Managing Financial Resources and Decisions | Clariton Antiques Ltd

Added on -2020-02-17

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Managing Financial Resourcesand Decisions
Table of ContentsIntroduction......................................................................................................................................3Task 1...............................................................................................................................................31.1 Unincorporated and incorporated business and sources of finance.......................................31.2 Internal and external sources along with their implications..................................................41.3 Appropriate source of finance................................................................................................5Task 2...............................................................................................................................................62.1 Cost of sources of finance......................................................................................................62.2 Importance of financial planning...........................................................................................72.3 Requirement of information for making effective decision...................................................82.4 Impact on financial statements..............................................................................................9Task 3.............................................................................................................................................103.1 Cash budget..........................................................................................................................103.2 Unit cost and pricing decisions............................................................................................113.3 Investment decisions............................................................................................................11Task 4.............................................................................................................................................144.1 Components of financial statements....................................................................................144.2 Formats of financial statements...........................................................................................144.3 Comparison of financial ratios.............................................................................................17Conclusion.....................................................................................................................................19References......................................................................................................................................202
INTRODUCTIONFinancial management is the methodology that is used by organization to make effectivecontrol over its income, expenditures, assets and liabilities. Main agenda of managing cash at theworkplace is to maximize profit and ensure sustainability. Sound capital structure is the aim ofevery corporation so that they can run their business well. It is only possible with the help ofeffective financial management strategies (Zimmerman, 2015). Present report is based onClariton Antiques Ltd. Five years ago, five partners have invested their money and started anunincorporated business of selling antiques items. Slowly it has developed its own reputation inthe industry and now, it has become one of the well-known brand names in London. Study will discuss several sources of finance which can raise capital of the cited firm.Venture capitalist and financial brokers are the two main sources where cost attached with thesesources will be analysed in this assignment. Economic forecasting and its importance in businesswill be discussed in this report. Unit cost, NPV, ARR and PBP calculations will be done in thisstudy to find out the feasibility of projects. In addition to this, financial ratio of Clariton AntiquesLtd will be illustrated in this report (Croce, Grilli and Murtinu, 2014). TASK 11.1 Unincorporated and incorporated business and sources of financea) Unincorporated businessesThese are such entities which have no legal identification and their liabilities are limited.Sole traders and partnership firms are the great examples of unincorporated business. Theseorganizations are not legally registered and owner or partners run business separately. ClaritonAntiques Ltd is working as unincorporated corporations. Sources of finance available to thebusiness are as follows:Personal saving: It is the main source of finance for unincorporated business likeClariton Antiques Ltd. In this, owner or partners of the cited firm can invest their owncapital for the expansion of organization. It assists in keeping liability of the entity incontrol because in this, partners need not to pay interest to any lender (Rubin, Aas andStead, 2015). 3
