Financial Planning for Businesses
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This assignment delves into the essential aspects of financial planning for businesses. It examines key financial planning concepts, profitability ratio analysis, and the preparation and interpretation of financial statements (balance sheet and income statement) for sole traders and partnership firms. The assignment emphasizes understanding financial planning techniques and their application in different business models.
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TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Sources of finance..................................................................................................................3
1.2 Implication of financial sources.............................................................................................4
1.3 Appropriate source of finance................................................................................................5
Task 2...............................................................................................................................................6
2.1 Cost of financial sources........................................................................................................6
2.2 Importance of financial planning for Clariton Antiques Ltd.................................................7
2.3 Information that need to make effective decision..................................................................8
2.4 Impact of sources on financial statements.............................................................................8
Task 3...............................................................................................................................................9
3.1 Cash budget............................................................................................................................9
3.2 Unit cost calculation............................................................................................................11
3.3 Investment decisions............................................................................................................11
Task 4 ............................................................................................................................................14
4.1 Key components of financial statements.............................................................................14
4.2 Financial statement of sole trader and partnership firms.....................................................14
4.3 Financial ratios of Clariton Antiques Ltd............................................................................16
Conclusion.....................................................................................................................................18
References......................................................................................................................................19
2
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Sources of finance..................................................................................................................3
1.2 Implication of financial sources.............................................................................................4
1.3 Appropriate source of finance................................................................................................5
Task 2...............................................................................................................................................6
2.1 Cost of financial sources........................................................................................................6
2.2 Importance of financial planning for Clariton Antiques Ltd.................................................7
2.3 Information that need to make effective decision..................................................................8
2.4 Impact of sources on financial statements.............................................................................8
Task 3...............................................................................................................................................9
3.1 Cash budget............................................................................................................................9
3.2 Unit cost calculation............................................................................................................11
3.3 Investment decisions............................................................................................................11
Task 4 ............................................................................................................................................14
4.1 Key components of financial statements.............................................................................14
4.2 Financial statement of sole trader and partnership firms.....................................................14
4.3 Financial ratios of Clariton Antiques Ltd............................................................................16
Conclusion.....................................................................................................................................18
References......................................................................................................................................19
2
INTRODUCTION
Financial management is the strategy-forming process which is used by firms as primary
evidence to make effective economic decisions. Sound capital management is the necessity of
business that assist in avoiding risk of insolvency (Tian and et.al, 2014). It is essential that firm
has capability to generate sufficient cash for enhancing profitability of the corporations. Present
report is based on the case study of Clariton Antiques Ltd. Firm is having strong reputation in the
market and aiming to raise its funds. Assignment will discuss the sources of finance available to
incorporated and unincorporated business. Evaluation of most appropriate source for cited firm
will be done in this study. Importance of financial planning with reference to budgeting, over
trading will be discussed in this report. Impact of venture capitalist and finance broker on
financial statement will be explained in this report. Cash budget for Clariton Antiques Ltd will be
prepared and to improve its economic position suggestion will be given (Coleman and Kariv,
2013). As Cited firm is not engaged in the production so unit cost and pricing decisions will be
illustrated in this study. NPV, ARR, PBP will be calculated for taking appropriate investment
decisions.
TASK 1
1.1 Sources of finance
a) Unincorporated business
Unincorporated businesses are those entities which are not having separate legal
identification. Owner is the person who is completely liable for the business liabilities. Clariton
Antiques Ltd is the partnership firm and work as unincorporated entity (Dinovitzer and Hagan,
2014). Sources of finance available to such type of entities are as following:
Personal saving (capital of owner and partners): It is kind of internal source in which
owner or partners are the persons those who invest their capital in the business for
getting high profit. It is appropriate financial source, advantage of this source is that as
company needs not to repay this amount and no interest has to be paid (Roehrich, Lewis
and George, 2014). So economically it is good for the entity like Clariton which is
working as startup company. But drawback is that owner and partners have to ensure
that they can generate profit otherwise they will have to face huge financial loose.
3
Financial management is the strategy-forming process which is used by firms as primary
evidence to make effective economic decisions. Sound capital management is the necessity of
business that assist in avoiding risk of insolvency (Tian and et.al, 2014). It is essential that firm
has capability to generate sufficient cash for enhancing profitability of the corporations. Present
report is based on the case study of Clariton Antiques Ltd. Firm is having strong reputation in the
market and aiming to raise its funds. Assignment will discuss the sources of finance available to
incorporated and unincorporated business. Evaluation of most appropriate source for cited firm
will be done in this study. Importance of financial planning with reference to budgeting, over
trading will be discussed in this report. Impact of venture capitalist and finance broker on
financial statement will be explained in this report. Cash budget for Clariton Antiques Ltd will be
prepared and to improve its economic position suggestion will be given (Coleman and Kariv,
2013). As Cited firm is not engaged in the production so unit cost and pricing decisions will be
illustrated in this study. NPV, ARR, PBP will be calculated for taking appropriate investment
decisions.
TASK 1
1.1 Sources of finance
a) Unincorporated business
Unincorporated businesses are those entities which are not having separate legal
identification. Owner is the person who is completely liable for the business liabilities. Clariton
Antiques Ltd is the partnership firm and work as unincorporated entity (Dinovitzer and Hagan,
2014). Sources of finance available to such type of entities are as following:
Personal saving (capital of owner and partners): It is kind of internal source in which
owner or partners are the persons those who invest their capital in the business for
getting high profit. It is appropriate financial source, advantage of this source is that as
company needs not to repay this amount and no interest has to be paid (Roehrich, Lewis
and George, 2014). So economically it is good for the entity like Clariton which is
working as startup company. But drawback is that owner and partners have to ensure
that they can generate profit otherwise they will have to face huge financial loose.
