Financial Analysis: Investment Appraisal of Clariton Antiques Ltd

This report provides a detailed analysis of financial resource management for Clariton Antiques Limited, a partnership with two existing branches in London, focusing on effective utilization of financial resources for business expansion. It examines various sources of finance available to both unincorporated and incorporated businesses, evaluating the implications of internal (retained profit, sale of assets) and external (bank loans, issue of shares) sources, and determining suitable options for Clariton's expansion into Birmingham. The report also assesses the costs associated with different financing methods, specifically venture capital and bank loans, and discusses the importance of financial planning, including budgeting and implications of inadequate financing. Furthermore, it identifies the necessary information for making informed financial decisions, considering the perspectives of partners, venture capitalists, and finance brokers, and analyzes the impact of financial decisions on the company's financial statements.

Managing financial
resources
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INTRODUCTION
Financial planning is very important for the organization because it help company
utilizing it all financial resources effectively and efficiently. Company can manage it finances by
preparing budget which help in reducing the expenses and increasing the revenue. The present
report is based on Clariton antique limited which is running by 4 partners, this company is
earning high profit and already had two branches in London. The present report covers, the key
component of financial statements is discussed. Along with this, the viability of project using
investment appraisals techniques can be assessed. Apart from this, the cost of two sources of
finance is analyzed.
TASK 1
1.1 Sources of finance
As per the given scenario, there are various type of sources of finance which are available
for the unincorporated and incorporated business. All the sources of finance are beneficial for the
organization for raising fund for the purpose of expanding business in new geographical area.
Some sources of finance available for business is discusses below:
 Unincorporated business: The organization who have separate legal identity from its
owner then business is known as unincorporated business (Locatelli, Invernizzi and
Mancini, 2016.). In this type of business whatever action is taken by business then only
owner is liable and it can be sued for the business activity.
Sources of finance for the unincorporated business are as follows:
 Retained profit; Profit is that which company earned by selling its product and services.
Company can use its own profit for expanding a business (Hodler, Luechinger and
Stutzer, 2015). Hence, it is the best sources of finance because company not need to pay
any type of interest or dividend for raising fund from retained profit. For example,
company can use its own profit without fulfilling any legal formalities and it doesn't
require taking permission from its shareholder.
 Sale of assets; Company can sale its own assets which are not longer in use. Along with
this fixed assets are those such as equipment and machine b y selling this company can
raise fund for expanding the business. For example, Clariton antique limited can sale its
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assets which are less or not in use and use that money for acquiring the building at
Birmingham. Firm not need to pay any interest for selling its own assets.
 Incorporated business: Organization who run its business by fulfilling all legal
formalities is known as incorporated business (Crosby and Henneberry, 2016). Company
who are running its under the incorporated business is legally declared as the corporate
entity.
Some sources of finance for incorporated business are as follows:
 Issue of share: shareholder who invest money in their business for the ownership and
therefore company can use those moneys for expanding business (Locatelli, Invernizzi,
and Mancini, 2016.). This is long term sources of finance for the Clariton antique limited.
If company raise fund from issue of share then it not required to paying back shareholder
their initial investment. Instead of it company need to pay only dividend to its
shareholder from its profit.
 Bank loan: Company can take loan from bank by fulfilling some legal formalities. It is a
long term source of finance for business (Geng, Bose and Chen, 2015). Apart from this
company need to pay fixed amount of interest with loan amount. For example, if
company take loan from bank then it need to keep security, so that in case if business
unable to pay loan amount then Bank repay it from security amount.
1.2 Implication of internal and external sources of finance
Internal sources of finance
Sources of
finance
Financial
implication
Legal implication Bankruptcy Dilution of
control
Retained profit If company raise
fund from
retained profit
them it not needs
to face any
financial
implication.
There is no need
to pay interest or
dividend because
company is using
its own money.
There is also no
legal implication
for using own
money. Company
not required to
fulfill any legal
formalities
(Greenbaum,
Thakor and Boot
2015.).
In case if
company unable
earn profit from
its new project
then it can suffer
from high loss.
There is no
dilution of
control.
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Sale of assets If organization
sale its own assets
then it not
required to face
any type of
financial issue.
There is no legal
formalities need
to fulfill because
company is using
it selling its own
assets
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External sources of finance
Sources of
finance
Financial
implication
Legal implication Bankruptcy Dilution of
control
Bank loan There are some
financial
implication which
company need to
face because
company is taking
loan from bank.
