Managing Finance Techniques for an Organisation

The provided project report is a comprehensive analysis of financial management techniques and sources of finance available to Claritan Antiques Ltd. It discusses the ideal ratio of 2:1 between current assets and long-term funds, and concludes that managing finance effectively can meet various requirements of an organisation.

Managing Financial
Resources and Decisions

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Different sources of finance.............................................................................................1
1.2 Assessment of using sources of finance ..........................................................................3
1.3 Evaluating the most appropriate source of finance..........................................................5
TASK 2............................................................................................................................................6
2.1 Analysing cost of two sources of finance.........................................................................6
2.2 Importance of financial planning......................................................................................7
2.3 Assessment of the information which is required for decision-making...........................7
2.4 Impact of choosing venture capitalist and finance broker on financial statements..........8
TASK 3............................................................................................................................................9
3.1 Preparing and analysing the cash budget..........................................................................9
3.2 Calculation of cost to make pricing decisions................................................................10
3.3 Assessing the viability of project...................................................................................11
TASK 4..........................................................................................................................................13
4.1 Key elements of financial statements.............................................................................13
4.2 Comparing the format.....................................................................................................14
4.3 Interpretation of recent financial statements..................................................................14
CONCLUSION .............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Business is operated with using sufficient amount of capital. An organisation is required
to secure adequate fund for running a business and to operate its day to day operations. There are
various sources for financing business like internal and external. The project report consists of ,
entrepreneurs have to understand the type and expansion of their ongoing business plan as well
as total amount of fund needed to intended business (Swayne, Duncan and Ginter, 2012). This
project report assesses the implications of both internal and external sources of finance. Analysis
of financial statements of company to determine cost and importance of financial planning is to
be given as well. Further, assessment of information that is required to make effective decision
on financing the takeover is explained here. Impacts of financial statements over the performance
of company are also discussed in this report along with evaluation of cash budgets and
calculation of costs in order to make pricing decision for Clarition Antiques Ltd. . The
understanding of key components of financial statements and comparison of formats with sole
and other firms is clearly stated in this report.
TASK 1
1.1 Different sources of finance
Finance is utmost important aspect of any business organisation. Without which not a
single operation can be performed by an organisation. It is a invariant requirement for all
developing businesses. Funds are essential for development and expansion of business unit in
order to earn maximum profit. There are various sources from which funds can be managed for
incorporated and unincorporated businesses (Chandra, 2011). The managers are responsible for
choosing appropriate kind of sources, because each of them have distinctive benefits and
limitation.
Unincorporated business:
As Clarition Antiques Ltd, is a unincorporated business entity mostly termed as sole
traders and partnership firms. They cannot raise their capital through sale of shares. They have
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an option to borrow from their family members and friends. Uses of saving and profit which are
incurred by the owners of the company can be essential for formation of new venture. Owners capital: It is the most common sources of finance which is invested by the
owners with their own resource There is no any other party involve in profitability and
sharing of capital. Retained earnings: It is termed as that amount which is retained by company after
making payments of debts and partner share. Personal savings: It is known as more easy and effective sources of finance available
with the entrepreneur (Brigham and Ehrhardt, 2013). In order to meet future
requirements, they use their savings.
Incorporated business:
This types of businesses offers plenty of opportunities over being a sole trader and
partnership. It consists of tax deduction, liabilities protection and many more. Share capital: It is related with the part of capital that comes from issuing shares by
company.
 Bank overdraft: It is a flexible borrowing facilities on bank account which is repayable on
demand. Usually, it carries huge interest rate.
Following are two important sources:
Internal sources: It refers as important sources of business operations by which it a
firm can manage its required capital. It does not depend on outside factors.
External sources: It is that source from which firms can collect the funds from outside
business premises.
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Illustration 1: Sources of finance
(Source: Different sources of finance, 2017)
1.2 Assessment of using sources of finance
Internal sources: Implication of internal sources can be explain determine into both positive
and negative manners. If, it is taken in more positive manner them is will be more profitable to
the company. Like:
Sale of assets
Advantage
Sale of fixed assets is the good way to raise finance from an assets that is no not for the
company for longer period of time.
Disadvantage
Some firms are unlikely to have large surplus assets to sell. It is termed as a slow
technique of raising finance.
