MANAGING FINANCIAL RESOURCES AND DECISIONS TABLE OF CONTENTS INTRODUCTION

MANAGING FINANCIAL
RESOURCES AND DECISIONS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance available to the business firms................................................................3
1.2 Implication of sources of finance..........................................................................................4
1.3 Appropriate source of finance...............................................................................................5
TASK 2............................................................................................................................................7
2.1 Cost of varied sources of finance in respect to dividend, interest and tax.............................7
2.2 Importance of financial planning for Clariton Antiques........................................................7
2.3 Information needs of the decision makers.............................................................................8
2.4 Impact of finance on the income statement and balance sheet..............................................9
TASK 3..........................................................................................................................................10
3.1 Budget for the Clariton Antiques.........................................................................................10
3.2 Computation of unit cost.....................................................................................................10
3.3 Project evaluation method...................................................................................................11
TASK 4..........................................................................................................................................13
4.1 Financial statement of the business firms............................................................................13
4.2 Format of financial statements.............................................................................................13
...................................................................................................................................................21
4.3 Ratio analysis.......................................................................................................................22
CONCLUSION..............................................................................................................................23
REFERENCES..............................................................................................................................24
Figure 1P&L account for partner...................................................................................................16
Figure 2P&L account for sole proprietor.......................................................................................17
Figure 3 P&L account for company.............................................................................................18
Figure 4Balance sheet of company................................................................................................19
Figure 5 Balance sheet for partners...............................................................................................20

Figure 6 Balance sheet of sole trader.............................................................................................21
Figure 7 Cash flow statement of sole trader..................................................................................22
Figure 8Cash flow statement of company.....................................................................................23
Table 1 Cash budget for Clariton...................................................................................................12
Table 2Calculation of unit cost......................................................................................................12
Table 3 Computation of payback period.......................................................................................13
Table 4 Calculation of ARR..........................................................................................................13
Table 5 Calculation of NPV..........................................................................................................14
Table 6 Gross and net profit ratio..................................................................................................24
Table 7 Current ratio of Clariton...................................................................................................24
Table 8Debt equity ratio................................................................................................................25

INTRODUCTION
Finance is the one of the most important aspect of the organization on which management
have to give due importance. This is because firm always face problem of scarcity of finance in
its business. In the current research study varied areas related to finance are discussed in detail.
In this regard, discussion is carried out on implications and appropriateness of source of finance.
Apart from this, in the report importance of financial planning is explained in context of budget,
implications of failure of business to finance adequately and overtrading etc. Best project is
selected for the company on the basis of results of project valuation approach. Finally,
performance of Clariton is evaluated by using ratio analysis and areas in which it needs to work
is identified.
TASK 1
1.1 Sources of finance available to the business firms
Sources of finance are of different type and business firms by contemplating varied factors
make decision about source of finance that must be used to raise fund for the business. There are
two type of firm’s namely unincorporated and incorporated business. Unincorporated business
refers to the sole trader, partners and cooperatives that run business at small level (Helleiner,
2010). On other hand, incorporated business refers to the company that have its own existence
separate from the owner. Varied sources of finance that are used by the large and small size
business firms are given below.
Incorporated business
 Equity: It is the one of the most important source of finance that is used by the most of the
business firms. This is because under same considerable amount of fund is raised by the
business firm from the general public. In case of equity it is not mandatory to pay finance
cost in each financial year. Thus, sole control of the decision in respect to payment of
dividend depends on the business firm and according to its cash flows easily finance cost is
managed in the business (Hong. and Kostovetsky, 2012). Firm can raise millions of amount
from stock market and by using same fund business operations. For example Clariton can
launch IPO in the market for raising capital of 6 million from the market and relevant amount
can be invested in business expansion in European nations.

 Venture capital: Venture capital is the source of finance which have high degree of
similarity to the equity. Only difference between both in that in case of former one through
stock exchange funds are raised from the market. But in case of latter source of finance one
entity make investment in business of other one without taking help of any intermediary.
Venture capital firm invest cash in the relevant business firm and in return obtain
shareholding in same. Firms that are not able to raise fund from the market usually take help
of venture capital firms in order to fund their business. Clariton can raise 6 million amount
through venture capital in different stages of business like establishment of office in foreign
nations and development of strong marketing campaign etc.
 Debentures: Sometimes large proportion of fund is already raised by the firm through equity
and cost of same is already high in the business (McLean, Zhang and Zhao, 2012). In case of
such kind of situation business firms prefer to take debt from the general public by issuing
debentures. This strategy make firm capital structure balanced and benefit same. In this
regard venture capital firm can issue debentures amount to 6 million at 8% interest rate to the
individual and institutional investors. It will be mandatory to pay interest on yearly basis to
debenture holders.
Unincorporated business
 Bank loan: Bank loan is the source of finance that comes in the debt category. Under this
financial institutions like banks give a debt to the business firms like Clariton at the specific
interest rate. Bank loan of long and short term are available to the business firm at the fixed
and floating interest rate. Business firms take bank loan at fixed or floating interest rate by
considering economic condition of the nation and decisions that can be taken by the central
bank. Bank loan of 6 million can be taken from the financial institutions at specific interest
rate to fund business operations or meeting working capital needs of the business.
 Overdraft: It is a short term source of finance that is used by the small and medium size
business to meet their working capital requirements. Usually, such kind of business firms
face a problem of scarcity of finance in the business. Thus, to meet short term requirements
they often make use of overdraft facility in order to meet day to day to business expenses.
 Retained earnings: It is the internal source of finance and used by all sort of business firms
whether they are incorporated or unincorporated in nature. It is the proportion of the overall
revenue that is earned by the business firm in the specific time period. Because it is the part

of the profit there is not cost of the mentioned source of finance and due to this reason it is
widely used by the firms in their business.
1.2 Implication of sources of finance
There is a difference between internal and external source of finance. External source of
finance refers to the amount of fund that is not generated through business operations. Whereas,
internal source of finance refers to the sources through which by using assets or business cash
flows funds are raised from business.
Sources of
finance (Internal
and external
source of
finance)
Financial
implications
Legal
implications
Dilution of
control
Bankruptcy
Equity (External
source of
finance)
Dividend is the
cost of equity
and its weightage
in overall finance
cost is higher
then interest.
Need to comply
with rules and
regulations that
are related to
paper formalities
which have to be
done with Stock
exchange.
Control get
reduced in case
of equity.
First priority is
given to creditors
then
shareholders.
Venture capital
(External source
of finance)
Same of equity Require to sign
contract with VC
firm.
Same of equity Same of equity.
Debenture
(External source
of finance)
Interest paid to
debenture
holders is the
cost of this
source of
finance.
Necessary to sign
relevant
documents and
submitting it to
regulatory
authority.
Control remain
same.
Same of equity
Bank loan
(External source
Interest is the
finance cost of
Necessary to
mortgage
Control remain Same of equity