Financial Planning for Partnership Firm

This assignment delves into the financial planning for Clariton Antique, a partnership firm specializing in antiques. It examines various financing sources available to them, focusing on both internal (personal savings) and external (bank loans) options. The report analyzes their financial health through ratios like liquidity, net profit, and gearing, providing insights into their ability to meet short-term obligations and profitability. It also explores the concept of budget determination and selecting appropriate financing methods for business expansion.

MFRD

ILLUSTRATION INDEX
Illustration 1: Cash budget ..............................................................................................................9
Illustration 2: Calculation of NPV.................................................................................................11
Illustration 3: Payback period .......................................................................................................12
Illustration 4: Calculation of ARR.................................................................................................13
Illustration 5: Calculation of liquidity ratio...................................................................................15
Illustration 6: calculation of net profit ratio...................................................................................16
Illustration 7: Calculation of Gearing ratio....................................................................................16

INTRODUCTION
The organisations or companies are set up with an aim of making profits and earn returns
on their investments. To run the firm, it is necessary to have sufficient funds and their proper
management. The financial management refers to managing funds of company in an effective
manner so that pre-determined objectives can be accomplished. The adequate arrangement of
finance is a crucial part of business which helps in performing various integral functions which
are vital for the firm. Managing all funds in an appropriate manner helps in smooth functioning
of activities and investments at proper places (Baranov, 2015). The present report is based on
managing financial resources and decisions which reflect the case of Clariton Antiques Ltd. The
case has various parts where different sources of finance are discussed that are suitable for
company. Besides this, cited firm is also approaching for the expansion of business for which
sound financial planning has been focussed. The owner of said entity has taken loans previously
and presently, want to raise £0.5 million for expansion purpose and for making some purchases.
On this basis, various decisions about right source of finance and plans to manage funds have
been discussed.
TASK 1
1.1 Sources of finance
a) Unincorporated business- A business enterprise which is owned by one or more than one
person is termed as unincorporated business. This type of firm does not have its isolated legal
entity because of which entire liability of actions are possessed by the owner (Crosby and
Henneberry, 2016). These types of organisations include sole proprietorship or family
businesses. For these kinds of firms, several sources of finance are available:
 Personal savings: The personal savings amounts for those sums which are saved by an
individual on personal basis. This type of source can be useful for investment in
businesses as it does not contain any kind of interest rate. Besides this, mentioned source
of capital is the cheapest form of investment which is promptly available for owner.
Thus, it can be a useful arrangement of funds that has many benefits for the owner.
 Retained earnings: The retained earnings are another source of capital for
unincorporated business where the firms can make investment from the profits earned by
company (Eckerd, 2015). When the major objective of business to make profits is
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achieved, it can use these profits by retaining it for the future use. This amount can be
reinvested as a capital for further activities of business. This may be a good source for
making expansion, purchasing of assets like furniture, etc.
 Selling assets: The unincorporated companies can arrange their finance by selling assets
of business which are of less use within organisation. These assets may include some
machineries, furniture or any land or building. Thus, amount collected by this selling can
be invested for various purposes like expansion of business, renovations, etc. Therefore,
this concept can be of utility for mentioned business sectors (Epstein and Buhovac,
2014).
 Working capital: The short term financial needs of business are fulfilled through
working capital of business. The working capital is an amount which is acquired by
making a write-off of assets from liabilities. The owner of incorporated business can
fulfil its objectives which are of short term by efficiently using its working capital.
Besides this, working capital is also useful for accomplishing different day-to-day
operations of business activities.
 b) Incorporated business: The incorporated business has separate entity which has all
natural benefits including protection of liability and facilities related to tax deductions
(Geng, Bose and Chen, 2015). In this type of business, owner can form a corporation and
raise its capital by selling shares of organisation. These types of businesses have to draft
legal articles of incorporation which includes objectives of business and many other
information that are essential to reveal. Such companies add Inc. or limited after the name
of organisation. The sources of funds available for such firms include below mentioned
ways:
 Loans from bank: In the present context, Clariton Antiques can arrange its financial
requirements by taking loans from banks or financial institutions. This is the most
common source of fund where company can borrow the amount at a particular rate of
interest decided by bank. According to the case, it is mentioned that enterprise already
has some previous liabilities of loans. Now, for the expansion objective, it can take
additional loan which can have either fixed or fluctuating interest rates (Czarnitzki and
Hottenrott, 2011). The cited business firm can chose any private or public bank that can
provide loans by fulfilling some necessary formalities.
