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Sources of Finance Used by Clariton Antiques Ltd

Added on - 11 Feb 2020

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Managing Financial Resourcesand Decisions
Table of ContentsINTRODUCTION...........................................................................................................................1TASK 1............................................................................................................................................11.1 Sources of finance for unincorporated and incorporated businesses....................................11.2 Implication of using internal and external sources of finance..............................................21.3 Appropriate source of finance for Clariton...........................................................................3TASK 2............................................................................................................................................42.1 Analysing cost of financial sources.......................................................................................42.2 Importance of financial planning..........................................................................................52.3 Assessment of information for making financing decisions.................................................62.4 Impact on financial statements..............................................................................................7TASK 3............................................................................................................................................83.1 Cash budget...........................................................................................................................83.2 Calculation of unit costs for making pricing decisions.........................................................93.3 Assessment of viability of projects.......................................................................................9TASK 4..........................................................................................................................................114.1 Financial statements components........................................................................................114.2 Financial statement formats................................................................................................114.3 Comparison of financial ratios............................................................................................13CONCLUSION..............................................................................................................................16
INTRODUCTIONFinancialmanagement can be determined as an effective and efficient management offunds of the company. It means the financial activities of procurement and utilisation of fundsare properly planned, controlled, directed and organised in order to achieve organisationalobejctives.. The main purpose of financial management is that the adequate funds are availableand utilised in an optimum manner to ensure profit maximisation and sustainability of theenterprise (Loorbach and Rotmans, 2010). For ensuring that, the operations of an organisationare carried out smoothly and it is essential to have a sound capital structure which can be ensuredby effective financial management strategies.The present report discusses about ClaritonAntiques Ltd. which is in partnership of four partners and it has been started as anunincorporated firm. It has grown steadily over the time and established goodwill in Londonmarket and now it is planning to acquire a building for opening one more branch.In this study, various sources of finance that can be used by Clariton are discussed for thesaid purpose. Further, it analyses the implications of using external and internal; sources offinance. Moreover, it provides an understanding of venture capitalists and financial brokers as asource of finance.TASK 11.1 Sources of finance for unincorporated and incorporated businessesa) Unincorporated businessesThese types of business do not have separate identity from its owners who are fully liablefor all activities of the business. The main examples of unincorporated businesses arepartnerships, sole proprietorship and the family trusts (Bradley, Wiklund and Shepherd, 2011).There is no legal registration and the liability is limited.Clariton is operating as anunincorporated business and the following sources of finance are available to it:Personal Savings:One of the main sources of finance which can be used by ClaritonAntiques Ltd. is personal savings. The owners and partners of the business invest theirsavings or capital which can be used for expansion and the growth purposes. The mainadvantage is that interest cost is saved because the company is not liable to pay interest tothe lenders.Bank loans:Another major source of finance that can be available to an unincorporatedbusiness Clariton is taking loan from the bank. The bank will charge interest at a1
specified rate on the loan amount till the repayment of loan.. The company have toprovide some security or personal guarantee at the time of availing loans (Simonovic,2012). It will increase the cash flow and thus will help in attaining firm's goals.b) Incorporated businessWhen a company carries out legal procedures to get registered, it is known asincorporated businesses. They are considered as the legal entities in the eyes of law and haveseparate identity from its owners. Moreover, they can sell stock shares of investors for raisingmoney and can avail various tax benefits. The main sources of finance available to theincorporated businesses are:Retained earnings:It is one of the major internal sources of finance which can be usedfor raising the capital. It is the profit which is not distributed among shareholders and isretained by the business. It is also known as ploughing back of profits (Huston, 2010). Itis quite beneficial as there is no interest cost or floatation cost involved and also there isno dilution of control of the company.Venture capital:It is the source of financing which is provided by the investors in smallor start up companies that have long term growth potential. The main advantageis thatfunds are available for expansion and development purpose.. But the major limitation isloss of control as the investors would like to involve in the decisionmaking of business.1.2 Implication of using internal and external sources of financea) Internal sourcesThe funds which are generated internally by a business are retained earnings, personalsavings, and sale of assets by business etc. These are the own funds of the company that can beutilised for its expansion.Retained earnings:The amount of profits that is retained by a company and is notdistributed as dividend to the shareholders is known as the retained earnings. The processof utilising the retained profit as a source of finance is known as the ploughing back ofprofits. There is no issue cost and interest cost involved in this source of finance. Further,as there is no involvement of the third party so there isno dilutionof control(Fischhendler and Heikkila, 2010). Thus, retained earnings do not lead to dilution ofcontrol and ownership. Moreover, there are no legal formalities which are required to becomplied while using retained earnings as a source of finance. Therefore, there is neither2
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