There is fixed
amount of interest
which company
need to pay to
bank and it also
need to keep
some security
before taking loan
from bank.
Bank only give
loan to
Organization after
seeing its
financial position.
There are little
legal formalities
which need to
fulfill (Iyer, da-
Rocha-Lopes and
Schoar, 2014).
If company
unable to pay
loan amount then
Bank sale its
security for
repaying the loan
amount.
Less dilution of
control
Issue of share Firm need to pay
dividend from its
profit to
shareholder. It
impacts the
company profit.
There are some
legal formalities
such as company
need to listed
itself in share
market for issuing
share from
shareholder.
There is less
dilution of control
and it is in
Shareholder hand.
1.3 Suitable sources of finance for Clariton antique limited
There are some internal and external sources of finance which are appropriate for the
Clariton antique limited. Clariton antique limited want to expand its business in Birmingham by
acquiring the building (Mina, Lahr and Hughes, 2013.). For this purpose it need to raise fund
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from the different sources of finance which are benefited for its new business and not cause any
financial implication. Therefore, Clariton antique limited can raise fund by issuing share from its
shareholder. In this company only required to listed itself at in market so that it can easily raise
fund from its shareholder. Along with this company need to pay dividend to its shareholder from
its profit. Further, company can easily raise fund from its retained profit because Clariton antique
limited not required to pay any interest or there is no opportunity cost charges at the time of
using own money (Bierman and Smidt, 2012.). However, for raising fund from the retained
profit company need to have enough profit. But it is a suitable source of finance for the Clariton
antique limited. Company can also take loan from bank if it required for longer period. It is so
because company need to pay interest loan and also need to keep some security. Bank only
charged fixed amount of interest on loan every month. This bank loan make easier for company
to make a systematic budget plan. Apart from this there is only little formalities which company
need to fulfill and then it can easily get money.
TASK 2
2.1 Cost of sources of finance
There are different type of cost which are associated with the different sources of finance.
According to the given scenario it is clear that company is using different sources of finance such
as venture capital and bank loan. There are some cost which is associated which are discussed
below:
a) Dividends; Clariton antique limited raise fund from venture capital that is We finance
limited. In this company need to pay dividend from its profit. Along with this cost of fund which
is company offering is a prefer stock that is changes afterward into a shareholder (Weil,
Schipper and Francis, 2013). So company purchase share and every stake holder take dividend
from Clariton antique limited. Apart from this it also impact the overall profitability of business
because dividend is distributed from profit. In this 'We finance limited take 20% of stake from
the business overall profit.
b) Interest: Clariton antique limited also raise fund from bank loan on which some cost
is associated that is interest rate (Bierman and Smidt, 2012.). At the time taking loan from bank
company also need to keep some security and pay specific amount of interest to the bank. Along
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with this, interest rate charge by bank is 2% overall annual rate on loan amount that is 2% in 10
years. Broker of company also charge interest of 1% of 0.5m GBP.
c) Tax; At the time when company take loan from bank then it also give relaxation to the
organization which is helpful for the organization (Schroeder, Clark and Cathey, 2011).
If Clariton antique limited take loan from bank then it need not required to pay taxation
amount.
2.2 Importance of financial planning
Financial planning play significant role in organization because it helps company in
managing all type of financial resources. Further, it facilitates collection of optimum fund and
also help in fixing the most appropriate capital structure. There are different way which Clariton
antique limited can used for financial planning that are as follow;
Budgeting: Budgeting help Clariton antique limited in understanding from where
expenses occur and how to control it (Jongman, Hochrainer-Stigler and Ward, 2014). Further it
is invaluable tool which help company in prioritize the spending and manager money. Along
with this it also helps in reducing expenditure and increase the revenue of company. Company
can make budget and can easily reduce all its expenditure along with this it also make sure that
unnecessary expenses can be controlled.
Implication of failure to finance adequately: If company not use the finance properly it
can impact all the function of organization. Company cannot carry out all its activities smoothly
and systematically. Along with this if company not have finance then it cannot buy resources
which are required for running business smoothly. Along with this Clariton antique limited
unable to pay to its labor and purchase raw material. It also affect the financial planning which is
done by organization.
Overtrading; overtrading is that when organization produce more and more goods either
it have enough resources or not. If company produce more good then their will be more output in
this case account payable of company will increase (Lapsley, Miller and Panozzo, 2010.).
