Financial Management Practices and Applications

This assignment delves into the realm of financial management, examining its core principles and practical applications. It presents a curated collection of books and journal articles that cover various aspects of financial management, including capital budgeting, risk assessment, and the impact of financial statements on decision-making. Additionally, it includes online resources that provide insights into budgeting techniques and the interpretation of key financial reports. This compilation offers students a comprehensive understanding of financial management concepts and their relevance in real-world scenarios.

MFRD

Table of Contents
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
1.1 Sources of finance available to incorporated and unincorporated business.....................3
1.2 Defining the impact of financial sources on business organization.................................4
1.3 Evaluating the suitable source of finance.........................................................................6
TASK 2......................................................................................................................................7
2.1Assessing the cost of varied sources of finance................................................................7
2.2 Explaining the importance of financial planning to Clariton Ltd....................................7
2.3 Assessing the information needed for different stakeholders..........................................8
2.4 Evaluating the impact of sources on financial statements...............................................9
TASK 3....................................................................................................................................10
3.1 Cash budget and making appropriate decision on the basis of deficit or surplus position
..............................................................................................................................................10
3.2 Unit cost and pricing decisions......................................................................................11
3.3 Finding best investment proposal by using investment appraisal techniques................12
TASK 4....................................................................................................................................14
4.1 Presenting the key components of financial statements.................................................14
4.2 Differentiating the financial statements of sole traders from partnership firm..............16
4.3 Assessing key information from final accounts by using ratio analysis technique........17
CONCUSION..........................................................................................................................19
REFERENCES.........................................................................................................................21

INTRODUCTION
In the business organization, top management has accountability to develop sound
framework that makes contribution in the attainment of organizational goals. Moreover, for
getting success in the highly competitive business environment company is required to make
proper use of money. In this context, manager is required to take decision by assessing
market trend and customer expectation. Further, managers also use financial techniques for
making decision in relation to the procurement, allocation and control. In this way, team of
higher management plays a vital role in ensuring optimum use of resources. Clariton Ltd has
been selected as an organization which offers antique products to UK customers. In this
context report will describe the tools and techniques that assist Clariton Ltd in making
suitable business decisions. Besides this, report will also provide deeper insight about the
financial health and performance of Clariton Ltd.
TASK 1
1.1 Sources of finance available to incorporated and unincorporated business
Unincorporated business
Sources of finance Description
Sales of assets Each business organization has some assets
which are not used by it in productive
activities. In this regard, by selling such
unprofitable assets sole traders and
partnership firm can generate fund.
Short term lease By taking fixed assets such as plant, land etc
on lease company can meet its monetary
requirements to a great extent (Gibbert, Hoegl
and Valikangas, 2014).
Incorporated business
Sources of finance Description
Venture capitalists It is the type of private or equity financing

which offers financial assistance to the
business organization for their long term
growth or potential. For instance: We
Finance Ltd is the venture capitalists which
offer start-up capital to the business
organizations. Hence, by approaching to the
venture capitalists Clariton Ltd can meet its
financial needs and requirements.
Bank loan Business organization can raise fund for
expansion plan by approaching to the
financial institution (Petty and et.al., 2015).
Moreover, banks always prefer to give
secured loan to the firm which is highly
growing.
European Union or government grant In the present era, EU also lays high level of
emphasis on offering monetary support to the
new and growing business organization. This
in turn enables them to raise employment
opportunity and thereby makes contribution
in the economic growth and development.
Hence, by presenting business idea or plan to
the government company can meet its
financial requirements.
\
1.2 Defining the impact of financial sources on business organization
Sources of
finance
Legal Financial Dilution of
control (Level
in terms of
high, low and
moderate)
Bankruptcy
(Priority in
getting amount
when company
becomes
bankrupt)
Internal sources of finance
Short term Business entity Rent charged by Moderate First priority