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 Share capital: The firm can also opt for another source of finance by issuing shares to
general public for subscription. These shares have a fixed rate of interest which investors
have to pay and it will help company to make an arrangement for the required capital.
The facility of subscribing shares can be given for both new and present shareholders.
 Debentures: Debentures are the debt instruments that are given on the basis of
trustworthiness as it is not secured by any collateral security. This type of source is the
most suitable for medium and large size businesses (Tang and Musa, 2011). On
debentures, fixed rate of interests have to be paid. In addition to this, a certificate is
issued which notifies the liability and evidence of taking credit. This is helpful for
accomplishing long term objectives of business.
 Government grants: The government grants are a useful source of arranging funds
where companies can apply for achieving it. This is a useful source of fund which can be
acquired easily and can have added benefits if company is running in any special zone.
Government grants loan on the basis of nature and type of business and by looking on its
various purposes (O'Riain, Curry and Harth, 2012).
1.2 Implications for using different sources of finance
Internal sources Personal source: In internal source of funds, personal income is a major one which is
collected by the owner through his/her personal ways. This amount may come through
various savings done by the proprietor or arranged from any family member, relative or a
friend. The foremost implication of this source is on personal capital which is lost by the
owner after investing it in the business. Thus, savings of proprietor will be lost but it will
have no implication in context of legal formalities and interest rates. Moreover, the funds
arranged on personal basis are completely controlled by the owner himself. So, there is
no concentration of power. On the other hand, commitment of proprietor increases in
case his personal savings are invested in business (Finance and Network, 2013). Retained capital: The retained earnings are also free from legal implications and do not
lead to any loss of power by the owner. The reason behind this is that retained earnings
are the part of those capital which is left out from profits. This has complete ownership of
proprietor and he has the full right to use it for desired purposes in business without any
financial or legal implications.
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External sources Bank loans: Acquiring funds through bank loans require some legal formalities along
with major documentation that are necessary for banks or financial institutions. With the
help of these formalities, bank verifies various details of company provided in the form
so that position of organisation can be cross checked in relation to its credit worthiness
(Vieira and Teixeira, 2010). Besides this, financial implications will be low as company
would be responsible to pay a fixed rate of interest as per the norms of bank. The control
of organisation will be nil on this source as inability of paying interest will result in
forfeiture of various assets by the bank that are of equal value borrowed by bank.
 Debentures: At the time of issuing debentures, both parties have to make a legal
agreement. Further, the enterprise will have to pay a fixed rate of interest as well on the
amount taken as debt. This source of finance is effective as it does not dilute the control
of organisation in any way. Moreover, the issuer does not have to pay any kind of stamp
duty on it (Brignall and Modell, 2011).
1.3 Evaluation of most appropriate source of financing
Clariton Antiques Company has present objective of expanding its business for which it
has to arrange finance from various sources. As per the above discussion of different financial
sources the cited firm can chose one which is suitable for its purpose. Besides this, the
implications elaborated above about different sources can also help in deciding the best source of
finance for mentioned firm which are as follows:
 Bank loan: The most common source of arranging finance is through bank loans which is
suitable for cited business venture as well. The company has already its liabilities for
bank loans (Guthrie, Olson and Humphrey, 2010). Now the enterprise can take additional
loans for arranging its financial requirements which will be better accomplished by this
way. The company can also have advantages as it will have less financial implication for
business and will have to pay a fixed rate of interest on it. In addition to this, the method
will be less risky as well.