3
Bank loan: It is external source of finance in which companies borrowed money from
financial institution at an agreed rate of interest for particular time period. Banks grant
loan on the bases of financial position and repay capacity of the organization. Advantage
of this source is that firms have to repay set amount as installment which is easy and
good for the budgeting (Weil, Schipper and Francis, 2013). But on other hand interest
rates and security amount can enhance economic burden of the Clariton.
b) Incorporated business
These are called as corporation and having legal identification. In his owner or partners
are not responsible for company's debt amount. Sources of finance available to such type of
business are as following:
Retained earnings: It is the source of finance which is available for the entities those
which are running their operations for more than one year (Musamali and Tarus, 2013).
In this company's profit ploughed back into business so that it can generate cash by
reusing money. Advantage of this source is that no need to repay and no need to pay
interest on it. But it may be possible that firms do not have enough profit which can be
reused.
Share issues: it is most common source of fiance for the limited firms in which entity
issue share to public to obtain money. No interest need to be paid on it but divide needs
to be paid to all shareholders. Apart from this, organization will have to share ownership
with them that can be negative for the corporation (Kale and Niosi, 2017).
1.2 Implication of financial sources
a) Internal financial sources
There are many internal sources of finance, these are internal funds and reused by the
firms for further development. Retained earning is the most common source, no economic
implication is attached with it as company needs not to pay interest to any lenders. But it is
necessary to use this amount in appropriate manner so that profit can get generated otherwise
firm will have to face opportunity cost (Ince and et.al, 2013). As it is internal funds so no legal
implications are attached with it. Ownership and controlling power need not to be transferred to
any shareholder.
4
financial institution at an agreed rate of interest for particular time period. Banks grant
loan on the bases of financial position and repay capacity of the organization. Advantage
of this source is that firms have to repay set amount as installment which is easy and
good for the budgeting (Weil, Schipper and Francis, 2013). But on other hand interest
rates and security amount can enhance economic burden of the Clariton.
b) Incorporated business
These are called as corporation and having legal identification. In his owner or partners
are not responsible for company's debt amount. Sources of finance available to such type of
business are as following:
Retained earnings: It is the source of finance which is available for the entities those
which are running their operations for more than one year (Musamali and Tarus, 2013).
In this company's profit ploughed back into business so that it can generate cash by
reusing money. Advantage of this source is that no need to repay and no need to pay
interest on it. But it may be possible that firms do not have enough profit which can be
reused.
Share issues: it is most common source of fiance for the limited firms in which entity
issue share to public to obtain money. No interest need to be paid on it but divide needs
to be paid to all shareholders. Apart from this, organization will have to share ownership
with them that can be negative for the corporation (Kale and Niosi, 2017).
1.2 Implication of financial sources
a) Internal financial sources
There are many internal sources of finance, these are internal funds and reused by the
firms for further development. Retained earning is the most common source, no economic
implication is attached with it as company needs not to pay interest to any lenders. But it is
necessary to use this amount in appropriate manner so that profit can get generated otherwise
firm will have to face opportunity cost (Ince and et.al, 2013). As it is internal funds so no legal
implications are attached with it. Ownership and controlling power need not to be transferred to
any shareholder.
4
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Personal saving is another financial source in which firms need not to pay interest and
installment to any lender (Van Auken and Carraher, 2013). But limited funding is the major
negative economic implication of this source. Ownership does not get diluted and controlling
remain in the hand of owner or partners. No legal formalities need to be followed by the
organizations so no legal implication is of personal saving source.
b) External financial source
Issuing shares and bank loan are two major external economic sources. Ownership gets
diluted as owner has to share possession with stakeholders. Legal agreement formed between
both parties and they have to follow regulations (Wonglimpiyarat, 2017). Dividend is the main
economic implication which is necessary to be paid by the company to all equity holders. Bank
loan is the source through which Clariton can collect huge amount, but interest paid and
repayment of all funds after certain period are economic implication of this source. Legal
contract made between lender and borrower, in his financial institutes get rights to cease the
property of the company if repayment does not take place on time. Ownership and controlling
power remain in the same hand (Pahnke, Katila and Eisenhardt, 2015).
1.3 Appropriate source of finance
As Clariton Antiques ltd is performing well and has developed its good reputation in the
market. Cited firm needs to raise funds £0.5 million and it wants to open another branch for that
it needs huge money. For that it can go with bank loans, set repayment will help in controlling
over budget and company will be able to collect huge amount which can fulfill its monitory
needs (Nandan, 2013). Fixed interest and repayment scheduled will not create unnecessary
burden of the organization so it would be able to afford it. Ownership will be in control of all
partners it can be said that bank loans will be suitable option for the corporation.
Apart from borrowing from financial institution, retained earning will be another
appropriate option for the Clariton. As cited firm can be able to reused internal funds
significantly for further development. By this way liability of the company will be in control,
ownership and controlling power will not get diluted (Savva and Scholtes, 2014).
5
installment to any lender (Van Auken and Carraher, 2013). But limited funding is the major
negative economic implication of this source. Ownership does not get diluted and controlling
remain in the hand of owner or partners. No legal formalities need to be followed by the
organizations so no legal implication is of personal saving source.
b) External financial source
Issuing shares and bank loan are two major external economic sources. Ownership gets
diluted as owner has to share possession with stakeholders. Legal agreement formed between
both parties and they have to follow regulations (Wonglimpiyarat, 2017). Dividend is the main
economic implication which is necessary to be paid by the company to all equity holders. Bank
loan is the source through which Clariton can collect huge amount, but interest paid and
repayment of all funds after certain period are economic implication of this source. Legal
contract made between lender and borrower, in his financial institutes get rights to cease the
property of the company if repayment does not take place on time. Ownership and controlling
power remain in the same hand (Pahnke, Katila and Eisenhardt, 2015).