lease has
accountability to
return back
assets to the real
owner after the
specified time
frame (Abanis
and et.al., 2013).
lease owner of
assets imposes
monetary cost.
Sales of assets Transfer of
ownership rights
Advertisement
and other
expenses
No -
External sources of finance
Bank loan Legal aspects
present that if
company makes
default in
making
repayment of
loan then
banking
institution can
cease related
asset or
collateral
security.
Interest which is
charged by
financial
institution on the
amount of loan
is considered as
financial cost to
the firm (Van
Auken and
Carraher, 2013).
Moderate First or high
Venture
capitalist
They also act as
an equity
investors so
Clariton Ltd
requires to give
voting right to
the shareholders
and thereby
Venture
capitalists are
also recognized
as a shareholder.
Thus, dividend
which is paid by
company to the
venture
High Least

involve them in
the decision
making aspect.
capitalists has
financial cost for
the firm.
EU grant or loan Legal aspects
entail that
company needs
to make use of
money in the
activities for
which it is
provided by EU.
If company
makes any kind
of default then
EU can impose
penalty in front
of the firm.
Interest amount
has financial
implications but
rate on which
liability is
determined is
highly lower as
compared to
other
alternatives or
options.
Moderate High priority
1.3 Evaluating the suitable source of finance
Clariton Ltd should raise fund from the following sources are enumerated below:
 Venture capitalists: This source of finance is highly effectual which offers both
monetary and non-monetary assistance to the business organization. Generation of
higher return is one of the main objectives of venture capitalists behind investing
money in the venture of firm. Thus, they provide business unit with proper
information regarding the operation and management. In this way, venture capitalist
firm also aid in strategic decision making and thereby helps in fulfilling goals (Fuchs
and Colyvas, 2013). However, on the critical note, it can be said that interference of
venture capitalists may result into loss of control. Moreover, such capitalists highly
influence the independency of higher management team to the significant level.
 Bank loan: Clariton Ltd can also fulfill its monetary requirement by taking loan from
financial institutions. Such source of finance is also highly effectual which in turn
helps in generating enough money. Along with this, bank loan also provides benefit to
the firm by reducing the level of tax burden. Further, bank loan offers opportunity to

the firm to repay amount of loan in the form of fixed periodical installments (Farewell
and Pinsker, 2015). In contrast to this, banking institution charges high interest on the
amount of loan. This in turn imposes high cost in front of the firm.
TASK 2
2.1Assessing the cost of varied sources of finance
Cost of both the sources such as venture capitalists and bank loan is as follows:
Dividend Clariton Ltd has accountability to offer
dividend to the venture capitalists whenever
it earns profit. In this way, dividend aspect
has monetary cost for the firm. For instance:
We Finance Ltd will take 20% stake in return
of money invested by it. By considering this,
it can be stated that dividend amount imposes
cost in front of the firm.
Interest In bank loan, business entity has liability to
make payment of interest to the banking
institution according the pre-specified rate
(Rubin, 2016). Cited case situation presents
that bank will charge 2% interest in against to
the monetary assistance provided by them.
Tax Bank loan is the main sources which offer tax
benefits or advantages to the firm. Hence, by
getting concession or exemption in tax
brackets company can enhance its
profitability aspect.
2.2 Explaining the importance of financial planning to Clariton Ltd
 Budgeting: Clariton Ltd needs to develop budget which in turn helps it in making
optimum use of financial resources. Moreover, budgeting technique enables firm to
make proper allocation of money in the different business activities and functions.
Hence, it is highly significant which in turn enables firm to create suitable spending