Overtrading impact the overall business and affect the company profit and sale. Apart from this
more production also impact the company profitability
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2.3 Information need for making financial decision
Clariton antique limited is running its business in partnership so it need it take some
information related to the raising fund from different sources which are as follows:
a) The partners; For raising fund from different sources it need to collect information from its
partners related to proportion of partner and cost of finance which need to pay by all partner
equally. If company not have any information regarding it then it can impact the overall business
performance (Vimpari, Kajander and Junnila, 2014). All the partners are important for making
each and every type of decision. For Example if company need to pay interest on bank loan then
all partner are equally liable for paying it equally.
b) Venture capitalist (We Finance Limited): it is a sources of finance from where company
raise fund. Here it is necessary for the firm to make know all the interest rate charger by We
finance limited (Capital Investment Appraisal Techniques. 2015). Along with this it also need to
know all the terms and condition which are made venture capital. The information which need
to take is the return on investment that is 50%.
c) Finance broker: Finance broker is a intermediary between the company and bank (Weygandt.
and et.al., 2010. ). Clariton antique limited need to collect information how much interest broker
will charge and all its other terms and condition.
2.4 the impact on the financial statements if Clariton Antiques Ltd
a) Venture capitalist (We Finance Limited); If Clariton antique limited raise fund from
the we finance limited than it need to pay divided from its profit. Its amount is also an expense
which reflect negatively on income statement (Murphy and Yetmar, 2010.). While, on the other
hand at the capital increase which reflect on liabilities sides of the balance sheet in a positive
way. However it is a expenses which show on profit of the income statement which affect in
negative way while it increase in liabilities so it show in positive way in the statement of
financial position.
b) Finance broker; Cost which finance broker charge is known as expenses for the
company. So it reflect at the loss side of balance profit and loss statements. While at balance
sheet it reflect at the liabilities side (Brigham & Ehrhardt, 2013). There is impact on financial
statement that is impact on balance sheet is beccuae company capital is increasing and help in
generating profits. Apart from this it need to pay loan amount and brokerage interest so it will
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impact the net profit. So it can be stated that income statement will be impacted in negative
manner.
TASK 3
3.1 Cash budget analysis
Budget is important for the organization because it helps organization in reducing the
overall expenses and for increasing the revenue of Clariton antique limited (Caglayan and Demir,
2014.). There are various type of budget which can be prepared by the organization for making a
appropriate decision.
Clariton antique limited cash budget is prepared below which reflects the receipts and
expenditure for the upcoming year. From the budget company can take decision where it need to
make improvement and what all strategies are beneficial for the organization success.
Cash budget for Clariton antique limited from the above cash budget it clearly indicated that in
month of January company cash flow is low and in month of may is had highest cash flow. If
company have lowest cash flow this mean that company expenses is increasing as compare to the
income such as it lowest cahsflow is -£539750.00 and higher cash flow is £235250 in june.
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Hence to overcome this negative cash flow company need to take make some strategies which
help in generating revenue and reducing expenses. For this company can use different strategies
such as economy of scale which help Clariton antique limited in reducing the cost of production
and increasing the sale. Apart from this it can easily formulate various strategist for grabbing the
attention of its customer.
3.2 Cost and price per unit.
Difference between variable cost and fixed cost is as follow
Fixed cost is that which does not change with the changes in quantity of production unit
while the variable cost is that which changes with the change in output (Iyer, Peydró and Schoar,
2014). Fixed cost are definite and it incur whether unit is produce or not. On the other hand
variable cost is charges only when there is unit produced. Example of fixed cost is deprecation,
salary and tax. Example of variable cost is packing expenses and material consumed etc.
cost per unit
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From the above table it can be stated that total cost is £31000 and output level is 155 unit.
Therefore cost per unit formula is £31000/155 =£200. in the above table company used cost plus
pricing method in which profit margin is added in the cost per unit.
3.3 Different financial tool
There are different type of financial tool which company can used for selecting a project
which is better for it. Clariton antique limited want to expand its business at Birmingham, so it
need to choose the financial tool for selecting a suitable project.
Net present value
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In net present value project is chosen who's net present value is high. From the above table it can
be stated that project A value is high that is 3.37 and project B value is 2.53 which means that
Clariton antique limited need to choose project A because in this net present value is high which
show company earn high profit. This project help company in expanding its business and for
earning profit.
Pay pack period method
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