1.3 Appropriate source of finance
As Clariton Antiques ltd is performing well and has developed its good reputation in the
market. Cited firm needs to raise funds £0.5 million and it wants to open another branch for that
it needs huge money. For that it can go with bank loans, set repayment will help in controlling
over budget and company will be able to collect huge amount which can fulfill its monitory
needs (Nandan, 2013). Fixed interest and repayment scheduled will not create unnecessary
burden of the organization so it would be able to afford it. Ownership will be in control of all
partners it can be said that bank loans will be suitable option for the corporation.
Apart from borrowing from financial institution, retained earning will be another
appropriate option for the Clariton. As cited firm can be able to reused internal funds
significantly for further development. By this way liability of the company will be in control,
ownership and controlling power will not get diluted (Savva and Scholtes, 2014).
5
TASK 2
2.1 Cost of financial sources
As per the given scenario “ We finance limited” is the venture capitalist and has approached to
Clariton. Capitalist is offering 0.5m finds against 20% stake in the business. Finance broker is
another source of finance which assist cited firm in taking loan from banks. But broker is
charging 1% brokerage from the borrower. Cost of both these sources are as following:
a) Dividends b) Interest c) Tax
It is the cost which is
associated with venture
capitalist. As Clariton will
have to give dividend to the
investor. 20% stake in the
business means 20% dividend
every year that can create
burden on the cited firm
(Lowendahl, 2014).
It is another cost which is
associated with the bank loans
via finance brokers. As if
Clariton borrows money from
financial institutes then
company will have to pay 2%
annual interest every year to
the banks. Apart from this 1%
brokerage charges by broker
that is also cost for the
organization (Lazzarini,
2015).
For instance:
10,00,000 loan taken by the
Clariton at 2% annual interets
then cost of interest would be :
=£1000000*2%+1% brokerage
=£20000+£10000
=£30000
It is associated with both
sources, when company raise
funds then it has to pay
corporate tax to government
on overall profit. Cost of Tax
can be calculated as below:
For instance: Current tax rate
is 30%
=£1000000*(1-0.3)*2%+1%
admin fees
=14000+10000
=£24000
6
2.1 Cost of financial sources
As per the given scenario “ We finance limited” is the venture capitalist and has approached to
Clariton. Capitalist is offering 0.5m finds against 20% stake in the business. Finance broker is
another source of finance which assist cited firm in taking loan from banks. But broker is
charging 1% brokerage from the borrower. Cost of both these sources are as following:
a) Dividends b) Interest c) Tax
It is the cost which is
associated with venture
capitalist. As Clariton will
have to give dividend to the
investor. 20% stake in the
business means 20% dividend
every year that can create
burden on the cited firm
(Lowendahl, 2014).
It is another cost which is
associated with the bank loans
via finance brokers. As if
Clariton borrows money from
financial institutes then
company will have to pay 2%
annual interest every year to
the banks. Apart from this 1%
brokerage charges by broker
that is also cost for the
organization (Lazzarini,
2015).
For instance:
10,00,000 loan taken by the
Clariton at 2% annual interets
then cost of interest would be :
=£1000000*2%+1% brokerage
=£20000+£10000
=£30000
It is associated with both
sources, when company raise
funds then it has to pay
corporate tax to government
on overall profit. Cost of Tax
can be calculated as below:
For instance: Current tax rate
is 30%
=£1000000*(1-0.3)*2%+1%
admin fees
=14000+10000
=£24000
6
2.2 Importance of financial planning for Clariton Antiques Ltd
Economic forecasting is the ongoing process of making sensible decision related to
monitory activities. It is the estimation tool through which organization can determine future
capital requirement against its goal (Neubauer and Lank, 2016).
Illustration 1: Financial planning
Financial Plans)
It is very important tool which supports in making policy and procedures for successfully
completion of financial function. It ensures availability of sufficient funds for smooth working of
business. Uncertainty such as shortage of funds can be minimized with the help of sound
economic forecasting. Effective utilization of funds can be done with the help of this tool, by this
way equilibrium between cash inflow and outflow will be maintained (Tracey, 2016).
a) Budgeting: budget is the quantitative plan of estimating future capital requirements of
companies. It supports in determining the future sales and disbursement. By this way
organization can make effective control over wastage and can raise funds significantly. With the
help of economic forecasting Clariton will be able to prepare good budget plan and can make
effective control over the cash management.
b) Implications of failure to finance adequately: With the help of sound economic forecasting
it would be easy for the cited firm that to manage cash well. By this way it can be able to
estimate future requirements and expenditure. Shortage or surplus of funds can be avoid so
which will reduce chances of failure of the organization to great extent. By this way Clariton can
be able to manage its cash significantly (Tracey, 2016).
c) Over trading: It is the situation when business try to engage in more investment activities
than its working capital capacity. Production more than its capacity can harm financial position
7
Economic forecasting is the ongoing process of making sensible decision related to
monitory activities. It is the estimation tool through which organization can determine future
capital requirement against its goal (Neubauer and Lank, 2016).
Illustration 1: Financial planning
Financial Plans)
It is very important tool which supports in making policy and procedures for successfully
completion of financial function. It ensures availability of sufficient funds for smooth working of
business. Uncertainty such as shortage of funds can be minimized with the help of sound
economic forecasting. Effective utilization of funds can be done with the help of this tool, by this
way equilibrium between cash inflow and outflow will be maintained (Tracey, 2016).
a) Budgeting: budget is the quantitative plan of estimating future capital requirements of
companies. It supports in determining the future sales and disbursement. By this way
organization can make effective control over wastage and can raise funds significantly. With the
help of economic forecasting Clariton will be able to prepare good budget plan and can make
effective control over the cash management.
b) Implications of failure to finance adequately: With the help of sound economic forecasting
it would be easy for the cited firm that to manage cash well. By this way it can be able to
estimate future requirements and expenditure. Shortage or surplus of funds can be avoid so
which will reduce chances of failure of the organization to great extent. By this way Clariton can
be able to manage its cash significantly (Tracey, 2016).
c) Over trading: It is the situation when business try to engage in more investment activities
than its working capital capacity. Production more than its capacity can harm financial position
7
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of the organization. Economic forecasting is very important and help to reduce issue related to
over trading.
