Financial Statements Analysis & Management

This assignment delves into the core concepts of financial statement analysis and management. It explores various types of financial statements like the Income Statement, Balance Sheet, Cash Flow Statement, and Statement of Changes in Equity. The assignment emphasizes understanding their components, purpose, and how they are used to analyze a company's financial health and performance. Furthermore, it discusses practical aspects of improving a business' financial position through effective financial management strategies.

Managing
Financial
Resource and
Decision
1

TABLE OF CONTENTS
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
1.1 Identification of the sources of finance......................................................................................3
1.2 Assessment of the implications of internal and external source of finances.............................4
1.3 Evaluation of the most appropriate sources of finance for Clariton Antiques Ltd....................4
TASK 2.................................................................................................................................................5
2.1 Analysing the costs of the two sources of finance by considering with reference to dividends,
interest and tax.................................................................................................................................5
2.2 Explanation the important of financial planning for the Clariton Antique Ltd.........................6
2.3 Assessment of the information that will be needed to make decisions on financing the
takeover............................................................................................................................................6
2.4 Explaining the impact on the financial statements of Clariton Antiques Ltd............................7
TASK 3.................................................................................................................................................7
3.1 Preparing an analysis of the cash budget for Clariton Antiques Ltd and advice on decisions
that can be taken to improve their financial position.......................................................................7
3.2 Explaining how unit costs will be calculated to make pricing decisions by giving suitable
examples..........................................................................................................................................8
3.3 Assessment of viability of the project using investment appraisal techniques and states
whether the options satisfy Peter’s criteria for investment..............................................................9
TASK 4...............................................................................................................................................12
4.1 Discussing the key components of financial statements..........................................................12
4.2 Comparison of the format by Clariton Antiques Ltd to presenting their financial statements
with sole trader or partnership or both...........................................................................................13
4.3 Interpret the recent financial statement of Clariton Antiques Ltd using appropriate ratios and
making comparison with the previous years..................................................................................13
CONCLUSION..................................................................................................................................14
REFERENCES...................................................................................................................................15
2

INTRODUCTION
Finance includes the evaluation, disclosure and management of financial activities in order to make
the business operations more successful. This is important for the businesses to take advantages of
growth opportunities (The basics of financial management, 2017). For the firms, there are several
types of finance available for them where they can easily raise their capital for different operational
activities. With the help of the proper financial management, an organization can manage the
movement of the money for numerous tasks. This can easily resolve capital related issues of the
enterprises. The present research is based on managing financial resources and decision. In order to
understand its significance, Clariton Antiques Ltd case study is taking into the consideration. The
business has established by four partners. The nature of the firm has unincorporated and it has
grown with very slow speed. By selling of antique items, company has developed a good reputation
in the market place. Cited organization has already 2 branched in London and recently, management
is planning to open a new branch in a building of Birmingham. This project will require £0.5
million investment. In the present time, company has few loans which may create a problem for
Clariton Antiques Ltd to raise the money from different loans sources. So, it has suggested to the
enterprise to go for public and raise the funds.
TASK 1
1.1 Identification of the sources of finance
Unincorporated business: This can be considered as a commercial organization which is privately
owned by one or more than one person. It does not have a separate legal identify of owners of the
firm. They have completely responsible for all actions and decisions which they have taken either in
the favour of company or not. Most common examples of unincorporated organizations are
partnership and sole trader (Broadbent and Cullen, 2012). In the case of death of owner, the chances
seizes of it can be possible. The possible sources of finance for such kinds of businesses are
personal savings, small business loans, retained profit, selling of assets, sale and lease back, hire
purchase etc.
Incorporated business: These are also with the name of corporation where the organizations are
getting various benefits such as liability protection etc. Under this, such kinds of companies are
easy to transfer the ownership of business to other parties via selling of shares. Private and public
limited enterprises come under the incorporated business category. These types of corporations can
arrange the funds from friends and family, bank loans, venture capital, government grants etc
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(Conway, 2013).
1.2 Assessment of the implications of internal and external source of finances
Internal source of finance: This type of capital generates internally by business such as retained
earnings and profits, selling of asses, reduction in working capital etc. Selection of a right internal
source of finance can help the organizations to manage the requirements of the funds for the present
and future business plans and operations. If Clariton Antiques Ltd raises the capital through retained
earning then it will not create an additional burden over the firm regarding paying interest or
instalment like borrow capital. It is a long term source of finance so it minimizes the compulsory
maturity issues such as in long term loans and debentures (Concept and Determination of Cost of
Retained Earning, 2016). There is a no dilution of control and ownership in business if cited
company increase the capital for new project from retained earnings. On the other hand, by sale of
assets, Clariton Antiques Ltd can easily generate the sufficient cash for new business expansion
plan. Along with this, firm can adopt the option of lease where by giving the useful assets on rent,
some good amount can be generated. Although, this method does not able to solve the long term
finance problem but current one can be easily resolved.