Bank loan: It is another source of finance available to Clariton Antique Ltd where citedfirm can borrow money for fixed period from financial institutions. Bank usually chargesinterest on lending amount but it is low and affordable by the borrower. Owner ofcompany needs to give security. It may be in the form of personal guarantee. This sourceof finance can increase cash inflow in the organization and support in accomplishing theaim of cited firm. b) Incorporated business:These are the legally structured entities who have to follow norms of internationalaccounting standards. In such type of organizations, person is not liable for the debt of company.It can get benefit of tax and owner can generate income by selling its stock in the markets.Sources of finance for incorporated business are maintained as below:Retained earnings: It is an important economic source that raises the capital of company.It is the internal source or can be termed as profit of entity (Deshpandé and et.al., 2013).Management of organization uses these funds for further development of the firms as noeconomic cost is associated with it. So, it can be a good source of finance for theenterprises. Venture capital: There are many capitalists who invest their money in the startupbusiness to gain higher returns. They invest a huge amount so that entity can expand itsoperations and generate a good amount of income. But, in this, owner has to involve themin board meetings and they can influence the decision of company. 1.2 Internal and external sources along with their implicationsa) Internal sourcesThese are the funds which are generated by business internally. Company’s own fund canbe utilized by the management for further development (Pe'er, and Keil, 2013). Retained earnings: It is the net profit of entity after paying dividend to its shareholders.This is a long term source of finance and in this, Clariton Antiques Ltd needs not to repaythis amount. So, no economic implications are associated with these funds. Along withthat, it does not create financial burden on the entity. In addition to this, as firm does notissue any equity thus, ownership needs not to be shared with any investors. Thus,4
ownership and control remains the same, they do not get diluted. Owner can take his owndecision without any influence of third party. No legal complications have to be faced bypartners and therefore, no legal implications are attached with the same (Pinkwart andProksch, 2014).Sales of assets: To generate the cash, Clariton Antiques Ltd can sell its assets in themarket that will increase cash inflow which can be used by the cited firm to acquirebuilding in Birmingham for opening its another branch. It is short term finance and noneed to repay it. So, economic implications are associated with the sale of assets. Whencompany sells its inventories then it has to make legal agreement with the purchaserwhich is a legal implication of this source of finance. But, in this, cited firm needs not toshare its ownership and also, controlling power remains in the hands of entrepreneur. B) External sourcesThese are such funds which are borrowed by the external market and it is necessary torepay the same on time. Bank loan: It is the main external financial source but in this, borrower has to pay intereston it and rate of interest may be fixed or variable. This is an economic implication forClariton Antiques Ltd (Ambrose, Cordell and Ma, 2015). Bank can demand security thatis another economic cost. Apart from this, financial institutions make a legal agreementwith the borrower so that if person do not pay installment then he would get legal rightsto sell its properties to recover the complete loan amount. In this, ownership andcontrolling power remains the same and owner needs not to share it with lenders.Equity share: Dividend is the economic implication of this source. Clariton Antique Ltdneeds to pay dividend to its equity partners. They have to follow regulations beforeopting this source of finance. Apart from this, in the equity share, owner has to shareownership with the equity holders and they can influence the decision of organization(Deffains-Crapsky and Sudolska, 2014).1.3 Appropriate source of financeAs Clariton Antiques Ltd is engaged in the selling of antique items. In this, it has to buyproducts from the suppliers and have to resale it in the market. For expanding business, cited5
firm needs funds but it is important to look upon the cost and implications before selecting anysource of finance. Bank loan can be the best way of raising funds of Clariton Antiques Ltd. Inthis, owner needs not to share controlling power with the lender and so, all important decisionscan be made by them individually without any interruption. Repayment schedule is simple andaffordable for the cited firm. Apart from this, interest rates of bank is low for startup firms and itcan get tax benefit on the same (Bessen and Meurer, 2013). So, it can be an appropriate source offinance for the organization.Retained earnings is another source which can raise the capital of entity. As it is aninternal source of finance so, there is no need to repay it as own capital can be used for furtherdevelopment or expansion of the business. No much legal formalities are needed to be followedand controlling power is the main benefit of this source. Apart from that, in this source offinance, no dilution of ownership takes place.TASK 22.1 Cost of sources of financeCost of raising funds can be measured by two ways; equity and debt. Cost of debt can beexplained as amount which is to be paid by organization on its debt. Whereas equity financing ishose sources in which firm has to share ownership against funds. It is attached with equity sharestype of sources whereas bank loan is the great example of debt financing. As Clariton AntiquesLtd has been just approached by “ We Finance Limited:. It is venture capitalists and isdemanding 20% stake in the business against its investment (Mayordomo, Peña and Schwartz,2014). Financial brokers are another persons those who can arrange funds for the organization.They take commission and arrange bank loan for the borrower. Both these sources are essentialand can increase capital of the company. Cost of these are explained as below:a) Dividends:If Clariton Antiques Ltd goes with venture capital then it will have to bear this cost. As itis very important to give dividend to capitalist and involve them in decision making process.That is legal right of the investor to get divided, but due to this financial burden of the companycan get enhanced. That is cost of venture capital source, 20% stake very high which can increaseexpenditure of the cited firm.b) Interest:6

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