2.3 Information that need to make effective decision
Clariton Antiques Ltd has many stakeholders, they all need variety of information before
making effective decisions.
a) The Partnership
Clariton is formed by four partners, they all invest their capital in the business so that
company can grow well. Before investing much amount in the company they need information
about number of customers, number of sales in a month, profit percentage, financial position,
number of employees, litigation history etc (Lazzarini, 2015). By this way partners will be able
to know the actual return on their investments. They will get to know how much to invest and
when they can get return. For instance if company is having any litigation history then
investment may be risky.
b) Venture capitalist (We Finance Limited)
As Clariton has been approached by “We finance limited” for the investment. But before
taking investment decisions company need to know about financial position, profit history,
dividend policy, working practices, total previous investments, solvency ratio etc. By this way
capitalist will be able to make its decision regarding investment in the organization. These details
will help in knowing actual return on its investment so that they can take their decision
(Lowendahl, 2014).
c) Finance Broker
Brokers assist Clariton in obtaining loan from the financial institutes. They need
information related to total assets of company, previous liabilities, profit history, credit history of
owner, solvency ratio, repay capacity etc. By this way broker will get o know the real interest
bearing capacity of the company. So whether loan has to be grant or not they can take their
decisions.
2.4 Impact of sources on financial statements
Financial statements are the records of the organization that shows the real performance
of the entities. Whenever organization opt any financial source then it impacts on the financial
statement of the organization to great extent:
8
over trading.
2.3 Information that need to make effective decision
Clariton Antiques Ltd has many stakeholders, they all need variety of information before
making effective decisions.
a) The Partnership
Clariton is formed by four partners, they all invest their capital in the business so that
company can grow well. Before investing much amount in the company they need information
about number of customers, number of sales in a month, profit percentage, financial position,
number of employees, litigation history etc (Lazzarini, 2015). By this way partners will be able
to know the actual return on their investments. They will get to know how much to invest and
when they can get return. For instance if company is having any litigation history then
investment may be risky.
b) Venture capitalist (We Finance Limited)
As Clariton has been approached by “We finance limited” for the investment. But before
taking investment decisions company need to know about financial position, profit history,
dividend policy, working practices, total previous investments, solvency ratio etc. By this way
capitalist will be able to make its decision regarding investment in the organization. These details
will help in knowing actual return on its investment so that they can take their decision
(Lowendahl, 2014).
c) Finance Broker
Brokers assist Clariton in obtaining loan from the financial institutes. They need
information related to total assets of company, previous liabilities, profit history, credit history of
owner, solvency ratio, repay capacity etc. By this way broker will get o know the real interest
bearing capacity of the company. So whether loan has to be grant or not they can take their
decisions.
2.4 Impact of sources on financial statements
Financial statements are the records of the organization that shows the real performance
of the entities. Whenever organization opt any financial source then it impacts on the financial
statement of the organization to great extent:
8
a) Venture Capitalist: We finance limited invest their capital in the organization then it will
impact on the financial statement of the Clariton. It will raise funds of the cited firm and will
impact on the balance sheet as share capital side will get affected. But company will have to give
20% stake in the business and will have to pay dividend so it will impact on the income
statement of the organization (What is Financial Planning? Meaning Types of Financial Plans,
2011). It will reflect on the expenditure side of the profit and loss account. Cash low statement
also get affected as cash inflow will get increased due to investment done by capitalist and as
company has to pay dividend so expenses will reflect in the cash outflow side in the statement.
b) Finance broker: It is another financial source that impacts on the all economic statements of
the organization. As company has to pay brokerage to the broker. So 1% commission will be
expenses for the cited firm and it will impact on the income statement. Cash inflow will raise up
so it will impact on the cash flow statement of the entity (Savva and Scholtes, 2014). Bank will
change 2% annual interest so it will show in the interest charged by bank in the profit and loss
account. Apart from this liability of the company will get increased so it will affect the balance
sheet as well. Assets side will also get strong and it will affect the balance sheet.
TASK 3
3.1 Cash budget
Estimation of future cash inflow and outflow is known as cash budget. It comprises two
areas; sources of funds and uses of cash. Organizations have to manage its cash well so hat it can
run its business significantly and can earn profit. It supports entities in assuming future income
and help to reduce unnecessary expenditures of the company (What is Financial Planning?
Meaning Types of Financial Plans, 2011). Cash budget of Clariton Antiques Ltd is prepared as
below:
Particulars January February March April May June
£ £ £ £ £ £
Cash inflow
Sales on
cash
15000 22500 300000 15000 15000 3750
9
impact on the financial statement of the Clariton. It will raise funds of the cited firm and will
impact on the balance sheet as share capital side will get affected. But company will have to give
20% stake in the business and will have to pay dividend so it will impact on the income
statement of the organization (What is Financial Planning? Meaning Types of Financial Plans,
2011). It will reflect on the expenditure side of the profit and loss account. Cash low statement
also get affected as cash inflow will get increased due to investment done by capitalist and as
company has to pay dividend so expenses will reflect in the cash outflow side in the statement.
b) Finance broker: It is another financial source that impacts on the all economic statements of
the organization. As company has to pay brokerage to the broker. So 1% commission will be
expenses for the cited firm and it will impact on the income statement. Cash inflow will raise up
so it will impact on the cash flow statement of the entity (Savva and Scholtes, 2014). Bank will
change 2% annual interest so it will show in the interest charged by bank in the profit and loss
account. Apart from this liability of the company will get increased so it will affect the balance
sheet as well. Assets side will also get strong and it will affect the balance sheet.
TASK 3
3.1 Cash budget
Estimation of future cash inflow and outflow is known as cash budget. It comprises two
areas; sources of funds and uses of cash. Organizations have to manage its cash well so hat it can
run its business significantly and can earn profit. It supports entities in assuming future income
and help to reduce unnecessary expenditures of the company (What is Financial Planning?
