Clariton Financial Statement Analysis

This assignment requires a detailed analysis of Clariton's financial statements using various financial ratios. The analysis focuses on evaluating the company's liquidity, solvency, and profitability over two years (2014-2015). The student interprets the trends in these ratios, compares them to industry standards, and draws conclusions about Clariton's financial health. Additionally, the assignment includes recommendations for cost control strategies and improvements to address any identified weaknesses.

MANAGING FINANCIAL
RESOURCES AND
DECISIONS

INTRODUCTION
Finance plays an important role in the business in order to successfully operate in the
industry. Further, every organisation needs adequate financial resources for meet with its
objectives and targets in the proper manner. Apart from this decision also an effective element
for the company which helps in smooth functioning of entity. The present report focuses on
different financing sources for raising fund for the purpose of business expansion. Clariotn
Antiques limited which is a partnership company which uses bank loan and venture capital for
expanding firm in country Birmingham. Further, respective report shows cost of financing
sources and their influence on financial position of the Clariton. In the accounting and financial
process cash budget and capital budgeting techniques are very important which shows through
the present report. Beside this, in the last part the research describes financial position as well as
performance in two accounting years.
TASK 1
1.1 Financing sources available for various businesses
Incorporated firms: In the corporate world, entrepreneur who must follow all the legal
rules and regulations for establish and operating firm in the industry are identified as
incorporated companies (Fracassi, 2016). Different kinds of financing sources which are
available for respective companies are as follows: Bank loan: In this the entity approaches to the bank for raising fund. It is the widely used
as well as the best source of finance for the such corporate business organisations. Preferred stock: In this source the seeking firm who wants to raise fund issues both
shares such as equity and preference as well as debentures in the market. In terms of such
source the company has to give preference to the preference shares while giving
dividend.
 Factoring: As per the source business entity sales its debtors as well as account
receivables at the discounting rate. The person of buyer collects amount from debtors on
the behalf of the organisation is known as factors. It takes charges from management in
terms of premium which is financing cost for firm (Weber, Staub-Bisang and Alfen,
2016).
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Unincorporated firms: Those types of businesses which can start and run their company
without completing any legal formalities are known as unincorporated business entities.
Financing sources available for such firms are given as below: Sale to stock: As per the internal source the company sale its stock which are unused and
not helps for generating sales and revenue (Internal Sources of Finance, 2017). The
amount which comes after selling respective stock is to be used for expanding business.
 Owner's fund or savings: Further, the entrepreneur who saved money or amount in his
personal life is drawn in the business for expanding. In this the company has not give any
type of cost or expenses.
1.2 Implications on business environment of internal as well as external financing sources
Financing
sources
Financial implications Implications in terms
of legal
Dilution of control
External financing sources:
Bank loan In terms of finance it
takes higher amount of
interest as a financing
cost which impacts
adversely on the business
and lead to reduce net
profit as well.
While taking bank loan
the entity needs to
complete all the process
of documentations as
well as show its
business valuation and
financial position as
well to the bank.
In this control of
business is not diluting
with bank.
Preferred stock Here the entity has to
give preference to those
stock which are
preference shares in order
to give dividend amount.
It leads to increase
indirect expenses and
It is necessary to
complete the process of
listing in stock market.
Without it enterprise
cannot issues shares
through IPO.
Control is diluting
with the stockholders
or shareholders.
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reduce net profit of firm
as well (Minnis and
Sutherland, 2016).
Factoring In this the external person
is appointed who takes
premium charges from
management which
increase expenses and
reduce profitability.
Needs to complete
documents with the
external factors.
No dilution of control
is here.
Internal financing sources:
Sales of stock Total assets are reduced
due to decreasing
inventory of the firm.
Not any legality
requires.
There is business
control is not diluting.
Owner's savings It helps to increase
capital, so there is
positive impact on the
financial position of firm.
Due to using personal
amount there in not any
type of legal formalities
are comes into
consideration
(Weygandt, Kimmel and
Kieso, 2015).