Retained earnings
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Advantage
The biggest advantage of using retained earnings is that it is not required to be paid back.
Disadvantage
With this, profit of a small business can get low with the maximum use. For a new
venture, it won't have any retained earnings.
Bankruptcy: It is legal process for liquidisation a business which is not able to pay out
their debts from last few year. This particular implication can affect the company's growth
opportunities.
External sources: In case of external sources, there are certain positive and negative aspects
which can be determined early before using it into their business operations (Robb and
Woodyard, 2011). Such as: Grants: The other important sources of finance for unincorporated businesses is
government grants which are provided for developing small business. The main motive is
to create opportunities and job assistance to skilled people. Long term loan: It helps the business with working capital that can be helpful for buying
assets, inventories and other equipment for further income generation for company.
Overdraft
Advantage
It is more quickly arranged. Company needs to pay interest on only that amount which is
overdrawn.
Disadvantage
Only small amount is provided as overdraft. Rate of interest is much higher.
Share capital
Advantage
For this, it doesn't have to be paid back and not any interest is required to be paid.
Disadvantage
Whatever is the profit, it must be distributed as dividend among every partner or
shareholders. Ownership of company can be changed.
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1.3 Evaluating the most appropriate source of finance
Before making any critical decision , it is necessary to analyse each of them in more
effective manner so that appropriate source can be selected. As the Claritan Antiques is operating
as unincorporated business so they required sufficient amount of capital to run their business
operation in easier manner. They are having opportunities to take support from of bank loan,
government grant and share capital which is the best option for raising funds for the development
of the company. In order to increase efficiency and profitability of the company internal sources
is best suitable for them. As, it more safe and appropriate in increasing maximum possibility to
gain valuable outcome from their little investments. The best option for them is to go with
internal sources. The point of risk is very low as compare to external and chances of getting
essential gain is much high as compare to other sources.
Long term loan:
Advantage
The main benefit is that large amount of fund is created in order to operate business as
normal after sales.
Disadvantage
It depends upon the amount of capital taken as loan and accordingly, high interest rate is
charged.
After analysing two of the important sources of finance, it has been found that both are
useful at their own level. As per Clariton Antiques Ltd is concerned, internal sources are less
risky as maximum amount is invested from their own hands. It is related with personal saving,
owners capital or retained earning. While, external sources are also too risky, as they are
collected from outside parties and they fixed high rate of interest. It will be make company to
think one time and make increase extra burden over them (Drechsler and Natter, 2012).
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TASK 2
2.1 Analysing cost of two sources of finance
There are various sources of finance that are necessary for the development of an
organisation. It come with cost which is required to be incur by an organisation to manage their
day to day operations. Some of the crucial decision are related with following explanation such
as:
Dividend: It is a payment which is made by a corporation to its shareholder's generally
termed as distribution of profits. It is determine as allocation of a fixed amount per share with
shareholder's receiving a dividend in balancing to holding shares of the company. Cash dividend
is considered as most average form of cost which is paid out in currency (Bradley, Wiklund and
Shepherd, 2011). As in 2016, the dividend declared was about £8000 in respective year.
The total cost of divided which is required to pay to company's shareholders are:
Cost of dividend: £8000 /20% = £40000
Interest: It is considered as cumulative sum of interest amount which is paid on a loan by
a borrower. Such amount would be consists of any point which is paid to overcome the rate of
interest on a particular loan. The cost of interest collected from the bank loan is around £0.5m
with 2% APR for 10 years. It would be cost 166666.
Cost of interest: £100, 00,000*2%*10/12 = 166666.7
Tax: The amount is a financial charges levied upon total profit. It can be charged out of
total sale done by the company during the year.
Cost of tax: £1255000- £14000 = £1241000
2.2 Importance of financial planning
Financial planning is known as comprehensive analysis of Claritan Antiques Ltd current
pay and future capital state. There are various aspects which is needed to be considered during
planning such as:
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Budgeting: It is the procedures of formulating a plan to spend company's capital.
Framing capital investment planning can allow you to identify in advance whether they are
having sufficient amount of capital to organise their activities. The importance of budget
planning is to balance our expenses with the income generated by the company. With the help of
proper strategies implementation budget will help in managing debt or to organise work in more
systematic manner.