 Personal saving: Another good source of financing for mentioned business venture is
through personal savings. This method has various benefits as it does not include any
kind of interest rates on it. Besides this it will be readily available for desired purpose of
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business and without going for any legal implication on it (James, King and Suryadi,
2011). Thus, the said firm can acquire good returns on its personal savings.
 Government grants: The government grants can prove to be of useful source in expansion
plan of stated business entity as the rate of interest on such instruments are relatively less.
Further, the method of arranging funds through this method has less risk and also
beneficial to attain cost effectiveness. Thus, it can help in managing the funds for
business in a useful manner.
TASK 2
2.1 Cost of financial sources
The financial sources adopted to make arrangement of funds always have some cost
included in it which is necessary to consider before opting for it. By this way, the company can
make an evaluation of cost and make a right decision for arranging finance. The two sources that
are mentioned below states the cost related with them: Shares: In case of issuing shares for arranging finance, the company will have to incur
cost in the form of dividends (Upton and et.al., 2015). The dividends are the part of
profits which are compulsorily payable to shareholders on regular basis. The form of
paying dividends can be decided by organisation which can be through cash, shares in the
stock or by giving any other property. But it is beneficial for firm as in this case, the
entity will not have any debt liability to repay every month. In addition, this method will
create lesser burden on stated enterprise and will be much helpful in creation of revenues
by making shareholders of business happy.
 Loans: The bank loans are easier and useful source of arranging finances that can be
chosen by mentioned business enterprise as well. In this case, the mentioned business
entity will have to pay a fixed rate of interest on monthly basis (Yellen, 2016). This will
make an additional burden on organisation. In addition to this, the entire amount which is
paid till final stage, amounts to greater sum than the original loan taken by the company.
2.2 Importance of financial planning
The financial planning is an integral part of business where organisation take important
decisions for making a sound plan to manage funds. This plan has much importance as it helps in
managing various expenses that can occur for business purpose. By making a plan, the business
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ventures can plan their financial activities in appropriate way. Further, this also acts as a
guideline that helps the company in taking decisions related to short term and long term
objectives (Samiksha, 2016). For the mentioned company financial planning can be helpful in
below stated manner:
 Determination of capital requirement: The foremost and primary step in financial
planning is related to making decision related to required capital. This can also be
understood as the step where budget for company will be decided on the basis of forecast
that can be done by finance manger. This will help in making decisions related to various
prospects of business that can be a contributing factor in determining the capital for
business. The mentioned business enterprise can ascertain the capital required for
expansion by forecasting various requirements of new business. This may also require to
make decision about various production and sales decisions along with maintenance of
working capital (Baranov, 2015).
 Arranging for financial sources: The next step is made in the financial planning by taking
decision about selection of source that can be adopted by business. For stated enterprise,
various methods have been discussed that can aid in arranging finance for expansion
activity. This is a necessary step so that required capital can be collected in adequate
amount as scarcity of money can raise disturbance in smooth functioning of various
operations. Besides this, the expansion activity may also result in failure and heavy losses
if it is not started with proper planning.
 Proper utilisation of resources: The financial planning is a vital step of business as it
helps in making optimum utilisation of various resources (Crosby and Henneberry,
2016). The Clariton antiques can make planning with detailed analysis of various
activities and required resources to fulfil them. In this context, it is necessary that firm
arranges adequate money which is essential for expansion. Besides this, it should also be
assured that activities does not lead to over trading where sales can become faster than
available capital. Therefore, it is vital to make forecasts for various sources and selecting
the most suitable one.
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2.3 Assessment of business information for making business decision
There are various persons who take the decisions related to business. In order to make
right decision, these persons require a number of information that should be availed by company.
The elaboration about it is given in below section:
 Partners: There are four partners of Clariton antiques who will make their decisions on
the basis of various financial statements of company (Eckerd, 2015). The major
statements of the business are income and expenditure statement, Profit and loss account
and balance sheet. With the help of income and expenditure account, the partners can
take a look on various sources of income for firm along with its different expenses in
business. Besides this, the profit and loss statements will help in monitoring net profits
made by organisation and losses occurred in a particular period. Moreover, the balance
sheet is an important statement which shows the actual position of enterprise. In addition
to this, the partners can also analyse the budget prepared by company.