External source of finance: These are those sources of finance where arrange by the organization
from the external world for the business. The examples of external supplies of funds are bank loans,
issuing stocks, debentures, equity shares, term loans, venture capital, bank overdraft etc (Rockey
and Collins, 2010). In case, Clariton Antiques Ltd increases its capital for new project then with the
help of equity shares then it will costly to the business. The reason of this is firm needs to return
dividends to shareholders. However, it will increase the capital of the business but it will require lot
of legal formalities needed to be completed. On the other hand, debentures are a cheaper mode of
raise the finance for cited organization as compare to equity. The implication of this is it contains
some cost of issuing which can affect the amount of raise funds. Apart from this, if Clariton
Antiques Ltd takes the help of term loan for finance of new project then company will have to give
interest on loan amount for the particular time duration. In against of this, bank will secure some
assets of the business as a guarantee (Siano, Kitchen and Giovanna Confetto, 2010). So, these
implications of diverse external sources of finance may be created a barrier for Clariton Antiques
Ltd.
1.3 Evaluation of the most appropriate sources of finance for Clariton Antiques Ltd
As per the given case study, it has found that Clariton Antiques Ltd has a partnership firm. So, there
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are wide options available for the business to raise the capital for new business project. Evaluation
of these supplies with the respect of the organization is as follows:
Personal capital: Here, the business partners can invest their own savings into Clariton Antiques
Ltd business to open a new branch of a building of Birmingham. From the evaluation of this, it has
determined that it can prevent the owners of the organization from the burden of paying interest and
keep the complete control over the trade (Epstein and Buhovac, 2014).
Retained profit: A business can only exist if it generates the profit from its operations. Clariton
Antiques Ltd can withdraw profits either by partners of organization or reinvest it to expand the
business.
Sale of assets: This is also a good option for Clariton Antiques Ltd where the current finance needs
of the business can be complete for the short time. On the basis of the assessment, it has determined
that by selling of un-useful goods and assets to other parties, the funds for new project of business
expansion can be arranged (Farmer and et.al., 2012).
Bank loans: With the help of the following source of finance, Clariton Antiques Ltd can arrange the
funds for the new business plan. Under this, firm has to pay interest rate against the taken loan
amount for the particular time duration. In case, if the organization goes bankrupt then bank will
recover the whole amount from owners by seizes the business and its related assets.
TASK 2
2.1 Analysing the costs of the two sources of finance by considering with reference to dividends,
interest and tax
There are major two source of finance available for Clariton Antiques Ltd within the context of
dividends, interest and tax. In this regards, the included costs of these two supplies are as follows:
Venture capital: It has contained both non-financial and financial cost which has at last affects the
business in both positive and negative terms. In case if Clariton Antiques Ltd take help of venture
capital to raise the capital for new business project then management will bound to pay dividends to
them after earning of profit. Along with this, enterprise will have to give 20% stake in the business
to venture capital. If due to any reasons, company generates lower profit then the amount of
dividends to shareholders will become decrease (Bennett, Lutz and Jayaram, 2012). This will made
the negative impact over the image of the cited firm which will affect the financial decisions of
business partners and shareholders.
Bank loans: For opening a new branch in a building of Birmingham, Clariton Antiques Ltd may
raise the funds by taking bank loan either for short or long term. In this situation, company have to
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bear the cost of paying interest over the borrow amount with the rate of 2% APR payable over 10
years. But it is one of the most effective sources of finance because it will offer high level of tax
benefits to the cited company at the time of paying of tax to government (Remund, 2010).
2.2 Explanation the important of financial planning for the Clariton Antique Ltd
Financial planning defines as the framework that delivers a greater insight to the organization about
the requirement of the funds to meet the new business objectives. In the case of Clariton Antique
Ltd, company has to develop a strong financial plan to complete a new plan related to opening of
new branch in a building of Birmingham. With the help of this, company can see a big and clear
picture regarding setting of short and long term goals. It makes the financial decisions of the
organization simpler and effective (Wätzold et.al., 2010). Apart from this, financial planning assists
cited firm to determine the capital structure for the new business project expansion. Along with this,
it facilitates the management to form financial policies regarding control over the cash, borrowing
of money etc.