Implication of failure of financial adequately: Finance is a life blood of an
organisation which help them to run their business operation in more effective manner. There are
certain implication regard it. Such as finance cost which is associated with tangible cost,
opportunity cost and tax effects etc. Some other implication is related with financial planning
which is needed for determining shortage and surpluses (Madura, 2011). Because of over trading
is can get affected. The major impact is seen over the decision making that is related with
accounting of financial transaction and extra costs appears in the financial records.
Over trading: It is known as a situation in which an organization is increasing its sales
than it can be financed accordingly. This leads to tremendous accounts receivable and lack of
working capital to manage and control their operations. It is mainly occurs in case company
wants to make expansion.
2.3 Assessment of the information which is required for decision-making
In order to determine best possible results company usually taken necessary decision
which can help them to take reach at valid solution. Various people are required to take effective
decisions and for that they need accurate information that will also vary. Some of the concern
people point of views are analyses.
The partners: As, they are unincorporated business which is operating as a team with
partners. If, they are going for takeover, Claritan Antiques Ltd need to pay certain amount as a
stake in the form of profit is need to be given. The decision that whether, to take certain amount
of share or cash is only made by analysing partners reaction.
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Venture capitalist: It is related with the funding that investors provide to start-up
companies and small businesses. They believe to have continuous and long term growth chances.
In case of Claritan Antiques Ltd, they are getting finance from “We Finance Limited” for this
they need to pay 20% stake for 0.5million of capital.
Finance broker: They act as a intermediary who brokers loan on behalf of individual or
businesses. They are responsible for plan, organise and negotiate the sale, purchase of shares and
other property at the time of merger, takeover or any other circumstances. They charge a fixed
amount of commission on their deal.
After analysis all the above situation, they need to go with venture capital as they are
safer and only 20% of total stake needed to be paid to them at the time of takeover.
2.4 Impact of choosing venture capitalist and finance broker on financial statements
Venture capitalist: It is ascended as a better sources of start-up funding in the last few
years times. It is considered as more effective tool for entrepreneur, but its impacts are often not
totally analysed. This will consists of huge risk but at the same time high potential for
sustainability and growth opportunities is always there. As, Clariton Antiques is needed to pay
20% of their ownership to them that can affect the performance and profitability of the company.
The amount of 0.5million is also offered to them in context of those 20% stake. The takeover
will carries huge risk of share downfalls (Davenport, 2012). The income statements of company
consists of profit and revenue and net profit that will get affected. Every transaction is
associated with funds management which get effected and ownerships of the company will also
goes down.
Finance brokers: It provides an expert assistance for selecting financial instrument for
retail customers. Short term interest rates and future contracts are analysed by broker while
financing any investment deal. The chances of fraud is more while coming into contract of
takeover. Major impact is observed in the balance sheet of company. If huge amount is paid in
the form of brokerage then it will increase extra debts which is not perfect for company.
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Accounting for finance is a systematic analysis, reporting and summarising of financial
transaction pertaining to a business. It consists of public consumptions and many more.
Various types of costs associated with finance are:
Direct cost which is related with the production of product and services. It is mostly based on
material, labour and expenses.
Fixed costs is does not varies with the changes in the units. It always remain constant with the
production. Like rent, fuel expense.
Operating costs is the cost for expenses which is used at the time of daily business activities. It
can be both variable and fixed.
TASK 3
3.1 Preparing and analysing the cash budget
Cash budget is known as financial budget that is used to compute the budgeted cash
inflows and outflows generated by the company during the year from various activities (Cash
Budget, 2013). It will help the managers to analyse any extra idle cash and cash deficit that is
foreseen during the year.
Cash Budget
Months
January February March April May June
Beginning Cash
Balance 110000 -539750 -392000 -76750 48500 166250
Add: Budgeted
Cash Receipts: 157500 285000 435000 562500 345000 288750
Total Cash
Available for Use 267500 -254750 43000 485750 393500 455000
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Less: Cash
Disbursements -807250 -137250 -119750 -437250 -227250 -219750
Cash
Surplus/(Deficit) -539750 -392000 -76750 48500 166250 235250
Budgeted Ending
Cash Balance -539750 -392000 -76750 48500 166250 235250
From the above cash budget of Clariton Antiques Ltd, it has been seen that in the initial
month of January, company has negative cash-flows till March. After controlling extra cost and
expenses during the time company is started to come in positive stage. The available of cash at
the opening stages is sufficient enough to make operate their function is well organise manner.