plan by making proper forecast of expenditure (Bland and et.al., 2015). In addition to
this, budgeting also provides Clariton Ltd with effectual framework for decision
making through the means of variance analysis (Budgeting and its importance, 2017).
Hence, by making comparison of actual performance with standard aspect company
can find out deviations and thereby would become able to take corrective action
within the suitable time frame.
 Implications to finance inadequately: Financial planning is highly significant which
in turn helps in making co-ordination between all the departments. In the absence of
effectual plan company is not able to carry out its business activities more effectively
and efficiently. This in turn may result into retrenchment of staff, loss of customer
base etc (Baiocchi and Ganuza, 2014). In addition to this, in the absence of effective
plan business unit would not become bale to meet contingent business situation more
effectively and efficiently. Thus, failure in relation to al such aspect may result into
loss of productivity and profitability.
 Overtrading: In the present times, with the aim to gain competitive edge over others
companies make focus on exploring the business operations more quickly. Hence, for
establishing another branch or unit company requires more fund. In this condition,
interest expense of firm increases and thereby affects the level of net profit. Higher
level of expenses closely influences working capital position of firm and thereby leads
negative cycle. Thus, Clariton Ltd needs to keep in mind such aspects while making
plan about business expansion.
2.3 Assessing the information needed for different stakeholders
 Partners: People prefer to invest money in the venture which is highly growing and
profitable. Hence, partners require information about the profitability aspect of fund
before investing money in the existing venture. The reason behind this, earning high
return is one of the main objectives of partners. Hence, they make evaluation of
financial health, position and performance while taking decision about financing the
business operations (Pietrzyk and Rokita, 2015). Further, such information also
enables partners to frame competent strategies which in turn help them in achieving
success.
 Venture capitalists: We Finance Ltd places emphasis on investing money in the
venture which is highly unique or innovative. On the basis of this aspect, they are
highly concerned with the expansion plan prepared by firm. By getting such

information investing firm can assess the extent to which plan of company is highly
effective and feasible in terms of target market or trend.
 Finance broker: Clariton Ltd has appointed finance broker with the aim to easily
convince bank for loan. In this, finance broker needs detailed information about
company’s plan and financials (Dellavigna and Pollet, 2013). By this, broker would
become able to frame and present effectual framework in front of banking institutions.
2.4 Evaluating the impact of sources on financial statements
The above identified sources of finance have closely influences the profit margin,
assets and liabilities aspect in the following manner:
Income statement: Interest, brokerage and dividend aspects are the expense which
directly influences the profit margin of firm. Moreover, in bank loan business unit is liable to
make payment of interest to bank. Further, for presenting sound business plan in front of
banking institutions Clariton Ltd also approaches to finance broker who will charge 1%
brokerage. In this, brokerage charge also imposes monetary cost in front of the firm. Further,
dividend amount is also expense for the business organization. According the accounting
rules all the expenses must be debited (Zhang, Huang and Zhang, 2015). Thus, by taking into
consideration all such aspects dividend, interest on loan and brokerage element recorded in
the debit side of income statement which in turn closely influences the net margin of firm.
Particulars Amount (in £)
Profit XXX
Less- Interest@2% (XXX)
Less:Brokerage@1% (XXX)
Less: Dividend to venture
capitalists
(XXX)
Balance sheet: Venture capitalists and bank loan highly impacts liquidity and solvency
aspect of firm. In the case of bank loan both long term obligations and cash at bank of
business unit increases with similar amount. Beside this, venture capitalists are also
recognized as equity investors. Thus, cash side of balance sheet will increase from the
amount invested by venture capitalists. Further, company has also obligation to make
payment to the shareholders at the time of dissolution. Thus, capital aspect of liabilities also

increases with the amount provided by investors. According to dual aspect concept both
assets and liabilities side of balance sheet affected to the significant level.
Liabilities Amount (in £) Assets Amount (in £)
Capita (Venture
capitalists)
Xxx Cash at bank
(Venture capitalists +
bank loan)
xxx
Bank loan xxx
TASK 3
3.1 Cash budget and making appropriate decision on the basis of deficit or surplus position
Cash budget contains information about the expenses which business unit will incur
during the particular time frame. Besides this, it also displays the revenue generated by firm
over the specified period (Brunzell, Liljeblom and Vaihekoski, 2013). Hence, by evaluating
both inflow and outflow company can assess the position of cash deficit or surplus in an
effectual way.
Cash budget of Clariton Ltd
Particulars January February March April May June
Cash Receipts
Received in same
month (5% of sales) 15000 22500 30000 15000 15000 3750
Amount received of
the following month
sales 80% 120000 240000 360000 480000 240000 240000
Received in two
month (15%) 22500 22500 45000 67500 90000 45000
Total cash receipts 157500 285000 435000 562500 345000 288750
Cash outflows
Payment to suppliers 807250 137250 119750 437250 227250 219750