On the other hand, by using the proper financial planning, Clariton Antique Ltd can easily make
sure about the availability of the funds for the new business project. It allows the management to
ensure regarding the balance between cash outflow and inflow with the aim of maintains the
stability of the business (Stone, 2013). Further, financial planning helps the cited organization to
plan growth and business expansion related programs for the long time survival in the marketplace.
In addition of this, it facilitates the company to collect the optimum capital for new plan and ensure
its effective utilization to attain the business objectives. Beside all of these, the failure and success
of distribution of services and goods of Clariton Antique Ltd business depends on the right financial
decisions and planning (Coombs, 2014). The reason of this is it aids in to make sure about the
smooth flow of finance and other operational activities.
2.3 Assessment of the information that will be needed to make decisions on financing the takeover
In order to take decisions in financing, Clariton Antique Ltd needs to assess some information
which is as follows:
Partners: For every organization, there are several options available for them regarding the business
partners’ selection. In the case of Clariton Antique Ltd, company has to consider the information
related to partners such as their investment capacity, financial position etc. By considering all these
information, the cited firm can take decision which business partner should be selected by Clariton
Antique Ltd in order to raise the finance (Shim and et.al. 2010).
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Venture capitalist: These are financial institutions where when a company borrow the funds from
these then they have to pay some percentage of stakes to venture capitalist in the business. In the
case of Clariton Antique Ltd, if organization raises the funds from this then management will need
the information about the percentage of stakes which will needed to be given to institution. Along
with this, other norms and regulations have to consider by the cited firm of Venture capitalist. Under
this, organization need to given 20% stake in the business to Venture capitalist. So, with the help of
all these information, Clariton Antique Ltd can take the right financial decisions for new business
project (Boiral, 2011).
Finance broker: These are the persons who are providing the loans to organizations from the banks
by charging some specific amount of fee. Before taking the help of financial brokers, Clariton
Antique Ltd has to get the complete details such brokerage fee or charge, bank loan interest rate,
norms etc. By assessing all information, organization has to take financial decisions.
2.4 Explaining the impact on the financial statements of Clariton Antiques Ltd
If Clariton Antiques Ltd raises the capital for opening a new branch project from two
options: venture capitalist and finance broker then it will affect the financial statement of the
company. In this context, effects of these on financial documents of organization are as follows:
Venture capital (We Finance Limited): As per the given case study, it has been clear that 'We
Finance Limited' a venture capital organisation, with an offer to finance Clariton Antiques Ltd
expansion by offering the full £0.5m for a 20% stake in the business. This thing may put the impact
on income statement where cited firm needed to be paying some amount of dividend to venture
capital firm. This will show the increment in expenses of the business by decreasing in income
amount (Carballo-Penela and Doménech, 2010). Along with this, in balance sheet, the total amount
of liabilities can be raised which will directly make the impact over the profit and loss account
statement. So, the overall impact of raise the capital by Clariton Antiques Ltd from venture
capitalist will be negative for the firm.
Finance broker: There is an alternative available for Clariton Antiques Ltd to arrange the funds by
bank loan by using the services of a finance broker. In this regards, company has to pay 1% fee on
the amount secured and interest on the loan will be 2% APR payable over 10 years. These will
affect the financial statement of the firm in terms in increase expenses of business in income
statement, liabilities in balance sheet and will show the losses in debit side of profit and loss
account document (George Jr and et.al., 2010).
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TASK 3
3.1 Preparing an analysis of the cash budget for Clariton Antiques Ltd and advice on decisions that
can be taken to improve their financial position
Cash budget prepares by the organizations in the case of receive pending payments and amounts
need to pay to other parties. It includes the detail information about cash inflow and outflow of
various activities like interest needed to pay, revenues, expenses etc. This facilitates the
management of the companies to develop a proper cash budget of whole year (Cash Budget, 2017).
By taking into the consideration of Clariton Antiques Ltd case study, 6 moths cash budget is as
follows:
Particulars January February March April May June
Opening cash 110000 -382250 290500 860750 738500 1051250
Sale 300000 450000 600000 300000 300000 75000
Receivables 15000 360000 90000 15000 240000 11250
Total cash inflow 425000 427750 980500 1175750 1278500 1137500
Payment 807250 137250 119750 437250 227250 219750
Total outflow 807250 137250 119750 437250 227250 219750
Closing balance -382250 290500 860750 738500 1051250 917750
From the analysis of above projected cash budget of Clariton Antiques Ltd, it has been determined
that between the timeframe of April and May, the sales revenue of the organization has reduced at
the significant level. Along with this, closing balance of January has negative and after the next
moths, it has increased with high level of percentage. Sales and expenses of the business have also
varied with the time.
