MFRD 1: Analyzing Financial Resources at Clariton Antique Limited

This report provides a comprehensive analysis of financial resource management for Clariton Antique Limited, focusing on various sources of finance, including bank loans, leasing, equity shares, and retained earnings. It assesses the implications of using internal and external finance sources, evaluating the best options for Clariton, such as bank loans and venture capital. The report also discusses the costs associated with different financing methods, the importance of financial planning, and the impact of financial decisions on the company's financial statements. Furthermore, it includes a cash budget analysis, cost per unit calculation, pricing strategies, and a viability assessment of a business project. The report concludes with a comparison of financial statement formats for sole proprietorships and partnerships, along with an interpretation of key financial ratios.

MFRD
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TABLE OF CONTENTS
Table of Contents.............................................................................................................................2
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Identified sources of finance..................................................................................................3
1.2 Assess the implications for using...........................................................................................4
1.3 Evaluating the best source of finance....................................................................................5
Task 2...............................................................................................................................................5
2.1 The cost of two sources of finance........................................................................................5
2.2 Importance of financial planning...........................................................................................6
2.3 Information need for making decision on financing..............................................................7
2.4 Impact of financial statement.................................................................................................8
TASK 3............................................................................................................................................9
3.1 Prepare cash budget and analyze them..................................................................................9
3.2 calculation of cost per unit and pricing................................................................................10
3.3 Assess the viability of the business project.........................................................................11
TASK 4..........................................................................................................................................15
4.1 Different financial statements..............................................................................................15
4.2 Compare financial formats used by sole owner and partnership.........................................17
4.3 Interpretation of ratios.........................................................................................................18
REFERENCES..............................................................................................................................23
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INTRODUCTION
Managing financial resources is very important for the organization for running all
business activities smoothly. It helps firm in reducing the overall expenses and increase the
revenue of company. Company can properly utilize all its fund by making budget because it
helps organization in understanding where they need to spend and where they need to save
finance. This present report is based on the Clariton antinque limited which want to expand its
business for increasing sale and for earning profit. In this report discussion is done on the various
sources of finance which are available for the business. Along with this. The importance of
financial planning for the business is explained. Apart from this, impact of the sources of finance
on the financial statement of the firm is analyzed.
TASK 1
1.1 Identified sources of finance
A.) Unincorporated business: Unincorporated business is that which does not have any
separate legal identity. In this type of organization, all liabilities are bear by the owner for any
action of business. Further, it may be used for any activity.
Some sources of finance for unincorporated business are as follows:
Bank loan: Clariton Company does not have enough money and so, it can take loan from bank
for short period and long time (Agarwal, Ben-David, and Evanoff, 2015). Bank charges interest
and company needs to repay it within a given time period.
Leasing: It is the best source of finance because company can hire equipment on lease and it
needs to pay rentals to lessor. There are different types of lease that are financial and operating.
B.) Incorporated business: It is a business which has many benefits for the partnership or sole
proprietorship (Leung, Springborn and Brockerhoff, 2014) . It includes additional tax deduction
and liability protection. Along with this, in this type of business, it can be company have right to
issue share for raising fund.
Various sources of finance of incorporated business are as follows:
Equity share: Company can issue shares from its shareholders and in return, it needs to
pay dividend to its shareholder. For the owner of equity ordinary share are issues. Company need
to pay to its shareholder dividend from its profit.
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Retained earnings: The profit which is remained after paying dividend to its shareholders
is known as retained earning of company (Hiesl, Crandall and Wagner, 2016.). Company can use
this retained profit for expanding its business. It is one of the best suitable sources of finance for
the organization so that it can easily use its own money for expanding its business.
1.2 Assess the implications for using
Implication of internal and external sources of finance
Internal sources Financial
implications
Legal implications Dilution of control
Retained earning It is highly cost
effective.
There is no obligation
for the organization
related to interest and
installment
(Zimmermann, and
Jørgensen, 2015).
Shares are not issued
so, there is no dilution
of ownership.
leasing In this, lessor is
responsible for the
maintenance of assets.
There are some terms
of taking assets on
lease that are needed
to be followed by both
lessor and lessee.
In leasing, there is no
dilution of control.
Bank loan In this, company needs
to pay loan amount in
installment and
including this, it needs
to pay fixed amount of
interest (Capital
Investment Appraisal
Bank can take legal
actions if loan is not
paid on given time.
There is no dilution of
control.
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Techniques. 2015).
Issue of share The cost on issue of
share is incurred by
owner.
There is provision of
law on which
company needs to
comply.
In exchange of
financial statement,
there is dilution of
control.