-
1.3 Evaluation of suitable financing sources for Clariton firm
In order to raising fund from market most appropriate or suitable financing sources are
bank loan as well as venture capital which are evaluated below:
Benefits/limitations Bank loan Venture capital
Benefits The respective sources if helpful
for the Clariton in order to know
Further, venture capitalist helps to
provide better and effective business
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its business valuation in its
respective industry.
It is a fast as well as quick
process of raising fund in order to
business expansion.
decisions to make more profitable and
productive.
It helps to Clariton in order to manage
overall business in proper and
effective manner.
Limitations Very main drawback of bank loan
is that it takes cost in form of
interest for long term which lead
to influence net profit of Clariton.
Another limitation is that if
business is unable to repay loan
then bank can wind up overall
business.
In terms of disadvantages here the
company loss its control over the
business and it dilutes with VC.
Apart from this the Clariton mus
shows its policies that how company is
currently operating in the industry as
well as in future how it will be operate
(Pijper, 2016).
TASK 2
2.1 Costs imposes by different financing sources on the enterprise
Dividends: According to the dividend it is cost of expenses of finance which are imposes
by the venture capital on the business. In the present research report venture capitalist firm WE
Finance Limited takes 20% stake of the whole business while taking amount worth 0.5m GBP.
Interest: Another type of cost is interest which is imposes by the commercial banks on
the Clariton when it takes loan or debt form them. Here when the respective business
organisation raise loan worth 0.5m GBP then it has to pay 2% interest rate for 10 years (Flower,
2016). As per this cost Clariton has to pay overall cost of finance is of worth £100000 for whole
period of ten years. Further, to the finance broker firm has to pay £50000 while using bank loan.
Tax: While taking fund from commercial banks then there are tax deductions are allowed
to the Clariton. Further, it can be said that the business is not needs to pay taxation amount which
helps to enhance net profit and reduce indirect expenditures in the enterprise.
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2.2 Financial planning's importance in the Clariton organisation
Financial planning means deciding in advance how much to spend, on what to spend
according to funds. Financial planning is a long term strategies which help in managing income
in an efficient manner (Brown and et.al., 2015). It can help Clariton Antiques Ltd to construct the
foundation to build a secure financial future. Through the financial planning Limited company
manage its short term and long term goals. In the various avenues its significance it given as
below:
Budgeting: It is a process in which entity able to know its financial informations for the
future accounting period. It can be possible when management use proper and appropriate
financial planning process. If it cannot adopt such process then it will not able to predict future
financial data.
Implications of failure to finance adequately: Moreover, when the company has not
adequate financial resource then it cannot produce goods and services in the proper way (Gullifer
and Payne, 2015). Hence, for increase revenue and allocate financial resources in adequate
manner to different organisational functions planning process of financial is very important.
Over trading: When the management produces high number products and services in
comparison to availability to resources and raw material then it can be known as over trading. It
can be reduce by using financial plan and adopting different tools such as control over the costs,
allocate resource in proper way etc.
2.3 Informations needed for making financing decisions
The partners: When in the firm new partner going to invest then he needs informations
of company's financial performance in the industry (Golosov and Tsyvinski, 2015). Further, he
requires that firm is up to which extent able to generate profit or loss after selling goods and
services to the customers.
Venture capitalist: Another source that is We Finance Limited which needs data of
business's past performance as well as its current market trends. Apart from this it has to know
about the return on investment ratio because venture capitalist relies on such proportion. Higher
the ratio of return on investment will lead to provide more amount of fund to the business.
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Finance broker: As per the finance broker he needs to know that company is how much
able to pay brokerage charges. Further, it is up to which extent efficient in order to fulfil its debt
obligations. These all informations are needed for the finance broker in order to take decision
regarding financing.