Meaning Types of Financial Plans, 2011). Cash budget of Clariton Antiques Ltd is prepared as
below:
Particulars January February March April May June
£ £ £ £ £ £
Cash inflow
Sales on
cash
15000 22500 300000 15000 15000 3750
9
Collection
on credit
142500 262500 405000 547500 330000 285000
Total cash
inflow
157500 285000 435000 562500 345000 288750
Cash
outflow
Total
payments
807250 137250 119750 437250 227250 219750
Total
outflow of
cash
807250 137250 119750 437250 227250 219750
Net cash
(Total
inflow- total
outflow of
cash)
-649750 147750 315250 125250 117750 69000
Opening
cash balance
110000 -539750 -392000 -76750 48500 166250
Closing
cash balance
-539750 -392000 -76750 48500 166250 235250
From the above cash budget it can be interpreted that Clariton has potential to grow and
in near future it can earn good profit. By looking on the cash inflow from January to June it
shows that cash inflow is continuous increasing. As company is having good cash sales income.
But initially cited firm was unable to manage its cash. It shows in its January budget in this, its
cash payments were higher than cash income. That means working capital management of the
company was not good earlier. After that it has improved its strategies and in the month of
February to June cited Clariton is able to manage its operations. As Inflow were higher than
outflow. That shows that company is able to generate good profit (Lowendahl, 2014).
For improving financial position of the cited firm it can be suggested that Clariton should
focus on cash selling of antique items. By this way cash inflow will get increased and it will be
beneficial for the firm to run its operations well. By this way, financial position of the entity will
get strong and it would be able to earn good profit (Lazzarini, 2015).
10
on credit
142500 262500 405000 547500 330000 285000
Total cash
inflow
157500 285000 435000 562500 345000 288750
Cash
outflow
Total
payments
807250 137250 119750 437250 227250 219750
Total
outflow of
cash
807250 137250 119750 437250 227250 219750
Net cash
(Total
inflow- total
outflow of
cash)
-649750 147750 315250 125250 117750 69000
Opening
cash balance
110000 -539750 -392000 -76750 48500 166250
Closing
cash balance
-539750 -392000 -76750 48500 166250 235250
From the above cash budget it can be interpreted that Clariton has potential to grow and
in near future it can earn good profit. By looking on the cash inflow from January to June it
shows that cash inflow is continuous increasing. As company is having good cash sales income.
But initially cited firm was unable to manage its cash. It shows in its January budget in this, its
cash payments were higher than cash income. That means working capital management of the
company was not good earlier. After that it has improved its strategies and in the month of
February to June cited Clariton is able to manage its operations. As Inflow were higher than
outflow. That shows that company is able to generate good profit (Lowendahl, 2014).
For improving financial position of the cited firm it can be suggested that Clariton should
focus on cash selling of antique items. By this way cash inflow will get increased and it will be
beneficial for the firm to run its operations well. By this way, financial position of the entity will
get strong and it would be able to earn good profit (Lazzarini, 2015).
10
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3.2 Unit cost calculation
The amount of money which is incurred to produce one single unit is called unit cost.
Generally expenditure of two types fixed and variables. For the company like Clariton which is
not engaged in the production for that, fixed costs are salaried paid to employees, rent of
premises. Variable costs are transportation cost because it is depended upon the total demand,
utility bills are other example of variable costs (Neubauer and Lank, 2016). Calculation of uni
cost in the Clariton can be done by following ways:
Unit cost= total costs/ number of unit produced
For instance:
Salaries paid= £15000
Rent of building=£15000
Transportation costs=£25000
Utility bills=£20000 and company wants to produce 5000 units then
Unit cost= £15000+£15000+£25000+£20000/5000
Unit cost= £75000/5000
Unit cost=£15 unit
Pricing decisions
Pricing decisions are those decisions which can influence the profit of the organization.
On the bases on unit cost Clariton can set its selling prices and can gain high profit. For instance
cited firm wants to earn profit of 20% then
Selling price= unit cost+unit cost* desired profit percentage
Selling price=£15+£15*20%
Selling price= £15+£3
Selling price=£18
So it can be said that if Clariton set selling price 18 then it would be able to gain desire
profit of its products.
11
The amount of money which is incurred to produce one single unit is called unit cost.
Generally expenditure of two types fixed and variables. For the company like Clariton which is
not engaged in the production for that, fixed costs are salaried paid to employees, rent of
premises. Variable costs are transportation cost because it is depended upon the total demand,
utility bills are other example of variable costs (Neubauer and Lank, 2016). Calculation of uni
cost in the Clariton can be done by following ways:
Unit cost= total costs/ number of unit produced
For instance:
Salaries paid= £15000
Rent of building=£15000
Transportation costs=£25000
Utility bills=£20000 and company wants to produce 5000 units then
Unit cost= £15000+£15000+£25000+£20000/5000
Unit cost= £75000/5000
Unit cost=£15 unit
Pricing decisions
Pricing decisions are those decisions which can influence the profit of the organization.
On the bases on unit cost Clariton can set its selling prices and can gain high profit. For instance
cited firm wants to earn profit of 20% then
Selling price= unit cost+unit cost* desired profit percentage
Selling price=£15+£15*20%
Selling price= £15+£3
Selling price=£18
So it can be said that if Clariton set selling price 18 then it would be able to gain desire
profit of its products.
11
3.3 Investment decisions
Investment is the important and critical decision, it is necessary that organizations invest
in any project by looking upon all aspects of the projects. Investment appraisals techniques
support the entities in taking their decisions (Tracey, 2016).
Pay back period:
It is the technique through which Clariton can get to know about time length of
recovering of the invested amount. It is simple process and finance manager can easily calculate
the figures. It focuses on risk factors so suggest investing in quick recovery projects. On other
hand it ignores essential factor that is profitability (Lazzarini, 2015).