1.3 Evaluating the best source of finance
Most appropriate sources of finance for Clariton Company is Bank loan because it wants
£0.5 in which bank charges 2% interest and broker will charge 1% fee on the amount secured
and interest for loan which is payable over the 10 years. It is the best source of finance because
company needs to pay a fixed amount of interest on the loan amount. There are some legal
formalities which company needs to fulfill at the time of taking load from bank (Leung,
Springborn and Brockerhoff, 2014). Along with this, company needs to keep some security for
taking loan and so, in any case, if it is not able to pay loan on time, then bank can repay it by
security. On the other hand, company is approached by “We finance limited” that is a venture
capital of organization. It offers the full amount of loan £0.5m for 20% stake in the business.
When Clariton takes loan from venture capital then it turns into shareholders. It is also the best
mode for raising fund which is available for Clariton. There are different type of sources of
finance available for the business, but those discuss above are the appropriate sources of finance
TASK 2
2.1 The cost of two sources of finance
According to the given scenario, Clariton antique limited approaches by We finance
limited and in alternative it can use the services of finance broker.
There are some cost associated with this finance which are as follows:
 a) Dividends: Clariton antique limited raise fund from the We finance limited where
stake is 20% for the business ((Agarwal, Ben-David, and Evanoff, 2015)). At the time of
taking loan from company it is required to pay dividend from its profit to venture capital.
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 b) Interest: Clariton antique limited is taking loan from bank where it need to pay 2% of
interest amount on loan amount. Along with this it also needs to pay 1% of fee over the
loan amount to finance broker. It is the cost which is associated with the bank loan
amount.
 c) Tax: At the time if company take loan from bank then it need to pay fixed amount of
interest. If firm take loan from bank then it give tax relaxation to the Clariton antique
limited (Capital Investment Appraisal Techniques. 2015). According to the given
scenario, company take loan from bank for expanding its business. Bank not take any
taxation from organization for giving them loan.
2.2 Importance of financial planning
Planning is very important for the organization so that it can carry out all its business
activity in systematic manner. It is necessary for the organization to planned all the financial
activities so that it not face trouble in future related to availability of finance. Apart from this
financial planning help company in reducing unnecessary expenses and increase the overall
company profitability. If proper financial planning is done then company can easily expand its
business in new geographical area. There are some financial planning method which are
discussed below;
a) Budgeting; Budgeting is the best method for managing the financial resources. If company
make effective budget for its company then it can easily reduce the unnecessary expenses and
increase the revenue (Leung, Springborn and Brockerhoff, 2014). Along with this by making
budget company ensure that where it wants to spend money and how much.. Clariton antique
limited can make effective budget for its for making its company financial stable.
b) Implications of failure to finance adequately; If company is unable to manage its finance
then is suffer a lot. Adequate finance help company in running its business smoothly and
systematically. Along with this if company not have adequate balance then it can impact the
organization in negative way. Company cannot operates its business activities because it have
insufficient amount.
c) Overtrading: Over trading take place when company expand its operating activities quickly
and this negatively impact the overall business. If company is over traded then it face liquidity
problem and run out of working capital (Hiesl, Crandall and Wagner, 2016.). Clariton antique
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limited need to make sure that it can manage resources by using the the resources effectively. If
financial plan is better then company can avoid the over trading activities. Apart from this, if
there is more production as compare to the available resources then overall business activities
will be negatively impacted.
2.3 Information need for making decision on financing
Clariton antique limited is a partnership firm which is run by four partners. Now this
company want to expand its business in new geographical area. So Clariton antique limited is
raising fund from different sources, for this purpose it need to collect some information and share
information with its partners. It is necessary for the organization to collect information which
help them in making appropriate decision. Company can collect various information which are
given below
a) The partners: For taking fiance from partner it need to collect various information. In
the business it is necessary for the firm to know how much proportion of capital is given to each
partner. All the partners in business must know rules and regulation so that it all the business
activities can be carried out smoothly. All the profit and loss shared equally between partner so it
is necessary that all information share with them before raising fund from the different sources.
b) Venture capitalist (We Finance Limited); Clariton antique limited have opportunity to
take loan from We finance limited for expanding its business. For this purpose, company can
collect information regarding divided which firm need to pay to its shareholder for raising fund
from them. As per the given scenario, Clariton antique limited taking loan £0.5 m on which 20%
is the stake which company need to pay. On the other hand, venture capital need to take
information from the Clariton antique limited that is return on investment. It also need to look
the financial position of the organization so that it can make decision that it need to give fund or
not.
c.) Finance broker; Finance broker is that who play role as intermediaries between bank
and organization. Along with this, company pay interest amount to the fiance broker for taking
loan from the bank. As per the given scenario, company is raising fund from the bank loan in
which it need to pay interest amount 2% to bank in 10 years. For raising fund form bank
company need to know the fee charged by the broker.