2.4 Influence on financial statements of Clariton of financing sources
Venture capitalist: While taking loan from We Finance Limited then dividend is to be
paid by Clariton to the shareholders by which profit is reduces in the income statement. On the
other side balance sheet affects in positive way because capital increases which lead to enhance
total liabilities of the firm (Mason and Harrison, 2015).
Finance broker: Further, as per the respective source the Clariton has to pay interest
amount as well as brokerage to the bank and finance broker respectively. It leads to decrease net
profit in the profit and loss account. Apart from this it leads to increase cash in the assets side as
well as enhance capital in the side of liabilities in balance sheet of Clariton.
Impact on the income statement as well as balance sheet is shown below:
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TASK 3
3.1 Clariton's cash budget and analysis of it
Cash budget is a plan to determine expected receipts as well as disposals for the future
financial years. In the budgeting there are various types of budgets are to be prepared such as
cash, production, material usage etc. in order to know upcoming requirements. It is to be
prepared on monthly basis by which management helpful to overcome extra disposals which are
occurs in the organisation such as Clariton (Cumming and Vismara, 2017). For respective firm
cash budget is as follows:
Analysis
It can be assessed from the cash budget that Clariton firm is not able to earn return in the
month of January i.e. -£649750. Further, net cash balance at the end of month increases for two
months only and again starts to reduce continuously. Due to reason of bank overdrafts the
management cannot collect more amount of cash in the same month which lead to reduce cash
outflows. The Highest cash balance generated by Clariton is in the month of March of worth
£315250 because of decreasing disposals as well as increasing incomes. Due to collecting only
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5% amount in the same month cash balance goes at the lowest amount in June which is of worth
£69000.
It can be recommended to the management of Clariton for combat such shortfalls that it
needs to make effective business policies to attract higher number of consumers. Moreover, it
should use cost control methods, stock management approaches, increase prices, offer discounts
to customers etc (Reddish, 2017). Theses all mentioned tactics will help to Clariton in order to
increase income and reduce disposals in proper way.
3.2 Methods to asses cost as well as price per unit
It needs to derive cost of each production unit and selling prices as well in the business
process. There are different types of cost which are incurred in production process are added for
deriving cost of one antique item of Clariton. With help of below mentioned example cost and
price deriving method is shown which is as follows:
From the above example it can be said that for determine cost per unit all type of
expenses are added and then with this total number of items are divided. In the present case cost
of one antique item incurred by Clariton is worth £200. Further, for determine price per unit cost
plus pricing method is used where percentage of profit added in the cost per unit. Here the
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respective firm will sell every antique item on price £220 which is derived by such way: £200
cost + 10% profit = £220 price per antique product.
3.3 Assessing project's viability using capital budgeting techniques
In order to assessing or taking decisions for making investment from two or more
mutually exclusive avenues capital budgeting techniques and tools used by management. Various
tools are such as ARR, payback method, IRR, NPV etc (Xiang, Worthington and Higgs, 2015).
which are described below:
NPV
ARR
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Payback period (PI)
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Basis for comparison Peter's benchmark Project 1 Project 2
NPV (in £m) 2 3.37 2.53
Payback period (in
years)
2.5 3.2 3
ARR (in %) 35 37.98 43.56
From the above analysis it can be said that both the investment avenues are able to
achieve benchmark. In terms of net present value project 1 gives higher return that is 3.37
compare to another project. Furthermore, according to the payback period as well as average rate
of return project 2 is better which respective values are 3 years and 43.56%. Most reliable and
used tool is NPV due to considering all factors such as time, discounting etc. Hence, to the
Clariton it can be suggested that it needs to invest in the project 1 for become more beneficial.
TASK 4
4.1 Presenting key elements of various financial statements
Name of financial statements Key elements
Statement of income (I/S): In the profit and loss account there are main key elements
which helps to assess profitability of the company are such as
follows (Elements of the Income Statement, 2016):
 Sales or revenue
 Expenditures: direct and indirect expenses
 Incomes: gross, operating and net profit.
