................................................................................172

INTRODUCTIONMoney is the first and foremost requirement of every commercial as well as serviceorganization unit either at a time of new start-up, global expansion or for the continuance of theroutine functionality. Clariton Antiques Ltd (CAL) was started by four partners initially as anunincorporated business but steadily growth of the firm achieved a good reputation by sellingdifferent antique products. Now, it owes two branches running in London, however, for theexpansion, partners are considering commencing operations at a new branch in Birminghamrequiring a beginning investment worth raise £0.5 million. It has option to “go public” and raiserequired money for the prospective expansion project. Therefore, the report will critically examine both the favourable and negative aspects ofevery finance source that are being available to Clariton and chose the most appropriate ones.Thereafter, in order to manage funds appropriately, it will describe the need and substantial benefitsof financial plan. Along with this, financial accounting concepts and statements will be explained toguide managers for the preparation of their annual reports whilst the result will be analyzedincorporating ratio analysis technique of strategic financial analysis. TASK 11.1 Identifying the sources of finance that are available to CALUnincorporated organizations: Any of the commercial establishment or business unit thatis owned by an individual or group of several members and regulated by them is calledunincorporated business typically includes sole proprietorship & partnership. Owner’s investment: It is the best source especially for the sole traders as they can investtheir personal savings available as a residue from the total income. Individual does not need torepay their own funds to himself or herself back and available at zero cost.Trade credit: Sole traders & partnership can also deal with the manufacturers for the tradecredit agreement. Under this, they can buy material without making immediately payment at thepoint of purchase and eliminates the need of high capitalization (Bir, 2016). Lease: In order to reduce excessive capital need to acquire new building, office and land,leasing is considered as the best choice. In such regards, unincorporated businesses can set termsand conditions with the real owner and receive rights to use assets for a fixed period of lease bymaking lease charges at the beginning of every year.Hire purchase: This alternative is often used by these form of businesses to get equipmentslike computer, vehicle & others by paying some amount immediately and residual as per decided3

instalments in the agreement (Hire purchase, 2016) Overdraft: Immediate or urgencies for short-term fund can be effectively resolved throughoverdraft by taking permission from the bank to withdraw some extent amount from the moneyavailable in their account. Sale of assets: Disposable or assets classified as not in use can be disposed-off in market forthe monetary collections by the sole trader or partners:Incorporated organizations: Corporations/Companies having a separate legal entity fromthat of owners are a type of incorporated business like Clariton Antiques Ltd. Go public/share capital: “Go public” is an option to the CAL to gather money from peoplein the form of share capital by the issuance of ordinary & preferences shares.Debt fund:Raising money through external borrowing is also a choice exists to the Clariton,in which, it can contact to the financial brokers and borrow required capital for the proposedexpansion plan (Zhao and Lu, 2016). Retained profits: Putting back the accumulated surplus of historical reporting years is anoption available to the company to meet out their capital requirement without any excessive legalformalities. 1.2 Assessing the impact and influence of variety of sources available to ClaritonLegal: There are high and complex legal formalities attached with debts like collateral, reportingannual accounts & others. However, hire purchase, leasing, overdraft & sales of assets require somedocumentation for transfer the right of utilization or ownership. In contrast, as Clariton will opt firsttime for the option “go public”, therefore, it will be necessary to list the share in a stock exchangebefore issuing it to the public. Financial:On debt-funding, trade credit, overdraft, hire purchase & leasing, interest is charged by theexternal parties for receiving some extra amount of return. Unlike it, on the disposal of assets,removal charges and freight outward required to be paid (Kogadeeva and Zamboni, 2016). Despiteit, although dividend is not a legal requirement, but still, to retain equity capital, Clariton will haveto pay reasonable dividend so that they will not disposed-off their share. Bankruptcy On debt funding, business is accountable to repay lenders with the borrowed money even ifClariton fails. In contrast, repayment of equity capital is not compulsory because ordinary investorsare the owners and they will be paid by the remainder fund available after payment to outsiders like4

