Financial Planning for Business Decision Making

Financial planning is crucial for businesses to make informed decisions. The report highlights the importance of balance sheet, income statement, and cash flow statements in making financial planning. Sole proprietorship and partnership businesses have different policies to maintain these financial statements. To take a right decision for business, it is essential to consider these financial statements and make informed decisions.

MFRD

Table of Contents
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
1.1 Sources of finance.................................................................................................................4
1.2 Implications for using various sources of finance.................................................................6
1.3 Evaluation of appropriate source of finance.........................................................................7
TASK 2............................................................................................................................................8
2.1 Cost of financial sources.......................................................................................................8
2.2 Importance of financial planning..........................................................................................9
2.3 Assessing business information for making decisions........................................................10
2.4 Impact on financial statement.............................................................................................11
TASK 3..........................................................................................................................................11
3.1 Cash Budget........................................................................................................................11
3.2 Unit cost and pricing...........................................................................................................12
3.3 Calculation of NPV.............................................................................................................13
TASK 4..........................................................................................................................................14
4.1 Key elements of financial statements..................................................................................14
4.2 Comparison of financial statements of two companies.......................................................14
4.3 Ratio analysis......................................................................................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Finance is the major need for every organisation so that all required activities of business
can be accomplished without any issue. A business firm is required to maintain sufficient amount
of funds which is helpful for maintaining daily operations. Therefore, it is necessary that funds
are maintained and managed in a proper way. The present report is based on managing financial
sources and decisions where case of Clariton Antiques Limited has been taken into
consideration. The report discusses about various sources of finance that can be managed by the
mentioned organisation to fulfil its various objectives (Brignall and Modell, 2011). Besides this,
the report has talked about implications that can be on cited firm by using different financial
sources. Report will also attempt to show the significance of finance in executing important
functions though they are of routine nature or for expansion activities. Clariton Antiques Limited
is also planning for expanding its business by acquiring the building in Birmingham. For this,
company is planning to arrange finance through loans of £0.5 million. In addition to this, it has
also focussed on different statements of organisation that are important to be maintained by a
business firm (Crosby and Henneberry, 2016).
TASK 1
1.1 Sources of finance
Unincorporated business
An Unincorporated business is a form of entity which does not possess any separate
status by incorporation. It may have a separate form for accounting purposes but it does not have
any separate legal entity. The single or multiple owners of business are generally responsible for
all the actions of enterprise. Therefore, this type of firm usually includes entities like sole
proprietorship business, family organisations and partnership firms. For all these business
organisations, following sources of finance are available:

 Fixed assets: Company can arrange the finance for business by selling its fixed assets.
For this, the fixed assets of organisation like properties, lands, machines, plant and
equipment, etc. can be used which are utilised in the enterprise for a long time
(Czarnitzki and Hottenrott, 2011). The fixed assets are good source for arranging funds as
unused possessions can be either sold or given in rent. In addition to this, it will not
require any type of interest on the same. Retained earnings: The retained earnings are those part of profits which are earned by the
business after deduction of dividends and other pay-outs. These are the most efficient
source of finance which are safe to use and can be arranged readily. On this, company
does not have to pay any interest as well. Thus, the owner of firm can reinvest money
from profits for making further use in business. For the said business, this source can be
useful in expansion activities as well as in purchasing of new plant and machinery or in
the renovation of building (Eckerd, 2015).
 Working capital: The working capital of company can also be used for financing the short
term needs of company. The amount of working capital is acquired by deducting the sum
of liabilities from assets. This source can be utilised for fulfilment of daily operations
conducted in the business. This amount also indicates the liquidity and efficiency of
organisation.
Incorporated business
The incorporated businesses are also known as corporations which are different from that
of sole proprietorship. Corporations enjoy various benefits over the incorporated businesses and
are considered as a separate legal entity before law. Therefore, these types of organisations are
liable for any type of taxes and other similar liabilities (Johnston and Marshall, 2016). Company
is also able to conduct the business on its own name along with the rights to sue or to be sued.
The mentioned organisation has to add Inc. or limited at the end of their name. For getting the
incorporation of business, company has to register itself with various documents. For
incorporated business, different sources of finance are available which are as follows: Share capital: In share capitals, the shareholders invest amounts in an organisation so that
they can acquire ownership of business. This source of finance is good for arranging long
term finance for enterprises. Apart from that, this source is good for arranging finance as
owner has to pay only shares in the form of profit to shareholders. Thus, they get relieved

