Managing Financial Resources and Decisions Solution
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Added on 2020-01-07
Managing Financial Resources and Decisions Solution
Added on 2020-01-07
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MFRD
ILLUSTRATION INDEXIllustration 1: Cash budget ..............................................................................................................9Illustration 2: Calculation of NPV.................................................................................................11Illustration 3: Payback period .......................................................................................................12Illustration 4: Calculation of ARR.................................................................................................13Illustration 5: Calculation of liquidity ratio...................................................................................15Illustration 6: calculation of net profit ratio...................................................................................16Illustration 7: Calculation of Gearing ratio....................................................................................16
INTRODUCTIONThe organisations or companies are set up with an aim of making profits and earn returnson their investments. To run the firm, it is necessary to have sufficient funds and their propermanagement. The financial management refers to managing funds of company in an effectivemanner so that pre-determined objectives can be accomplished. The adequate arrangement offinance is a crucial part of business which helps in performing various integral functions whichare vital for the firm. Managing all funds in an appropriate manner helps in smooth functioningof activities and investments at proper places (Baranov, 2015). The present report is based onmanaging financial resources and decisions which reflect the case of Clariton Antiques Ltd. Thecase has various parts where different sources of finance are discussed that are suitable forcompany. Besides this, cited firm is also approaching for the expansion of business for whichsound financial planning has been focussed. The owner of said entity has taken loans previouslyand 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 havebeen discussed.TASK 11.1 Sources of financea) Unincorporated business- A business enterprise which is owned by one or more than oneperson is termed as unincorporated business. This type of firm does not have its isolated legalentity because of which entire liability of actions are possessed by the owner (Crosby andHenneberry, 2016). These types of organisations include sole proprietorship or familybusinesses. For these kinds of firms, several sources of finance are available: Personal savings: The personal savings amounts for those sums which are saved by anindividual on personal basis. This type of source can be useful for investment inbusinesses as it does not contain any kind of interest rate. Besides this, mentioned sourceof 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 forunincorporated business where the firms can make investment from the profits earned bycompany (Eckerd, 2015). When the major objective of business to make profits is1
achieved, it can use these profits by retaining it for the future use. This amount can bereinvested as a capital for further activities of business. This may be a good source formaking expansion, purchasing of assets like furniture, etc. Selling assets: The unincorporated companies can arrange their finance by selling assetsof business which are of less use within organisation. These assets may include somemachineries, furniture or any land or building. Thus, amount collected by this selling canbe 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 throughworking capital of business. The working capital is an amount which is acquired bymaking a write-off of assets from liabilities. The owner of incorporated business canfulfil 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-dayoperations of business activities.b) Incorporated business: The incorporated business has separate entity which has allnatural 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 andraise its capital by selling shares of organisation. These types of businesses have to draftlegal articles of incorporation which includes objectives of business and many otherinformation that are essential to reveal. Such companies add Inc. or limited after the nameof organisation. The sources of funds available for such firms include below mentionedways:Loans from bank: In the present context, Clariton Antiques can arrange its financialrequirements by taking loans from banks or financial institutions. This is the mostcommon source of fund where company can borrow the amount at a particular rate ofinterest decided by bank. According to the case, it is mentioned that enterprise alreadyhas some previous liabilities of loans. Now, for the expansion objective, it can takeadditional loan which can have either fixed or fluctuating interest rates (Czarnitzki andHottenrott, 2011). The cited business firm can chose any private or public bank that canprovide loans by fulfilling some necessary formalities. 2
Share capital: The firm can also opt for another source of finance by issuing shares togeneral public for subscription. These shares have a fixed rate of interest which investorshave 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 oftrustworthiness as it is not secured by any collateral security. This type of source is themost suitable for medium and large size businesses (Tang and Musa, 2011). Ondebentures, fixed rate of interests have to be paid. In addition to this, a certificate isissued which notifies the liability and evidence of taking credit. This is helpful foraccomplishing long term objectives of business.Government grants: The government grants are a useful source of arranging fundswhere companies can apply for achieving it. This is a useful source of fund which can beacquired 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 itsvarious purposes (O'Riain, Curry and Harth, 2012).1.2 Implications for using different sources of financeInternal sourcesPersonal source: In internal source of funds, personal income is a major one which iscollected by the owner through his/her personal ways. This amount may come throughvarious savings done by the proprietor or arranged from any family member, relative or afriend. The foremost implication of this source is on personal capital which is lost by theowner after investing it in the business. Thus, savings of proprietor will be lost but it willhave no implication in context of legal formalities and interest rates. Moreover, the fundsarranged on personal basis are completely controlled by the owner himself. So, there isno concentration of power. On the other hand, commitment of proprietor increases incase his personal savings are invested in business (Finance and Network, 2013).Retained capital: The retained earnings are also free from legal implications and do notlead to any loss of power by the owner. The reason behind this is that retained earningsare the part of those capital which is left out from profits. This has complete ownership ofproprietor and he has the full right to use it for desired purposes in business without anyfinancial or legal implications. 3
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