lenders, suppliers & others. Dilution: Issuance of share capital and collecting money through venture capitalists results insignificant dilution of control to the investors, as a result, they can intrusion in the corporatedecisions & control Clariton’s activities. Unlike this, there are no such rights or power available tolenders, suppliers, lessor & assets vendor, in other words, it does not dilute or diversify control(Finkler and et.al., 2016). However, retained profit is already the rights of shareholders, therefore, itbring no change in dilution. 1.3 Choosing the appropriate source of financeBenefits Drawbcks Go to the publicNo legal consequence in failure of dividend payment No need of collateral Excessive legal complianceCharges of listing fees & othersDilution of entity control Debt Tax-deductible interest charges Long-term funds collection No control diversification Legal consequences for failure of interest payment Collateral securityComplex legal formalities Retained earningsNo legal requirement No change in control No interest & dividend need Fear of dissatisfaction among shareholders Looking to the results, it is founded that Clariton must choose a combination of Go to thepublic & long-term bank borrowings to collect £0.5m to establish a new branch for expanding theoperations. Here, a long-term loan has been suggested because of tax advantages & preventingtransfer of controlling rights. However, on the other side, go to the public has been suggested tomanage gearing level, otherwise, collection of money only via debt raise fixed financial cost to avery high level, and failure of complying with such duty may cause legal consequences. By using acombination of both these sources enable CAL to manage their solvency position and thereby long-term liabilities can be meet out timely. TASK 22.1 Comparing the cost of equity versus debt financingDividend: Equity cost is slightly complex as it comes from the money invested by theshareholders. They typically require a reasonable rate of return based on the market performanceand stock volatility (de Lecea, Cooper and Smit, 2016). Out of profits earned, Clariton will be needsto pay dividend considering competitors, shareholders expectation & market volatility also. Here, it5

is required to be noted that it is not a legal requirement; therefore, if managers decides to notdistribute any dividend because of less return and any other reason, then it will not lead to cause anylegal consequences on the firm. Interest: Fund that Clariton borrow from the market to meet their capital requirement iscalled debt; in return, lenders need the interest for the risk undertaken or the privilege. Thus, thefixed or volatile burden is the cost of borrowings. In accordance with the debt covenants &agreements for repayment schedule, it is a legal obligation to make payment of instalmentsincluding interest; otherwise, breach of such duties raises legal consequences to the CAL. Tax benefits: Although cost of debt is legally compulsory for the firm, still it iscomparatively cheaper source than equity just due to the tax relief. In UK, taxation body, HerMajesty Revenues & Custom (HMRC) gives taxation reliefs to the corporations to the extent ofmoney paid as an interest to meet debt obligations and on remainder balance, tax duties are imposedand levied. On the contrary, dividend distribution decisions are made after subtracting taxationduties from the remainder of profits available.2.2 Explaining the importance of financial planningFinancial or monetary planning refers to setting out a plan & policies that how a businesswill achieve its set strategic targets & objectives. It starts with setting out a plan and afterwards,creating policies for the resources, material, equipment and other on the basis of timeframe. CAL’sfinancial planner has to create a best plan considering the proper and proficient management offunds to get good results on this. Budgeting: Budgetary planning will be of great significance for the Clariton to construct aplan to tailor future capital requirement, its allocation & distribution, better and proficientutilization of resources and manage surplus fund through generating larger revenue over expensesincurred (Martin, 2016). Failure of business to finance adequately: In the current dynamic era, there are toughchallenges exist in the front of organizations. For instance, volatility in interest, fall in aggregatemarket demand, inflation & many others. Meeting out challenges and financial threatening andachieving desired goals can only assured through an appropriate & suitable financial plan. Overtrading: Too aggressively and suddenly expansion of the CAL through taking toomuch long-term borrowings from the market and financial institutions is called overtrading.Financial Planner makes plan and keep track over the functionality so as to detect what potentialfinancial threatening can be arises (Bondarenko, 2016). Moreover, decisions regarding capitalstructure (equity versus debt) help to manage balanced structure and combat overtrading possibility.6

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