from the liability of paying initial amount invested by shareholders (Kaplan and
Atkinson, 2015). Bank loans: Bank loans are the most common way of arranging finance with various
benefits. In this, the borrower has to give cash or any property in the form of collateral
security to get the required amount from bank or other financial institutions. The amount
has to be paid out with interest after ascertained time period between both the parties.
Clariton Antiques Ltd. is also arranging the finance through loans for its expansion
objectives. Further, company has already previous loans as well. The cited organisation
has an option of acquiring loans through either public or private banks. In addition to this,
various formalities will be required to comply with and monthly interest must also be
paid by the firm for making a payback.
 Debentures: The debentures are a debt instrument in which there is no need of securing
amount with any property, physical asset or collateral securities (McKinney, 2015).
Debentures are given to business organisations on the basis of their creditworthiness.
Different business corporations issue debentures to secure the capital.
1.2 Implications for using various sources of finance
Internal sources Retained earnings: Retained earnings are the part of profits which are left out after
paying all liabilities to different parties. Mentioned company can use this type of source
to arrange finance by reinvesting the money for required purposes. Besides this, the said
source of finance is preferred by enterprises as it does not include any type of cost to
company. Further, it does not involve issue related cost as well. The mentioned firm will
not have to comply any type of legal formalities. In addition to this, it does not result into
any dilution of control for shareholders.
 Personal savings: The personal saving is also a good option for business ventures for
arranging required finance through internal sources (Smith, 2014). Proprietors generally
have some amount of savings from their personal sources which they can invest in their
business that does not involve any type of cost and interests in the business. Owner can
also use the funds collected or borrowed by family members, friends and other relatives.
Major implication in this source of internal financing is the owner losses his personal
amount. However, it does not result in any kind of legal compliances or interest rates as

well as the owner will have a better commitment with his personal capital which can
result in earning good profits.
External sources
 Bank loan: Bank loans are a good source of financing through external sources. Through
this source of funding, various large operations in business can be accomplished. Besides
this, company can attain a large sum by availing various required information to the
banks (Smith, 2014). The major implication of this source is that it requires various legal
formalities which a borrower must provide. Apart from this, it is also evident that if the
borrower fails to provide needed information in a proper way, bank can refuse to give the
loan. In addition to this, it also raises responsibility to pay interest on pre-determined
rates failing to which bank can retain the collateral security. Moreover, the dilution of
control will be more as the owner has to pay regular interest in appropriate way.
 Debentures: The debentures are issued by making an agreement between both issuer and
issuee. For this, the issuee will have to pay amount of interest which can either be based
on fixed or floating rate of interest. The debentures does not result into any dilution of
control (Oh, Chang and Cheng, 2016). Apart from this, the issuer dos not have to pay any
stamp duty as well because of which it is preferred by many business organisations.
1.3 Evaluation of appropriate source of finance
The Clariton company is making plan for expanding its another branch in Berminghum
for which it is considering various financial sources. The above sections have discussed various
sources of arranging funds that can be acquired either through internal or external means.
Besides this, the organisation will have to make a choice among these so that best one can be
selected which can help in fulfilling the ascertained objectives. The best source of finance for
mentioned company will be:
 Bank loan: The bank loans will be good source for arranging finance in context of
expansion purpose. The mentioned company has its previous liabilities as well in which it
has taken loans. Currently, the cited entity needs the amount of £0.5 million to
accomplish its objective. The additional loan of this amount can be acquired through
various banks and financial institutions at fixed rate of interest (Haider, Sadiq and
Tesfamariam, 2016). This method is good to acquire a large sum of money for long term
purpose. In addition to this, it has less financial implication as well.