Formula:
Pay back period = initial investment / cash flow per period
Investment 1 £m Investment 2 £m
Initial investment -8.6 -4.4
1 1.6 -7 0.8 -3.6
2 2.8 -4.2 1.4 -2.2
3 3.4 -0.8 2 -0.2
4 3.6 2.8 2.4 2.2
5 4 6.8 2.3 4.5
6 4.2 11 2.6 7.1
Pay back period 3.22 3.08
From the above calculation it can be said that both projects are vibal and feasible. As in
both company is able to get result according to its expectation. But if Clariton has to go with one
project then it must invest in the project 2. In this company is able to recover its amount within
3.08 year.
Average Rate of return:
12
Investment is the important and critical decision, it is necessary that organizations invest
in any project by looking upon all aspects of the projects. Investment appraisals techniques
support the entities in taking their decisions (Tracey, 2016).
Pay back period:
It is the technique through which Clariton can get to know about time length of
recovering of the invested amount. It is simple process and finance manager can easily calculate
the figures. It focuses on risk factors so suggest investing in quick recovery projects. On other
hand it ignores essential factor that is profitability (Lazzarini, 2015).
Formula:
Pay back period = initial investment / cash flow per period
Investment 1 £m Investment 2 £m
Initial investment -8.6 -4.4
1 1.6 -7 0.8 -3.6
2 2.8 -4.2 1.4 -2.2
3 3.4 -0.8 2 -0.2
4 3.6 2.8 2.4 2.2
5 4 6.8 2.3 4.5
6 4.2 11 2.6 7.1
Pay back period 3.22 3.08
From the above calculation it can be said that both projects are vibal and feasible. As in
both company is able to get result according to its expectation. But if Clariton has to go with one
project then it must invest in the project 2. In this company is able to recover its amount within
3.08 year.
Average Rate of return:
12
It is another investment appraisal technique that concentrate on the profitability of the
project's. But time factor is completely ignore by the method while taking investment decisions.
Formula:
ARR (%) = Total net income / no. of year / Initial cost *100
Investment 1 Investment 2
£m £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 3.26 1.9166
ARR 37.98% 43.56%
From the above calculations it can be said hat investment in project 2 would be beneficial
for the Clariton Antiques Ltd. As both are viable and are giving results more than its expectation.
But cited firm should go with project 2 as in this it is able to get profit of 43.56% which is higher
than 37.98%. So it is viable investment project for the organization.
Net Present Value (NPV)
It is the method which defines the difference between current cash inflow value and
future income. It is simple technique and helps to select such project in which it can generate
income soon (Lazzarini, 2015). But as PV factor is assuming by the firms so actual results may
get differed from the real outcome.
13
project's. But time factor is completely ignore by the method while taking investment decisions.
Formula:
ARR (%) = Total net income / no. of year / Initial cost *100
Investment 1 Investment 2
£m £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 3.26 1.9166
ARR 37.98% 43.56%
From the above calculations it can be said hat investment in project 2 would be beneficial
for the Clariton Antiques Ltd. As both are viable and are giving results more than its expectation.
But cited firm should go with project 2 as in this it is able to get profit of 43.56% which is higher
than 37.98%. So it is viable investment project for the organization.
Net Present Value (NPV)
It is the method which defines the difference between current cash inflow value and
future income. It is simple technique and helps to select such project in which it can generate
income soon (Lazzarini, 2015). But as PV factor is assuming by the firms so actual results may
get differed from the real outcome.
13
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Formula:
Investment 1 PV @ 14% Present value Investment 2
PV @
14%
Present
value
£m £m £m £m
Initial
investment 8.6 4.4
1 1.6 0.877 1 0.8 0.877 1
2 2.8 0.769 2 1.4 0.769 1
3 3.4 0.675 2 2 0.675 1
4 3.6 0.592 2 2.4 0.592 1
5 4 0.519 2 2.3 0.519 1
6 4.2 0.456 2 2.6 0.456 1
Total 12 7
NPV 3.38 2.53
From the above calculations it can be said that Clariton should go with project 2. As in
this it is able to generate income soon as compare to project1. This investment would be feasible
for the cited firm.
TASK 4
4.1 Key components of financial statements
Income statements: It is the account that shows financial performance of the organization;
Main element of this statement are revenues, cost of sales, income from other sources,
expenditures etc.
Cash flow statement: It is the account which shows the cash activities of the
organizations. Key components of this statement are cash flow from operating activities,
investing activities, finance activities.
14
Investment 1 PV @ 14% Present value Investment 2
PV @
14%
Present
value
£m £m £m £m
Initial
investment 8.6 4.4
1 1.6 0.877 1 0.8 0.877 1
2 2.8 0.769 2 1.4 0.769 1
3 3.4 0.675 2 2 0.675 1
4 3.6 0.592 2 2.4 0.592 1
5 4 0.519 2 2.3 0.519 1
6 4.2 0.456 2 2.6 0.456 1
Total 12 7
NPV 3.38 2.53
From the above calculations it can be said that Clariton should go with project 2. As in
this it is able to generate income soon as compare to project1. This investment would be feasible
for the cited firm.
TASK 4
4.1 Key components of financial statements
Income statements: It is the account that shows financial performance of the organization;
Main element of this statement are revenues, cost of sales, income from other sources,
expenditures etc.
Cash flow statement: It is the account which shows the cash activities of the
organizations. Key components of this statement are cash flow from operating activities,
investing activities, finance activities.
14
Statement of change in equity and gains: It is the account which shows the equity
movement of the organization. Retained earning and shareholder equity are two elements.
Accumulated earning, share capital, revaluation reserves are included in this account
(Profitability Ratio Analysis, 2017).
Balance sheet: It has three main key components; assets, liability and equity. Tangible
and intangible are two types of assets included in it. Long term and short term liabilities
are included in this statement.