Because, cash surplus is in showing in deficit till March, after that they are converted the amount
in surplus. In the first three months, they are getting cash deficit which means company needs to
make changes in credit policy or to borrow funds. After the period of March, in rest three
months, they are getting surplus amount which is effective for company. They can make further
investment plan for the payment of loan.
3.2 Calculation of cost to make pricing decisions
From those company which is associated with production of goods and services, the cost
per units is mainly derived from the variable costs and fixed costs. In case of Claritan Antiques
Ltd they are not associated with any production process (Da Dalt and Coughlin, 2016). On an
assumption basis data is been taken into consideration, it can be analyse to make effective
pricing decision. Capital pricing method: It is used to analyse a theoretical aspects of required
rate of return from an assets (6 Different Pricing, 2017). It is done to make decision regarding
multiple assets to well diversified portfolio. Such model is used to explain the relationship
among systematic risk and expected return for assets, specially related with inventory of the
company.
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It is essential for Claritan Antiques Ltd to make pricing decision by engaging in
production process. Without this, it is not easy to make specific decision. This can be explained
by using certain examples.
Unit produced for the year is 10000
Direct material cost 50000
Direct labour cost 20000
Fixed cost 10000
Profit margin =10%
Unit cost = T.C / No. of units
= (50000+20000+10000)/10000 u
= ￡8 unit
Profit = £8 * 10% = £ 0.80
Selling price = £ 8 + £ 0.80
Selling price = £ 8.80 per unit
From the above information which is used on an assumption basis, it can be seen that
profit can be attain by using cost plus method as, it increase with 10%. It is known as profit
percentage for the company and through this selling price unit is determine as 8.80 per units.
3.3 Assessing the viability of project
In case of Investment 1
Year
Cash flows
(million) PV Factors @ 14% Present value
Initial
investment -8.6 1 -8.6
Year 1 1.6 0.8771929825 1.4035087719
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Year 2 2.8 0.7694675285 2.1545090797
Year 3 3.4 0.6749715162 2.2949031551
Year 4 3.6 0.5920802774 2.1314889985
Year 5 4 0.5193686644 2.0774746574
Year 6 4.2 0.4555865477 1.9134635003
Total Present value 11.975348163
NPV 3.375348163
Payback period 4.29 years
In case of Investment 2
Year
Cash flows
(million) PV Factors @ 14% Present value
Initial
investment -4.4 1 -4.4
Year 1 0.8 0.8771929825 0.701754386
Year 2 1.4 0.7694675285 1.0772545399
Year 3 2 0.6749715162 1.3499430324
Year 4 2.4 0.5920802774 1.4209926657
Year 5 2.3 0.5193686644 1.194547928
Year 6 2.6 0.4555865477 1.184525024
Total Present value 6.9290175759
NPV 2.5290175759
Payback period 3.89 years
From the above computation, it has been found that in order to get more accurate results
they need to use various investment appraisal tools. Such as
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NPV: It is known as net present value which is related with present value of cash inflows
and the outflows. It is used for the purpose of determining profitability of a project investment
plan.
Payback period: It is the time which is required for an investment to get recovery its
initial amount in relation to profit or savings (Ho and Peng, 2016).
By using these techniques in the above investment proposals, it has been found that in
case of 1st investment they are incurring NPV of 3.3 million with the payback period of 4.29
years. While, in case of investment 2, they are getting 2.5million with payback period of 3.89
years to get recover the amount.
TASK 4
4.1 Key elements of financial statements
Income statements: The other name this particular statements is profit and loss accounts.
It is one of the financial records of Claritan Antiques which represent income and expenses incur
by the company during the year (Picker and et. al., 2016). It is used to compute net income or
loss over a period of time. The revenue side of statements consists of non-operating expenses.
Statement of cash-flows: It is the financial statement that represents changes in balance
sheet account and effect of cash and cash equivalent and evaluating down from various activities.
Such as operating, investing and financing.