 Venture capitalist: We finance which is a venture capitalist will take decision by
analysing various risks related to business so that important decision can be taken to
minimise it (Epstein and Buhovac, 2014). For this, the said business entity will make a
look on number of workers and position of firm in market. The decision related to
making investment will be taken after proper analysis of market share acquired by the
stated organisation. The important statement of company like cash flow statement will
give appropriate information and knowledge about position of entity. Thus, with the help
of these analysis, the quoted enterprise will make decisions related to investments.
 Finance broker: The finance broker is an inter mediator between an organisation and its
clients. The broker keeps a track of information on the basis of which he gives advices to
companies so that they can make investments on the best firms (Geng, Bose and Chen,
2015). On each investment done by the client, broker gets the brokerage on it. For getting
information about market and best firms to make investments, the broker will make an
analysis of balance sheets and ability of enterprise to make profits. According to balance
sheet, the sound position found for company will be advised for investment to client.
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2.4 Impacts on financial statements
If Clariton Antiques Company opts for venture capitalist and financial broker, it will have
a definite impact on its financial statements. The affects that will be exerted upon the statements
have been explained in following statement:
 Venture capitalist: When the quoted firm chose to go with venture capitalist, then it will
have to show it on liabilities side in balance sheet as it will create a liability. The
organisation will be liable to pay dividends which will be shown on liabilities side
(Czarnitzki and Hottenrott, 2011). Besides this, it will have an impact on assets sides as
well because the amount acquired from venture capitalist will increase the cash amount
of company that will be entered in the assets side of balance sheet.
 Finance broker: The selection of brokers will have an impact on profit and loss statement
of said business organisation. This option will not have any consequence on balance sheet
of mentioned enterprise. On choosing finance broker, the entity will have to pay
brokerage which will amount for an expense for venture and its entry will be done on
debit side of P&L account (Tang and Musa, 2011).
Entry in Profit and loss account
Particulars Amount in £ Particulars Amount in £
Brokerage xxx
Entry in Balance sheet
Liabilities Amount £ Assets Amount £
Venture capitalist xxx Cash xxx
TASK 3
3.1 Cash budget
Particulars January February March April May June
Cash Receipts
Received in same 15000 22500 30000 15000 15000 3750
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month (5% of sale
collected within the
same month)
Sales revenue
Received in one
month (80%) 120000 240000 360000 480000 240000 240000
Amount Received in
second month (15%
following the sale) 22500 22500 45000 67500 90000 45000
Total receipts
generated during
each month 157500 285000 435000 562500 345000 288750
Cash Payments
Payment made to
suppliers 807250 137250 119750 437250 227250 219750
Cash position
(Shortage/Surplus) -649750 147750 315250 125250 117750 69000
Opening cash
balance 110000 -539750 -392000 -76750 48500 166250
Closing cash
balance -539750 -392000 -76750 48500 166250 235250
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The above cash budget of Clariton Company shows that it started with the opening
balance of £110000 from January. With the help of various plans the quoted entity has been able
to generate good revenues and receivables. This has made the total receivables of enterprise to
£288750 at the end of June. Besides this, it has make some payments as well which amounts to
£807250. This has made the closing balance of company to reach in negative as the payments of
organisation is more than its receivables. Afterwards, the firm has made an continuous increase
in its revenues which may be a result of better marketing activities, optimum utilisation of
resources etc. This leads to attain cost effectiveness in the operations of business.
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%
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Selling price per unit £123
(Unit cost and pricing)
The above table shows the calculation of unit cost and pricing for Clariton Antiques Ltd.
As per the table, company has its fixed expenses of £65000 which may include different
expenditures like depreciation, rents, electricity bills etc. Similarly, the variable expense include
different costs related to labour, cost of raw materials, packing etc. the total expenses have
reached to £97000. The total production output of organisation is 970 units as per unit cost is
£100. Thus, the profit margin of enterprise is 23%. On this basis, the selling price of mentioned
entity per unit is fixed at £123. This states that mentioned organisation has more fixed expenses.