 Retained earnings: The stated business organisation can go for retained earnings as well
where it can acquire the required amount by without any kind of interest and financial
implications. The objective of firm can also be accomplished without having any type of
interest liability to pay as the amount will be of the business. Apart from this, it does not
give rise to any legal implication also. The quoted business entity can accomplish its
desire through this funding without having much negative implications.
 Debentures: The mentioned entity can also go for debentures to arrange the funds
(Madura, 2011). The debentures can be opted as it can be obtained without securing the
amount by any collateral security. Further, on the basis of creditworthiness, the amount
can be obtained by having less implication.
TASK 2
2.1 Cost of financial sources
Every source of finance arranged by the company includes cost with it which
organisation must consider so that a better decision can be made. It is necessary that these costs
must be evaluated top make a right decision. The sources of finance and costs that are borne by
them are as follows:
 Shares: The shares that are issued by company includes cost with it. The cost included in
shares is in the form of dividends. The company has to pay dividends to shareholders
which is a obligatory function. The dividends are paid out to all shareholders on the basis
of their shares in the organisation. The dividends are part of earnings made by company
that can be given in form of cash, property or by giving shares in the stock (Finnerty,
2013). By making payment of dividend timely to the shareholders, the company cam
maintain the trust level with them which will help in attaining the required assistance in
future as well. The burden will be lesser in this form of finance which is helpful in
maintaining the capacity of business.
 Loans: The loans can be acquired easily to fulfil the long term objectives of business
entities. The Clariton company can go for this option by fulfilling some normal
formalities. The cost related to this source of finance is rate of interest that has to be paid
on borrowed some every month. The interest will be paid on the basis of rate fixed by
issuer at the time of passing loan. Though the method of arranging finance through loans

is easier but, the it creates extra burden in the form of interest which must be paid for a
long term (Zang, 2011).
2.2 Importance of financial planning
The financial planning is a process where capital needed for business activities are
determined. This process is based on formulation of policies and procedures so that different
financial sources can be searched and opted for investment purpose. The planning for finance in
business organisations is a crucial step hence, Clariton Antiques also goes for this. The
importance of financial planing for mentioned entity is as follows:
 Ensuring adequate finance: The financial planning is a significant function performed by
the companies. For said business entity, this function will be of much help as it will assist
in ensuring the proper arrangement of funds in the business (Samiksha, 2016). Besides
this, it aids in making plan in advance for making decision about various sources of
finance that are available for enterprise as per its pre determined objective. Therefore,
entity will make a sound financial plan that can provide aid in ensuring finance for
different objectives.
 Reduces uncertainty: The financial planning helps in reducing various uncertainties of
business by making a planning in well advance. By this, the management can make
policies and procedures that are suitable for business and can manage different risks as
well. Apart from this, the market conditions change frequently which can pose threat for
business. With the help of proper financial planning, risks can be reduced and changing
market conditions can be met easily by arranging required funds (Czarnitzki and
Hottenrott, 2011).
 Efficient utilisation: The sound financial planning helps in ensuring the best and optimum
use of available resources and funds. The said business organisation will be able to make
proper use of money by making sound policies that can help in putting check on wastage
of funds ion unproductive areas. The financial planning aids in making right decision for
investments so that more revenues can be earned. Apart from this, various incomes and
expenses can also be managed in appropriate way which is a necessary part of business.
 Helps in operating activities: The right financial planning done by the organisations help
in managing different activities related to production, distribution, marketing, promotion
etc. (Tang and Musa, 2011). The companies construct the entire planning in proper way