Notes to financial statement: Accounting policies, contingencies, good will, acquisition
cost are included in this statement (What is Financial Planning? Meaning Types of
Financial Plans, 2011).
4.2 Financial statement of sole trader and partnership firms
Sole traders:
These are separate firms and they do not have to follow international accounting
standards. In the income statement, only income and expenditure are included, profit of partners
are not included in this. Balance sheet has two parts assets and liability. As no partner is included
in it so no need to add capital of all investors in this.
Partnership firms:
It is necessary to include profit of all partners in the income statement. They have to
follow international accounting statements while preparing all these statements. In the balance
sheet companies have to include capital side as well with assets and liabilities (What is Financial
Planning? Meaning Types of Financial Plans, 2011).
Illustration 2: Balance sheet of partnership firm
15
movement of the organization. Retained earning and shareholder equity are two elements.
Accumulated earning, share capital, revaluation reserves are included in this account
(Profitability Ratio Analysis, 2017).
Balance sheet: It has three main key components; assets, liability and equity. Tangible
and intangible are two types of assets included in it. Long term and short term liabilities
are included in this statement.
Notes to financial statement: Accounting policies, contingencies, good will, acquisition
cost are included in this statement (What is Financial Planning? Meaning Types of
Financial Plans, 2011).
4.2 Financial statement of sole trader and partnership firms
Sole traders:
These are separate firms and they do not have to follow international accounting
standards. In the income statement, only income and expenditure are included, profit of partners
are not included in this. Balance sheet has two parts assets and liability. As no partner is included
in it so no need to add capital of all investors in this.
Partnership firms:
It is necessary to include profit of all partners in the income statement. They have to
follow international accounting statements while preparing all these statements. In the balance
sheet companies have to include capital side as well with assets and liabilities (What is Financial
Planning? Meaning Types of Financial Plans, 2011).
Illustration 2: Balance sheet of partnership firm
15
Illustration 3: Income statement of sole traders
Illustration 4: Balance sheet of sole trader
4.3 Financial ratios of Clariton Antiques Ltd
Profitability ratio:
Overall performance and growth of the company can be shown with the help of this ratio.
16
Illustration 4: Balance sheet of sole trader
4.3 Financial ratios of Clariton Antiques Ltd
Profitability ratio:
Overall performance and growth of the company can be shown with the help of this ratio.
16
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Gross margin ratio: Gross profit / sales income
Operating margin ratio = Net income / net sales
Net margin ratio = Net income / net sales
From the above calculations it can be said that Clarition is able to gain good profit in near
future as well. As its performance is very good gross margin ratio was in the year 2015 14.34%
and in 2016 it is 14.18%. But it is assuming that it can manage it well in coming year because
gross profit is increasing (Lazzarini, 2015). Operating margin ratio was in the year 2015 3.77%
but in 2016 it gets increased to 4.54%. Net margin profit has also raised, in the 2015 it was
1.89% but in 2016 it was 2.63%.
Liquidity ratio
Liquidity and capacity of paying liability on time can be analyses with the help of this
ratio.
17
Operating margin ratio = Net income / net sales
Net margin ratio = Net income / net sales
From the above calculations it can be said that Clarition is able to gain good profit in near
future as well. As its performance is very good gross margin ratio was in the year 2015 14.34%
and in 2016 it is 14.18%. But it is assuming that it can manage it well in coming year because
gross profit is increasing (Lazzarini, 2015). Operating margin ratio was in the year 2015 3.77%
but in 2016 it gets increased to 4.54%. Net margin profit has also raised, in the 2015 it was
1.89% but in 2016 it was 2.63%.
Liquidity ratio
Liquidity and capacity of paying liability on time can be analyses with the help of this
ratio.
17
From the above calculation it can be said that in 2015 current ratio was 2.41 whereas in
2016 it was 2.48. Though it is slow improvement but it shows that company is able to menage its
liabilities.
From the above calculations it can be said that Clariton is much more capable to meet its
liabilities, as in 2015 its quick ratio was 2.27 but in 2016 it was 2.33.
Gearing ratio
It helps to measure the financial risk of the organizations.
From the above calculation it can be said that in the year 2015 it was 0.16 and in 2016 it
reached to 0.19.
CONCLUSION
From the above report it can be concluded that management of financial activities are the
essential part of the business and important for the growth of the company. Bank loan is the
appropriate source of fiance and can help the organization in raising its funds. Though due to this
liability of the entity get increased but it can be managed by the Clariton significantly. Financial
planning is very important by this way companies can reduce their risk of failure and can
minimize uncertainties of the business. From the investment appraisals it can be suggested that
investment in project 2 can be beneficial for the cited firm and in this it can gain high profit.
18
2016 it was 2.48. Though it is slow improvement but it shows that company is able to menage its
liabilities.
From the above calculations it can be said that Clariton is much more capable to meet its
liabilities, as in 2015 its quick ratio was 2.27 but in 2016 it was 2.33.
Gearing ratio
It helps to measure the financial risk of the organizations.
From the above calculation it can be said that in the year 2015 it was 0.16 and in 2016 it
reached to 0.19.
CONCLUSION
From the above report it can be concluded that management of financial activities are the
essential part of the business and important for the growth of the company. Bank loan is the
appropriate source of fiance and can help the organization in raising its funds. Though due to this
liability of the entity get increased but it can be managed by the Clariton significantly. Financial
planning is very important by this way companies can reduce their risk of failure and can
minimize uncertainties of the business. From the investment appraisals it can be suggested that
investment in project 2 can be beneficial for the cited firm and in this it can gain high profit.
18
REFERENCES
Books and Journals
Coleman, S. and Kariv, D., 2013. Gender, performance and financial strategy: a dynamic
capabilities perspective. Journal of Developmental Entrepreneurship. 18(03).pp.1350020.
Dinovitzer, R. and Hagan, J., 2014. Hierarchical structure and gender dissimilarity in American
legal labor markets. Social Forces. 92(3). pp.929-955.