Total cash outflow 807250 137250 119750 437250 227250 219750
Cash
Shortage/Surplus
(Total inflow – total
outflow) -649750 147750 315250 125250 117750 69000
Opening cash
balance 110000 -539750 -392000 -76750 48500 166250
Closing cash
balance -539750 -392000 -76750 48500 166250 235250
The above mentioned budgeting framework presents that cash receipts of Clariton Ltd
decreases from £562500 to £288750. It is not good indicator because position of inflow has
direct impact on the closing cash balance of firm. Hence, for enhancing sales revenue
company is required to make focus on promotional aspects. On the basis of this aspect by
placing advertisements on social media and newspaper business unit can develop awareness
among the customers regarding the antique or unique item offered by it.
Along with this, business unit needs to lay emphasis on offering items to the
customers on cash basis rather than granting high credit. In line with the sales revenue,
payment which is made by firm to suppliers also fluctuates. From the month of January to
March closing cash balance is negative. Thereafter, such balance of firm inclined from
£48500 to £235250. Thus, Clariton Ltd requires making continuous monitoring of expenses
and financial aspects. This in turn enables firm to undertake corrective measure within the
suitable time frame and contributes in the organizational success.
3.2 Unit cost and pricing decisions
For making pricing decision it is highly required for business unit to assess per unit
cost. Moreover, without having deeper insight about the unit it is not possible for firm to
calculate appropriate price. Thus, by summing up all the costs and dividing it from number of
antique items offered Clariton Ltd can determine unit cost. Hence, by taking into
consideration such cost company can offer product or services to the customers at suitable
price and thereby would become able to get desired profit margin (Gibbert, Hoegl and
Valikangas, 2014). There are several pricing methods which can be used by Clariton Ltd
includes cost plus or mark up, marginal costing etc.

Computation of unit cost and pricing decision
Particulars
Amoun
t (in £)
Depreciation on fixed
assets 1500
Fuel 800
Electricity 2000
Maintenance charges 2500
Miscellaneous expenses 4000
Administration expenses 2500
Rent 5000
Salaries 10000
Insurance 1800
Advertisements 2000
Total cost 32100
Number of antique
items offered 400
Unit cost (Total cost /
number of antique
items) 80.25
Profit margin 20% (unit
cost * profit %) 16.05
Price (Cost + profit) 96.3
The above mentioned table presents that unit cost of antique item is £80.25. On the
basis of this aspect, Clariton Ltd is required to charge £96.3 for each antique item which in
turn enables them to get 20% profit margin by selling each item.
3.3 Finding best investment proposal by using investment appraisal techniques

Manager of Clariton Antiques Ltd undertakes investment appraisal techniques with
the aim to assess attractiveness of potential proposals (Petty and et.al., 2015). According to
the given case scenario company has two proposals in which it can invest money for
enhancing the profit margin.
Calculation of NPV, ARR and Payback period
Years
Projec
t A
Cumulativ
e cash
inflow (in
£)
PV
factor
@14
%
Discounte
d cash
inflow (in
£)
Projec
t B
Cumulativ
e cash
inflow (in
£)
Discounte
d cash
inflow
(in £)
1 1.6 1.6 0.877 1.40 0.8 0.8 0.70
2 2.8 4.4 0.769 2.15 1.4 2.2 1.08
3 3.4 7.8 0.675 2.29 2 4.2 1.35
4 3.6 11.4 0.592 2.13 2.4 6.6 1.42
5 4 15.4 0.519 2.08 2.3 8.9 1.19
6 4.2 19.6 0.456 1.91 2.6 11.5 1.18
Total
discounte
d cash
inflow 11.98 6.93
Initial
investmen
t 8.6 4.4
Total
discounte
d cash
inflow –
initial
investmen
t 3.38 2.53
43.56%
Evaluation of outcomes
Particulars Investment option 1 Investment option
2
Selection of
proposal
Payback period 3 + 0.8 / 3.6
= 3 + 0.22
= 3.2 years
3 + 0.2 / 2.4
=3.1 years
Option 2
NPV £3.38 £2.53 Option 1 and 2 both