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2.4 Impact of financial statement
There are different type of financial statements is prepared by the firm such as balance
sheet, income statement and cash flow statements. If company raise fund from different sources
then it has great impact on the financial statement which are discusses below:
Venture capitalist (We finance limited): if company take loan from the venture capitalist
then it need to pay cost in term of stake. Clariton antique limited pay dividend to its stakeholder
from its profit amount (Dorfman and Cather, 2012). According to the given scenario, Clariton
antique limited is partnership firm so it need to prepare income statements. In income statements
this sources of fund show that expense increase so the profit and loss statement affects. Along
with this capital liabilities of the firm is increase so it impacts positively in the balance sheet.
Finance broker: Broker charge fee from the organization, so it is expenses for the
organization which reflect in the profit and loss statement of the income statement (Agarwal,
Ben-David and Evanoff, 2015.). Along with this it goes to loss side, at the financial statement.
On the other hand it is treated in liabilities side of balance sheet. Its impact on balance sheet is
positive while on the income statements it is negative.
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TASK 3
3.1 Prepare cash budget and analyze them
Particulars January February March April May June
Receipts
Received in same
month 15000 22500 30000 15000 15000 3750
Received in one
month 120000 240000 360000 480000 240000 240000
Received in two
month 22500 22500 45000 67500 90000 45000
Total receipts 157500 285000 435000 562500 345000 288750
Payments
Payment to suppliers 807250 137250 119750 437250 227250 219750
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
Interpretations
Cash budget has prepared by the clariton antique Ltd in order to ascertain the movement
of cash inflow and outflow into and out of the current business (Cantillon, Maître and Watson,
2016). This statement is also regarded as one of the important financial statements in
determining the financial performance of an entity as this will lead an entity towards the deficit
or surplus.
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Receipts- This is regarded as basic flow of income to be generated by an enterprise from trade
receivables in various percentages. The initial amount of receipts is lower which further gets
increased with the passage of several months.
Payments- The pressure of payment is higher in the initial month that reduces over the month
which helps in enhancing the cash inflow to be incurred by the business. After initial quarter the
clariton has generated higher amount of surplus generated in the business.
Months November December
Janu
ary February March April May June July
Sales 150000 150000
3000
00 450000 600000 300000 300000 75000
15000
0
Received in
same month
1500
0 22500 30000 15000 15000 3750
Received in
one month
1200
00 240000 360000 480000 240000 240000
Received in
two months
2250
0 22500 45000 67500 90000 45000
3.2 calculation of cost per unit and pricing
Operating and running cost Total cost Units Per unit
Depreciation(Charge on machines) 5000 4000 1.25
Fuel and lubricant oil 2500 4000 0.625
Supervisor wages 500 4000 0.125
Repairs and Maintenance
Repairs 800 4000 0.2
Overhead 1000 4000 0.25
Petty expenses 250 4000 0.0625
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Standing charges
Salary of manager 3000 4000
Insurance 1500 4000
Rent of premises 2100 4000
Motor vehicle 5800 4000
General expenses 4200 4000
Interest 1800 4000
Total standing cost 15400 4000 3.85
Total Cost per unit 6.3625
Add profit@20% 1.27
Add Service taxation @16% 0.2032
Selling price 7.83
Cost plus pricing- The fixed and variable cost will be included in the prices developed by an
entity owner for various products along with the specific amount of profit percentage included in
the prices set buy an individual.
Absorption- it is that kid of pricing technique which helps in enhancing the overall market
position of the business as this stresses on enclosing all kinds of costs to be incurred by an entity
with little profit amount. The competitive fight will be provided by the clariton as they will not
added specific amount of profit percentages to attract wide number of customers towards their
business.
3.3 Assess the viability of the business project
Years Project A Cumulative cash flows
0 8.6 -8.6
1 1.6 -7
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2 2.8 -4.2
3 3.4 -0.8
4 3.6 2.8
5 4 6.8
6 4.2 11
Calculation of payback period
= 3+0.8/3.6
=3+0.22
=3.22 years
Table 1: Payback of Project B
Years Project B Cumulative cash flows
0 4.4 -4.4
1 0.8 -3.6
2 1.4 -2.2
3 2 -0.2
4 2.4 2.2
5 2.3 4.5
6 2.6 7.1
Calculation of payback period
3+0.2/2.4
=3.08 years
Interpretations
Traditional form of capital budgeting emphasizes o the concept of time value of money in
which cash flows are evaluated in order to determine time period (Finkler, Smith, Calabrese and
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