Ince, H. and et.al., 2013. The impact of ERP systems and supply chain management practices on
firm performance: case of Turkish companies. Procedia-Social and Behavioral
Sciences. 99. pp.1124-1133.
Kale, D. and Niosi, J., 2017. The special issue of the journal Technology Analysis & Strategic
Management on biosimilar: capabilities, regulations and affordable healthcare.
Lazzarini, S. G., 2015. Strategizing by the government: Can industrial policy create firm‐level
competitive advantage?. Strategic Management Journal. 36(1). pp.97-112.
Lowendahl, B. R., 2014. 11 Co-operative strategies for professional service firms: unique
opportunities and challenges. Coalitions and Competition (Routledge Revivals): The
Globalization of Professional Business Services. pp.161.
Musamali, M. M. and Tarus, D. K., 2013. Does firm profile influence financial access among
small and medium enterprises in Kenya?. Asian Economic and Financial Review. 3(6).
pp.714.
Nandan, H., 2013. Fundamentals of entrepreneurship. PHI Learning Pvt. Ltd..
Neubauer, F. and Lank, A. G., 2016. The family business: Its governance for sustainability.
Springer.
Pahnke, E. C., Katila, R. and Eisenhardt, K. M., 2015. Who takes you to the dance? How
partners’ institutional logics influence innovation in young firms.Administrative Science
Quarterly. 60(4). pp.596-633.
Roehrich, J. K., Lewis, M. A. and George, G., 2014. Are public–private partnerships a healthy
option? A systematic literature review. Social Science & Medicine. 113. pp.110-119.
Savva, N. and Scholtes, S., 2014. Opt‐Out Options in New Product Co‐development
Partnerships. Production and Operations Management. 23(8). pp.1370-1386.
19
Books and Journals
Coleman, S. and Kariv, D., 2013. Gender, performance and financial strategy: a dynamic
capabilities perspective. Journal of Developmental Entrepreneurship. 18(03).pp.1350020.
Dinovitzer, R. and Hagan, J., 2014. Hierarchical structure and gender dissimilarity in American
legal labor markets. Social Forces. 92(3). pp.929-955.
Ince, H. and et.al., 2013. The impact of ERP systems and supply chain management practices on
firm performance: case of Turkish companies. Procedia-Social and Behavioral
Sciences. 99. pp.1124-1133.
Kale, D. and Niosi, J., 2017. The special issue of the journal Technology Analysis & Strategic
Management on biosimilar: capabilities, regulations and affordable healthcare.
Lazzarini, S. G., 2015. Strategizing by the government: Can industrial policy create firm‐level
competitive advantage?. Strategic Management Journal. 36(1). pp.97-112.
Lowendahl, B. R., 2014. 11 Co-operative strategies for professional service firms: unique
opportunities and challenges. Coalitions and Competition (Routledge Revivals): The
Globalization of Professional Business Services. pp.161.
Musamali, M. M. and Tarus, D. K., 2013. Does firm profile influence financial access among
small and medium enterprises in Kenya?. Asian Economic and Financial Review. 3(6).
pp.714.
Nandan, H., 2013. Fundamentals of entrepreneurship. PHI Learning Pvt. Ltd..
Neubauer, F. and Lank, A. G., 2016. The family business: Its governance for sustainability.
Springer.
Pahnke, E. C., Katila, R. and Eisenhardt, K. M., 2015. Who takes you to the dance? How
partners’ institutional logics influence innovation in young firms.Administrative Science
Quarterly. 60(4). pp.596-633.
Roehrich, J. K., Lewis, M. A. and George, G., 2014. Are public–private partnerships a healthy
option? A systematic literature review. Social Science & Medicine. 113. pp.110-119.
Savva, N. and Scholtes, S., 2014. Opt‐Out Options in New Product Co‐development
Partnerships. Production and Operations Management. 23(8). pp.1370-1386.
19
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Tian, L. and et.al., 2014. Stimulating shale gas development in China: A comparison with the US
experience. Energy Policy. 75. pp.109-116.
Tracey, W. R., 2016. The human resources glossary: The complete desk reference for HR
executives, managers, and practitioners. CRC Press.
Van Auken, H. and Carraher, S., 2013. Influences on frequency of preparation of financial
statements among SMEs. Journal of Innovation Management. 1(1). pp.143-157.
Weil, R. L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Wonglimpiyarat, J., 2017. Technology auditing and risk management of technology
incubators/science parks. World Journal of Entrepreneurship, Management and
Sustainable Development. 13(1).
Online
Profitability Ratio Analysis, 2017. [Online]. Available through:
<https://www.thebalance.com/profitability-ratio-analysis-393185>. [Accessed on 24th
February 2017].
What is Financial Planning? Meaning Types of Financial Plans, 2011. [Online]. Available
through: <http://kalyan-city.blogspot.in/2011/11/what-is-financial-planning-
meaning.html>. [Accessed on 24th February 2017].
20
experience. Energy Policy. 75. pp.109-116.
Tracey, W. R., 2016. The human resources glossary: The complete desk reference for HR
executives, managers, and practitioners. CRC Press.
Van Auken, H. and Carraher, S., 2013. Influences on frequency of preparation of financial
statements among SMEs. Journal of Innovation Management. 1(1). pp.143-157.
Weil, R. L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Wonglimpiyarat, J., 2017. Technology auditing and risk management of technology
incubators/science parks. World Journal of Entrepreneurship, Management and
Sustainable Development. 13(1).
Online
Profitability Ratio Analysis, 2017. [Online]. Available through:
<https://www.thebalance.com/profitability-ratio-analysis-393185>. [Accessed on 24th
February 2017].
What is Financial Planning? Meaning Types of Financial Plans, 2011. [Online]. Available
through: <http://kalyan-city.blogspot.in/2011/11/what-is-financial-planning-
meaning.html>. [Accessed on 24th February 2017].
20
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