On the basis of the cash budget analysis of Clariton Antiques Ltd, it has identified that expenses of
the organization have increased with the alarming rate. Firm has not effectively utilized its funds
and other resources in optimal manner. So, in this regards, it has suggested to the cited company
that management should outsourced the work of debt collection to the external organizations. By
using the different methods of minimizing the expenses, company can easily restructure its
expenditures. Along with this, by giving some unusable assets on lease or hire, Clariton Antiques
Ltd should optimally utilize it resources. Beside all of these, enterprise can go for the different
payment mode options such make the payment through online applications, credit etc, it will
becomes easy for the firm to increase the financial performance of business in more effective
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manner (How to improve your business' financial position, 2016).
3.2 Explaining how unit costs will be calculated to make pricing decisions by giving suitable
examples
Unit cost determines the capacity of the firm to produce the goods or service at a particular
set cost. It includes various kinds of costing such as labour costs, indirect and direct cost,
production and distribution costing, tax, overheads etc. This shows the clear picture of profitability
of the firm. In the case of Clariton Antiques Ltd, company has sold antique items to the customers.
It has not produced any kind of goods or services for the end users. But in the context of
determining the profitability of the business, an example needed to be considered related to the
calculation of unit cost which is as follows:
Unit cost
Fixed cost £42000
Variable cost £12000
Total cost £54000
Production volume 500 units
Cost per unit £108
Profit margin 18%
Price per unit £127
In the above table, it has assumed that the value of fixed cost of antique item has £42000 where
variable costs have £12000. Total costs of both of them have £54000. It has set that ordering volume
generated by the company related to products has 500 units. In this context, cost per unit from the
calculation has £108 per unit. To attain the profit margin, 18% profit has set by the organization on
per unit. By calculation, it has identified that price per unit after adding of profit has become £127.
3.3 Assessment of viability of the project using investment appraisal techniques and states whether
the options satisfy Peter’s criteria for investment
The given case study has shown that Clariton Antiques Ltd has conducted a financial analysis of
two investment projects overseas. From this, it has found that it would only be possible to fund one
of the two proposed projects by the organization. The reason of high costs of capital is because of
inflation at 14%. In this context, Clariton Antiques Ltd has decided that the investments will only be
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considered if they meet the following criteria:
Payback: 3.5 Years
Average Rate of Return: 35%
Net Present Value: £2m
With this respect, assessment of the viability of the projects with the application of investment
appraisal techniques is as follows:
Net Present Value of Project 1:
Year Cash flow (in £m) PV factor @ 14% Present value (in £m)
Initial investment 8.6
1 1.6 0.877 1.4
2 2.8 0.769 2.2
3 3.4 0.675 2.3
4 3.6 0.592 2.1
5 4 0.519 2.1
6 4.2 0.456 1.9
Total 12.0
Net Present Value 3.4
Net Present Value of Project 2:
Year Cash flow (in £m) PV factor @ 14% Present value (in £m)
Initial investment 4.4
1 0.8 0.877 0.7
2 1.4 0.769 1.1
3 2 0.675 1.3
4 2.4 0.592 1.4
5 2.3 0.519 1.2
6 2.6 0.456 1.2
Total 6.9
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Net Present Value 2.5
Payback period
Year
Cash flow of
Project 1 (in £m)
Cumulative cash
flow
Cash flow of
Project 2 (in £m)
Cumulative cash
flow
Initial investment 8.6 4.4
1 1.6 1.6 0.8 0.8
2 2.8 4.4 1.4 2.2
3 3.4 7.8 2 4.2
4 3.6 11.4 2.4 6.6
5 4 15.4 2.3 8.9
6 4.2 19.6 2.6 11.5
Payback period 3.2 years 3 years
Accounting rate of return:
Year Cash flow of Project 1 (in £m) Cash flow of Project 2 (in £m)
Initial investment 8.6 4.4
1 1.6 0.8
2 2.8 1.4
3 3.4 2
4 3.6 2.4
5 4 2.3
6 4.2 2.6
Total 19.6 11.5
Average 3.27 1.92
Accounting rate of return 37.98% 43.56%
From the above calculation, it has found that
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Net Present Value of Project 1 £3.4m
Net Present Value of Project 2 £2.5m
Payback period of Project 1 3.2 years
Payback period of Project 2 3 years
Accounting rate of return of Project 1 37.98%
Accounting rate of return of Project 2 43.56%
By comparing these values with the set Peter’s criteria for investment, it has found that Project B
has almost completed all the requirement of set criteria as compare to Project 1. So, Clariton
Antiques Ltd should invest the investment in Project 2 because it will give good NPV value of
funds where initial amount easily recover within the less time frame with high Accounting rate of
return.