so that different activities can be performed without any barrier in way. Besides this, the
proper budget plan can be made which assist in making allocation of funds for different
activities. Thus, a good financial plan helps in accomplishing overall objectives of
business with best use of funds available for business.
2.3 Assessing business information for making decisions
The business decisions must be taken with a proper thought so that no wrong decisions
can be made. For this, it is necessary to make a study of various data and information available
with firm. In context of present case related to Clariton Antiques Ltd. the business decisions will
be taken by various persons who are as follows:
 Partners: The significant statements of business enterprise are income and financial
statements, profit and loss accounts,, balance sheet and cash books. All these financial
statements record various important data and information that are useful for business
(Brignall and Modell, 2011). The said business entity has four partners and all these will
need information through these statements so that they can have a clear vision of business
and its current position. The income and expenditure statements helps in assessing
various earnings made by the company along with amounts spent for different activities
in a particular time period. The profit and loss statements also are of much importance as
it gives wide information about net and gross profit or net and gross losses made for a
specific time. The balance sheet aids in analysing the current position of business. All
these statements will be collected by the partners to make a decision (Czarnitzki and
Hottenrott, 2011).
 Venture capitalist: The venture capitalist role in present case is played by We Finance
Ltd. The venture capitalists are responsible to make various decisions that can help in
reducing the risks of business. The venture capitalist will ask for the number of
employees present in business as well position of firm in market that can be determined
through balance sheet of company. The investments decisions will be taken by making an
analysis of market share that are in the name of said business firm. The crucial statement
of organisation like cash flow statement will yield suitable data and knowledge about
orientation of entity. Thus, with the aid of these investigations, the stated enterprise will
take determination related to investments (Johnston and Marshall, 2016).

 Finance broker: The brokers are a middle person between company and banks or
financial institutions who arrange for capital required by the business. The brokers have a
wide range of information about different banks and institutions who provide finance for
various enterprises. Thus, they use these information and provide financial advices to the
business organisations so that they can take help of suitable financial source to make
arrangement of funds. The broker will form an investigation of balance sheets and
potential of entity to earn revenues. Thus, the best suitable method will be suggested by
the broker to business firm.
2.4 Impact on financial statement
 Venture capitalist: 'WE finance ltd.' is a venture capitalist in present business case. If the
company chooses the venture capitalist, for arranging the finance, financial statements
will be impacted in various ways (McKinney, 2015). In case of retrieving finance through
'We finance', the amount will be entered in liabilities side of the balance sheet. Apart
from this, the asset side will also be affected where the entry of venture capital will be
done for same. Further, the company will charge dividends that will be expenses for
Clariton, hence the amount will be entered in income statement at expenses side.
 Finance broker: The company is acquiring the finance through bank loans for which it
has to hire a broker who will help in making the arrangements of loan. In return, the
broker will charge a sum of money as he is a mediator between bank and said
organisation. The charges paid to broker will be entered at expenses side of profit and
loss statement along with the interest amount paid by bank (Smith, 2014). The bank loan
is a liability which must be paid by firm, hence it will be shown in liabilities side of
balance sheet. With this, the capital is accumulated and simultaneously liabilities of the
balance sheet also enhances. So, the finance broker impact on the income statement and
balance sheet.
TASK 3
3.1 Cash Budget
January February March April May June Total
Sources of cash inflow

5% of the current
month’s sales 15000 22500 30000 15000 15000 3750 101250
80% of the previous
month’s sales 120000 240000 360000 480000 240000 240000 1680000
15% of the second last
month 22500 22500 45000 67500 90000 45000 292500
Sum total of cash
inflows 157500 285000 435000 562500 345000 288750 2073750
Cash outflows
Payments 807250 137250 119750 437250 227250 219750 1948500
Sum of cash outflows 807250 137250 119750 437250 227250 219750 1948500
Net cash flow (CI-CO)
(Shortfall/surplus) -649750 147750 315250 125250 117750 69000 125250
Add: Opening balance 110000 -539750
-
392000 -76750 48500 166250 110000
Closing cash position -539750 -392000 -76750 48500 166250 235250 235250
The above cash budget of Clariton company shows that the opening balance was
£110000 for January. The company has a good sales volume and gained profits which resulted
into better receivables from various parties. The total sum paid by the company during this time
is £807250 which is more than the cash inflows of organisation. As a result, the company has
attained a negative net cash balance at the end. Afterwards, company has made good growth
which may be the result of better marketing efforts or proper financial planning.
3.2 Unit cost and pricing
Cost per unit
Particulars Amount
Fixed expenses £65000
Variable expenses £32000
Total expenses or cost £97000