Statements of changes in equity and gains: It represent an entity's profit or loss for a
reporting time duration. It consists of various items such as income and expenditure which is
associated in other wide profit for that period of time. It is a financial statement that reports the
changes in the equity portion of balance sheet in an accounting period of time.
Statements of financial position: It is called as balance sheet or summary of financial
balances of an individual or organisation whether related with sole trader or partnership firm. It
represent the financial position of the company during the year (Shortal and et. al., 2016). The
main purpose of using this statement is take crucial decision about investment in other segments
of the company. It consists of mainly assets and liabilities of Claritan Antiques Ltd.
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Notes to the financial statements:
Such notes are discussion of items that are accompany the financial statements that is
income statement, balance sheet and cash-flows. It is considered to be most crucial aspect in
order to take vital decision for the betterment of the company.
4.2 Comparing the format
Basis of difference Sole Trader Companies
Meaning It is a person who is
responsible for managing
their own business and keep
all the profit with them.
These are associated with the
policies which are made by
the government.
Financial statements Profitability statement Income statement and cash
flows, balance sheet,
statement of changes in
equity and supporting notes
are prepared by the firm.
Auditing requirements No Yes
Rule and regulation involve No UK GAAP, IFRS
As, Claritan Antiques is a unincorporated business organisation which is operating as
well organise business entity. Financial statements are not so important if they are running their
operations at small level. However, if they are working as a partnership firm, all necessary
statements are needed to be considered.
4.3 Interpretation of recent financial statements
Ratios Formula 2015 2016
1.Profitability ratio
Operating profit ratio (Operating profit / Net sales)*100 377.05% 454.18%
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Gross profit ratio (Gross profit / Net sales)*100 1434.43% 1418.33%
Net profit ratio (Net profit / Net sales)*100 188.52% 262.95%
2. Liquidity ratio
Current ratio (Current assets / Current liabilities) 0.33 0.23
Quick ratio
(Quick assets-stock / Current
liabilities ) 0.18 0.08
3. Total assets turnover ratio (Net sales / Average total assets) 3.11 3.19
4. Inventory turnover ratio
(Cost of goods sold / Average
inventory) 15.03 15.49
From the above ratio analysis, it has been found that profitability position of company is
more in 2016 as compare to previous year. Whereas, the liquidity position of Claritan Antiques is
0.23, 0.08 in 2016 which is low as compared to ideal ratio of 2:1.
CONCLUSION
From the above project report, it has been concluded that managing finance is an
effective technique to meet various requirements of an organisation. The project report consists
of various information regarding different sources of finance available to Claritan Antiques Ltd.
It also covers various implication of using those sources-of-finance. The calculation of ratios in
order to analyse best possible outcome for the company is explain under this project. Certain key
component of financial statements are clearly discussed under this project.
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Brigham, E. F. and Ehrhardt, M. C., 2013. Financial management: Theory & practice. Cengage
Learning.
Drechsler, W. and Natter, M., 2012. Understanding a firm's openness decisions in innovation.
Journal of Business Research. 65(3). pp.438-445.
Bradley, S. W., Wiklund, J. and Shepherd, D. A., 2011. Swinging a double-edged sword: The
effect of slack on entrepreneurial management and growth. Journal of Business
Venturing. 26(5). pp.537-554.
Madura, J., 2011. International financial management. Cengage Learning.
Davenport, T. H., 2012. Business intelligence and organizational decisions. Organizational
Applications of Business Intelligence Management: Emerging Trends: Emerging Trends,
p.1.
Da Dalt, O. and Coughlin, J. F., 2016. Managing Financial Well-Being in the Shadow of
Alzheimer’s Disease. Public Policy & Aging Report. 26(1). pp.36-38.
Ho, S.S.H. and Peng, M.Y.P., 2016. Managing Resources and Relations in Higher Education
Institutions: A Framework for Understanding Performance Improvement. Educational
Sciences: Theory & Practice. 16(1). pp.279-300.
Picker, R. and et. al., 2016. Applying international financial reporting standards. John Wiley &
Sons.
Shortall, J. and et. al., 2016. Investment appraisal of automatic milking and conventional milking
technologies in a pasture-based dairy system. Journal of Dairy Science. 99(9). pp.7700-
7713.
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6 Different Pricing. 2017. [Online]. Available through: <https://quickbooks.intuit.com/r/pricing-
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