 Losses
Statement of cash flow
(SOCF):
The statement which shows inflows as well as various
disposals in different activities is known as SOCF. Main
elements of the formate are given as below:
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 Cash inflows
 Cash outflows
It shows various organisational activity's incomes and expenses
such as:
 Operating activities
 Financing activities
 Investing activities
Balance sheet (B/S): Key components of respective statement are such as below:
 Assets: Fixed and current
 Liabilities: Current and non-current liabilities
 Total equity capital of shareholders
Statement of changes in equity
and gains:
Key components of the statement are such as follows:
 Total shareholder's equity
 Share premium
 Retained profit
Notes or disclosures to
financial statement:
In this used terms, accounting standards, theories etc. while
preparing financial statements are shown which are given as
below:
 Accounting standards
 UK GAAP theory
 IFRS
 UK accounting standards etc.
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4.2 Segregation among financial formates of sole proprietor as well as Clariton
Basis of
segregation
Sole proprietor Partnership firm such as Clariton
Antiques Ltd.
Mean of business Operating in the industry without
following legal rules and has only
one owner.
Operating in the sector in legal
manner and two or more owners are
there.
Capital accounts Only one account in this firm. Number of capital accounts are
prepared as per the available
partners.
Income statement There is not any requirement to use
all the standards as well as no need
to include tax amount in books of
account (Minsky, 2015).
It prepares by following all the
accounting standards and taxation
amount must include in the
accounts.
Profit or loss
sharing
Both the terms are with owner only. Distributed in all the partners as per
the proportion of capital invested.
Accounting
standards
Not require to follow. Legally requires to use all the
standards such as IRFS, UK GAAP
etc.
Scope of finance Low number of financing resources
are available for such firms.
There are wide range of sources of
finance are available for respective
business entity (Carbó‐Valverde,
Rodríguez‐Fernández and Udell,
2016).
Publications of
statements
Not requires to publish. Legally necessary to publish
accounts.
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4.3 Interpreting financial statements of Clariton entity
In order to interpreting financial statements of Clariton there is the best measurement is
financial ratios. In the accounting and financial process various types of ratios available such as
efficiency, profitability, liquidity, debt equity etc. which are given as below:
It can be visualised from the above table that in the financial year 2015 Clariton's position
is well in comparison to the year 2014. Current as well as acid test ratios are 0.33:1 and 0.19:1
respectively which are better from last year. On the other side in comparison to standard ratio 2:1
financial position is poor in both the years which shows that it is not able to meet with short term
obligations in sufficient manner.
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In the accounting period 2014 and 2015 debt equity ratio is 0.51:1 and 0.47:1 which
shows that business is able to generate profit in next year. Higher the profit helps to repay debt
and reduce loan amount in the next year. Apart from this it can be analysed that capital through
equity is also increases in the year 2015.
From the table it can be interpreted that, all the turnover ratios increases from the
financial year 2014 to 2015. Stock turnover ratio enhances from 22.72 to 23.41 which indicates
that Clariton utilizing its inventory in appropriate manner in next accounting year (Gadenne,
2015). Further, total and fixed assets turnover ratios are such as 1.59 and 1.84 which are
increases from the year 2015. It shows that the firm is highly efficient for generating revenue
using assets in later accounting period.
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In the financial period 2016 GP ratios declining from 14.34% to 14.18% which indicate
that Clariton is unable to control over the COGS. Further, as per the OP and NP ratios these are
increases from 2015 and reaches up to 4.54% and 2.63% respectively. It can be assessed that
management is able to are highly maintained and reduced indirect expenses in the next year.
CONCLUSION
It can be summarised from the report that bank loan as well as venture capitalist both are
appropriate financing sources for the Clariton business entity. Further, as per the cash budget the
due to overdrafts and collecting only 5% cash net cash balance is negative in month of January.
It can be concluded that financial performance of the Clariton is better and well in comparison to
previous accounting year. Moreover, to overcome shortfalls business needs to use cost control
strategies, attract customers, enhance prices etc.
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