are feasible
according to the
standard criteria as
well as initial
investment
ARR 37.98% 43.56% Option 2
Payback period: The above table presents that payback period of investment option 1
is 3.2 years. On the other side, Clariton Ltd will take 3 years and 1 month to recover the
amount of initial investment. Further, manager of business unit has setting down the criteria
for payback period is 3.5 years. Hence, by considering all such aspects it can be said that
investment option 1will prove to be profitable for firm.
Net present value (NPV): From investment appraisal analysis, it has been assessed
that NPV of option 1 and 2 is £3.38 & £2.53 respectively. It shows that NPV of proposal 1 is
higher than other alternative. However, initial investment which is associated with investment
proposal 1 is higher to the significant level as compared to option B. Thus, Clariton Ltd
should invest money in investment option 2.
Average rate of return: ARR of project A and B is 37.98% and 43.56% respectively.
It shows that accounting rate of return of investment option B is higher as compared to
others.
Thus, by taking into consideration all such aspects it can be said that Clariton should
employ money in proposal 2. This in turn makes value addition in money and thereby helps
company in achieving success.
TASK 4
4.1 Presenting the key components of financial statements
Clariton Ltd prepares following financial statements at the end of accounting year to
get information about monetary health and performance is enumerated below:
Particulars Meaning Key components
Income statement It displays the revenue  Income: profit,

generated or recognized by
firm during the specified
time frame. Income
statement also entails the cost
and expenses charged against
the revenue generated during
the accounting period.
interest and dividend
received.
 Expenses: insurance,
electricity,
advertisement and
miscellaneous
expenses etc.
Cash flow statement Clariton Ltd prepares such
statement with the aim to
assess the impact of income
and balance sheet changes on
cash and equivalents (Abanis
and et.al., 2013). Thus, by
evaluating both inflow and
outflow Claritin Ltd can
frame suitable investment
strategies.
 Operating activities:
Net profit, expenses,
increase and decrease
in assets.
 Financing activities:
Purchasing and sales
of fixed assets.
 Investing activities:
Issue of shares and
debentures,
redemption etc.
Balance sheet It presents the summary of
assets, liabilities and
shareholders’ equity at
specific point of time.
Assets
 Fixed assets: Land &
building, Plant &
machinery,
Furniture’s & fixtures
etc.
 Current assets: cash
at bank, debtor,
prepaid expenses etc.
Liabilities
 Shareholders’ equity
 Long term debt
 Current obligations or
liabilities: Creditors,
bank overdraft etc.

Statement of changes in
equity
This statement is prepared by
Clariton Antique Ltd at the
end of accounting year with
the aim to identify the
changes take place in
shareholders’ equity, reserves
and dividend aspects.
 Net profit generated
during the accounting
year
 Increase or decrease
in capital reserve
 Dividend paid to the
shareholders
(Statement of change
in equity, 2017)
Supporting notes Clariton Ltd presents
supporting notes at the end of
final accounts. This in turn
provides company and its
stakeholders with the
information about the manner
in which each transaction is
treated as well as recorded
(Van Auken and Carraher,
2013).
International accounting
standards, principles and
conventions
4.2 Differentiating the financial statements of sole traders from partnership firm
There is significant difference takes place in the financial statements which are
prepared by sole trader and partnership firm.
Basis of difference Partnership firm Sole trader
Ownership structure Clariton Ltd is a partnership
firm in which partners take
decision by their mutual
discussion.
Owner has solely right in
relation to making decision
under sole proprietorship
firm.
Financial statements Clariton Ltd prepare
following statements are
enumerated below:
 Income statement
Sole trader places emphasis
on preparing income
statement with the aim to
assess revenue generated by