To meet this, the firm makes its margin for profit at 23% over 970 units.
3.3 Calculation of NPV
Illustration 1: Calculation of NPV
The above table has depicted the calculation of NPV for two investment proposals. On
this basis, the net present value (NPV) of first investment project is more than the second one.
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This shows that the first investment will have a more sense for the investor in terms of finance.
Thus, the stated firm should go for first investment proposal which is more meaningful.
Illustration 2: Payback period
The payback period is calculated to make an analysis for various investment projects so
that it can be interpreted that which one is more viable in the sense of recovering the amount
invested. As per this analysis, the above table shows that the second project is more suitable as it
gives the invested amount back earlier than the first one. The first project is taking three years
and two months for giving back the amount while the second one takes just three years.
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Illustration 3: Calculation of ARR
The ARR of a company refers to the average rate of return which is higher for second
investment. This reveals that the second project is more able to give better returns to
organisation.
TASK 4
4.1 Key components of financial statements
 Income statement: The income statement of a company shows various income and
expenditures of an organisation that has been made for a particular period of time. Thus,
the said statement gives a clear picture of net profits earned by enterprise along with its
expenses (O'Riain, Curry and Harth, 2012). Thus, it helps in making decision related to
procedures that should be adopted to move further so that surplus can be maintained in
the business.
 Cash flow statement: The cash flow of a company helps in monitoring cash that is
inflowing or out flowing in organisation. This aids in persuasion of various sources of
cash so that the organisation can attain high growth measures in the economy. This also
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helps the managers of firm in making various strategies that are helpful for maintaining
business operations.
 Balance sheet: The balance sheet of an organisation is a significant statement that shows
various assets and liabilities of company (Finance and Network, 2013). It is made on
annual basis which also reveals the actual position of firm. The stability maintained in the
balance sheet is attractive for investors as it shows the creditworthiness and sound
financial position of entity.
4.2 Comparison between financial statements adopted by two firms
Basis Clariton Antique La Consignment
Type The Clariton Antique is a
partnership firm who works
for sharing all profits and
losses between each partner
equally. It has four partners.
La consignment is a sole
proprietorship firm whose
major objective is to generate
maximum revenues. All the
profits and losses are borne by
sole trader (Vieira and
Teixeira, 2010).
Financial statements The said company has four
partner and each maintain the
partner capital account so that
they can monitor their share in
profits. This is shown in the
P&L account.
The position of business is
monitored by owner with the
help of income statements.
Norms and policies The role of each partner in
company is either equal or
based on the share invested by
them in organisation (Brignall
and Modell, 2011).
The sole proprietor has to
comply with various
formalities which will help in
monitoring the taxes and
revenues.
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4.3 Ratio analysis
Illustration 4: Calculation of liquidity ratio
Quick ratio
The quick ratio of a company shows the capability of a firm to meet the meet the
requirements of short term liquidity.
Current ratio
The current ration of an organisation reveals the ability of an enterprise to meet its short
term requirements. The method of calculating the current ratio is to deduct current assets from
the current liabilities. In present context, the current ratio of firm is better in 2015 which is 2.27
than 2016 which is 2.33.
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Illustration 5: calculation of net profit ratio
Net profit ration: The net profit ratio is calculated to know about the revenues earned by
organisation for a specific year. The present calculation shows that position of firm is better in
2016 where it made 2.63% of profit as compared to 1.89% in 2015.
Illustration 6: Calculation of gearing ratio
Gearing ratio: Gearing ratio shows the organisation's long term debts as compared to the equity
capital.
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CONCLUSION
The present report is based on managing financial resources and making decisions. It has
discussed various sources of finance that are available for a partnership firm Clariton Antique.
The report has also focussed on financial planning for expansion of business which helps in
determination of budget and choosing right finance source for organisation. In this context the
said business enterprise has selected bank loan for arranging funds externally and personal
savings internally.
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