Output volume 970 units
Cost per unit £100
Margin of profit in percentage 23.00%
Selling price per unit £123
The method of unit cost and pricing has been depicted in above table which shows
various fixed and variable expenses of company. Fixed expenditures include rent, electricity bills
etc. on other hand variable expenses include labour cost, raw material purchase etc. The total
production units done by organisation will be acquired by dividing cost per unit with total
production. The profit margin of company is 23% and on this basis, the selling price of cited
venture per unit is fixed at £123.
Unit cost = (Total fixed costs + Total variable costs) / Total units produced
3.3 Calculation of NPV
ARR
1st = (£19.6m/6)/£8.6*100 = 37.98%
2nd = (11.5/6)/4.4*100 = 43.56%
As per the analysis, it is clear that payback period of 2nd project is lower than 1st, which makes the
second project more viable to choose. While on other hand, the ARR method applied for
examination entails that second project is better which again makes it better project. As per the
NPV method, it is showing that first project is more viable. On this basis, it can be said that first
project must be selected as NPV is gives best results and right method for selecting the
investment decision.
1st
investment
2nd
investment
Cumulati
ve values
Cumulati
ve values DF
PV
(1st) PV (2nd)
Initial
capital
cost -8.6 -4.4 -8.6 -4.4 1 -8.6 -4.4
1 1.6 0.8 -7 -3.6
0.877
2 1.40352 0.70176

2 2.8 1.4 2.8 -2.2
0.769
5 2.1546 1.0773
3 3.4 2 6.2 -0.2 0.675 2.295 1.35
4 3.6 2.4 3.6 2.2
0.592
1 2.13156 1.42104
5 4 2.3 7.6 4.5
0.519
4 2.0776 1.19462
6 4.2 2.6 4.2 7.1
0.455
6 1.91352 1.18456
Payback
period
3+(0.8m/
3.6m) =3.22
3+(0.2m/
2.4m) =
3.08 NPV 3.3758 2.52928
TASK 4
4.1 Key elements of financial statements
 Balance sheet: The balance sheet is an important financial statement that gives a clear
picture of the company and its position in market (Haider, Sadiq and Tesfamariam,
2016). The balance sheet is made every year at the end of financial period. The good
financial position remarked in the balance sheet is helpful for attracting investors.
 Income statements: The income statements show various income and expenditure of
company at specific time. This statement helps in determining the surplus and deficit of
business which are obtained through various incomes and expenses of firm.
 Cash flow statements: The cash flow statements give a vision of different incomes and
outcomes of cash in business (Finnerty, 2013). On the basis of this statement, the
managers make decisions so that a smooth flow of cash can be maintained within
business. This can be done through proper financial planning in the organisation.
4.2 Comparison of financial statements of two companies
Basis Clariton Antique La Consignment
Type The said organisation is a
partnership business where
partners share all profits and
losses equally.
La consignment is a sole
proprietorship firm who works
for earning maximum revenues
from business (Czarnitzki and
Hottenrott, 2011).

Financial statements In partnership firms, the
partners' capital account is
prepared where all transactions
of individual partners are
recorded.
Here, the owner monitors the
activities of business through
balance sheet and profit and
loss accounts.
4.3 Ratio analysis
Quick ratio
The quick ratio of a company expresses the potential of organisation that how well a firm can
meet its short term liabilities. This ration is also popularly known as acid-test ratio.
Current ratio
The current ratio refers to organisation's ability to meet the short and long term liabilities. This is
also known as liquidity ratio where total assets and liabilities of company is considered (Madura,
2011).
In present statement, the current ratio of enterprise is better in 2015 which was 2.27 than 2016
which is 2.33.

Gearing ratio
The gearing ratio entails the financial ratio where it compares the owner's funds borrowed with
respect to its equity.
CONCLUSION
The present report is based on Managing financial sources and decisions where Clariton
Antiques Ltd. Is making financial planning to take a right decision for business. The above
report concludes that balance sheet, income and expenses statements and cash flow statements
are the important statements that are useful for company in making financial planning. Besides
this, the sole proprietorship and partnership business have different policies to maintain financial
statements.

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