TASK 4
4.1 Discussing the key components of financial statements
There have four types of financial statements have prepared by Clariton Antiques Ltd to represent
various financial information of the company in front of the shareholders and stakeholders. These
documents have contained some major key components which are as follows:
Income statement: It has contained the elements related to cost of goods sold, gross profit,
operating income, operating expenses and profits. With the help of this, it has become easy of
Clariton Antiques Ltd to find out the financial earning and overall performance of the business
(Faulkenberry, 2017).
Cash flow statement: This defines the liquidity and solvency of Clariton Antiques Ltd. It covers
several elements: cash flow from operating activities, investing actions and finance work. This has
assisted the firm to find the detail information regarding cash inflow and outflow (Faulkenberry,
2017).
Statement of change in equity and gains: This states the change in equity of owner of the
organization. Clariton Antiques Ltd has used this because it is a partnership firm where the
investment levels of partners have changed with the time. The following statement has included
opening balance, effects of change in accounting policies, impact of correction of prior period error,
restated balance, and change in share capital; alteration in revaluation reserve, income or loss for
the period, closing balance and other losses/gains elements (Statement of Changes in Equity, 2017).
Statement of financial positions: This defines the overall financial position of the firm within the
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specific timeframe. In the case of Clariton Antiques Ltd, it has involved liabilities, assets and equity
elements which have most important at the time of preparation of balance sheet at the time of
completion of financial year (Statement of Financial Position [Balance Sheet], 2017).
Notes to the financial statement: Clariton Antiques Ltd has written the accounting principles after
preparing various financial statements as notes. This has helped the readers such as shareholder and
stakeholders to know which accounting principles have followed by the firm during evaluating
financial performance.
4.2 Comparison of the format by Clariton Antiques Ltd to presenting their financial statements with
sole trader or partnership or both
Financial statements of Clariton Antiques Ltd have different from the sole trader financial
documentation process. The difference between them is showing in below table.
Parameters Sole trader organization Partnership
Capital account Only owner capital account take place Number of capital account depends
on the number of partners or owners
in the business.
Profit and loss
statements
Whole generated profit only belongs
to a single owner.
Profit distribution base on the ratio
of investment of business partners.
Income statement Not prepare To show the expenses and income
of the firm during the whole
financial year.
Balance sheet Only prepares for single owner of
business.
Prepares for each partner in the
business as per the level of equity.
Statement of
Partner’s Equity
No statement prepare It prepares to show the change in
equity of the partners because with
the time, the amount of investment
has changed (Major Difference Of
The Financial Statement between
Sole Proprietorship And
Partnership, 2005).
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4.3 Interpret the recent financial statement of Clariton Antiques Ltd using appropriate ratios and
making comparison with the previous years
Ratios 2015 2016
Profitability ratios
Gross profit ratio Gross margin / revenue 14.34% 14.18%
Operating profit ratio Operating margin / revenue 3.77% 4.54%
Net profit ratio Net margin / revenue 1.89% 2.63%
Liquidity ratios
Current ratio Current assets / current liabilities 2.41 2.48
Quick ratio
Current assets- (Closing stock + prepaid
expenses) / current liabilities 2.27 2.33
Solvency ratios
Debt equity ratio Debt / equity 0.16 0.19
Efficiency ratios
Stock turnover ratio COGS / Stock 22.72 22.91
Asset turnover ratio Net revenue / total assets 1.64 1.60
Fixed asset turnover
ratio Net revenue / fixed assets 1.81 1.85
On the basis of the above table, it has found that Clariton Antiques Ltd, in 2016, gross profit
of the company has decreased as compare to 2015. While Net profit of company has risen in 2016
which was low in 2015. Current ratio of organization has increased from 2015 to 2016. Same as,
Quick ratio has also amplified within the one year gap. On the other hand, Solvency ratio of
Clariton Antiques Ltd has increased in 2016 as compare to 2015. Apart from this, Asset turnover
ratio and Stock turnover ratio both have changed under the following duration. This has directly
affected the fixed asset turnover ratio of the organization.
CONCLUSION
From the above report, it can be concluded that Clariton Antique Ltd has required some
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capital to open one more branch. The most effective sources for this have bank loans and equity
share. With the help of right financial planning, company has able to plan it funds flow. On the
other hand, there have various financial statements prepared by the organization to determine the
financial position of the business. These declarations have contained different elements.
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REFERENCES
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Carballo-Penela, A. and Doménech, J.L., 2010. Managing the carbon footprint of products: the
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