 SOCF
 SOFP
 Statement of changes
in equity
firm over expenses.
Accounting standards and
rules
Business unit considers UK
GAAP and IASB while
preparing the financial
statements.
Not obliged to follow
specific accounting policies.
Audit requirements In accordance with laws,
company which has
shareholders need to organize
audit of financial statements
(Fuchs and Colyvas, 2013).
There are no auditing
requirements for sole traders.
Publishing requirements To provide information to
shareholders about
company’s performance
Clariton Ltd has legal
obligation to publish final
accounts at the end of
accounting year.
Sole traders do not have an
obligation to publish or
present final accounts.
4.3 Assessing key information from final accounts by using ratio analysis technique
Ratio analysis of Clariton Ltd is as follows:
Profitability ratios

Profitability ratios entail that there is no significant growth has taken place in the
gross and net margin of Clariton Ltd. In the year of 2015 and 2016 gross profit margin
generated by firm over direct expenses account for 14.34% & 14.18% respectively. On the
other side, NP margin of firm increased in the year of 2016 from 1.89% to 2.63%. It shows
that, in the accounting period 2016 business unit has exerted effectual control on indirect
expenses. However, still gross and net profit margin of Clariton Ltd was not during the
financial year 2015 and 2106. Thus, business unit is required to make focus on promotional
aspects or campaign. In addition to this, firm also needs to make control on both direct and
indirect expenses. By doing this, Clariton Ltd can make improvement in its profitability
aspect to a great extent.
Liquidity ratios
Liquidity ratio provides deeper insight about the extent to which company has enough
current assets for fulfilling the obligations. Financial statement analysis reveals that current
ratio of Clariton Ltd was .23 and .33 in the year of 2014 & 2015. On the other side, acid test
ratio of Clariton Ltd also inclined from 0.08 to 0.18 at the end of accounting year 2015.
Hence, in the year of 2015, company’s ability in relation to meeting the current obligations
increased significantly. Moreover, according to ideal ratio company must have 2 current
assets for meeting 1 obligation. In addition to this, ideal quick ratio entails that company must
maintain 1 current asset which can be easily converted into cash in against to 2 liabilities.
Thus, by keeping in mind idea ratio it can be stated that liquidity position of company is not
sound (Farewell and Pinsker, 2015). Hence, company needs to make changes in the existing
framework which in turn enables them to maintain proper current assets in comparison to
liabilities.
Solvency ratio

The above mentioned table presents that debt-equity ratio of Clariton Ltd was .58
and .55 in the year of 2014 & 2015. This aspect shows that solvency position of company is
sound. Moreover, according to debt-equity ratio company must issue 1 debt in against to 2
equity shares. Thus, it can be presented that Clariton Ltd has built and maintain effective
financial structure.
Efficiency ratio
Results of ratio analysis present that both assets and inventory turnover ratio of
Clariton Ltd has increased in the year of 2105 as compared to previous years. Moreover, in
the year of 2015, assets and inventory turnover ratio was 1.60 and 22.91. It clearly presents
that during such period Clariton antique Ltd has made optimum use of assets. Thus, company
needs to motivate their personnel which in turn helps them in achieving goals and objectives.
CONCUSION
By considering the whole report, it has been concluded that Clariton Ltd needs to
consider cost and implication of each source while making selection of source. Besides this, it
can be revealed from the report that by generating fund from Venture Capitalists company
can open another branch in London more effectually. Further, by taking loan from financial
institutions business unit can explore business operations without facing any kind of
difficulties. Along with this, it has been articulated that by using budgeting framework firm
can make control on overspending. It can be seen in the report that business unit is required to