Managing Financial Resources: Clariton Antiques Ltd Analysis Report

This report provides a comprehensive analysis of financial resource management for Clariton Antiques Ltd, focusing on the identification of finance sources, both internal and external, and assessing their implications. It evaluates the most appropriate sources of finance for the company's expansion, particularly considering a venture capital offer. The report delves into the costs associated with different financing options, including dividends, interest, and taxes, and emphasizes the importance of financial planning. It also assesses the information needed for financing decisions, analyzes the impact on financial statements, and compares financial statement formats. The report concludes with recommendations for Clariton Antiques Ltd regarding its financial strategies.

Managing Financial
Resources and Decision

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................4
1.1 Identify the sources of finance available...............................................................................4
1.2 Assessment of the implications for using Internal and External sources of finance.............5
1.3 Evaluation of the most appropriate sources of finance for Clariton Antiques Ltd...............7
TASK 2 ..........................................................................................................................................8
2.1 Analysis of the costs of the two sources of finance under consideration.............................8
2.2 Explain the importance of financial planning for Clariton Antiques Ltd............................9
2.3 assessment of the information that will be needed to make decision on financing............10
2.4 Impact on the financial statements through Venture capitalist (We Finance Limited) and
Finance broker...........................................................................................................................11
TASK 3..........................................................................................................................................12
3.1..............................................................................................................................................12
3.2.........................................................................................................................................13
3.3..............................................................................................................................................14
TASK 4 .........................................................................................................................................16
4.1 key components of financial statements.............................................................................16
4.2 Comparison of formats used by Clariton Antiques Ltd to present its financial statements
with that of sole trader or partnership firm...............................................................................17
4.3..............................................................................................................................................18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Financial resources are soul of the business enterprise. In this report, very financial
resources that an entity can opt for managing its business operations. Further, report talks about
incorporated and unincorporated organisations and their financial resources. Clariton Antique
Ltd was started by four partners. It has its two branches which are situated at London, further
they are also willing to establish another branch at Birmingham. This report also contains a
detailed analysis of offer which is given by We Finance Limited to Clariton Antiques Ltd to
expand its business structure. The report contains a detailed analysis regarding the cost of two
sources of finance in reference to dividend, interest and tax. Besides this, the reader will know
the importance of financial planning for cited entity and they can also derive important
knowledge regarding key components of the financial statements.
TASK 1
1.1 Identify the sources of finance available
There are certain sources of finance which are available for various types of entities.
Weather it is an unincorporated entity or an incorporated entity; they both require funds to carry
out business activities(Brammer and et.al, 2012). But the sources which are appropriate for them
may be different. The various types of financial sources which are available for unincorporated
and incorporated entities are as follows: Unincorporated Entities: A business organisation which does not have a separate legal
identity. If such entity is not following a separate legal concept of accounting then it will
be considered as an unincorporated association or entity. In such entity, owner possesses
all liabilities which are related with the business enterprise. Sole proprietors, partnership
firms can be considered as unincorporated entities(Brigham and Ehrhardt, 2013). The
sources of finance which are available for unincorporated entities are as follows :
◦ Personal Savings: For the organisations like partnership firms and sole proprietors,
personal savings can be a major source of finance. Though this, they can fund their
day to day activities(Chandra, 2011).
◦ Small Business Loan: Unincorporated entities can seek for small business loans to
finance their business requirements. Management of the cited entity can approach
towards bank and other financial institutes.

◦ Small Business Line of Credit: Unincorporated entities can apply for business line of
credit. It is almost same as a small business loan. If the repayment of small business
loan is compared with small business line credit then it is almost same. Cited entity
can take loan in instalments rather than taking it in lump-sum. Incorporated Entities: Those enterprises which are registered and have separate legal
entity from that of its owner is known as the incorporated entities. The sources of finance
which are available to them are mentioned below :
◦ Retained earnings: The retained earnings are the most usual source of finance for any
incorporated entity(DRURY, 2013). Companies earn profit and they retain certain
profits which can be used by them for meeting their future needs and requirements.
These savings are termed as the retained earnings. Clariton Antiques Ltd is an
incorporated entity hence it can finance the short term requirements like funding of
working capital through retained earnings.
◦ Bank loans: Just like unincorporated entities, cited entity can also borrow money
through banks and other financial institutions.
◦ Equity shares: A company can issue shares in public so that they can get adequate
finance(Ebrahimnejad and et.al, 2010).
◦ Debentures and Bonds: Incorporated entities can issue debentures in the public to
finance their business activities. Debentures and bonds are long term business loan
which bears a fix rate of interest.
◦ Venture Capitalists: Cited entity can finance their projects through venture capitalist.
Venture capitalist is considered as an investor who either provides finance to newly
established venture or to start a new project in the existing venture.
1.2 Assessment of the implications for using Internal and External sources of finance
Sources of finance regulates the activities of a business enterprise. An entity requires
funds to conduct its day to day activities(Gregory and et.al, 2012). For getting funds for the
fulfilment of business needs, cited entity, firstly needs to assess various sources of finance. There
are mainly two category of finance and these are mentioned below :
Sources of finance Implications regarding finance Legal implications
Internal source of finance :

Retained Earning Retained earning is that part of
profit which is retained out of
it after giving dividend to the
shareholders. An entity can use
retained earning to meet the
current needs and
requirements.
There are no such legal
implications of retained
earnings.
Working capital Working capital can indirectly
be a source of finance. As if a
company reduces the funds
employed in its working
capital then that amount can be
used for other purpose(Pfohl
and et.al, 2010).
Working capital bear no any
legal implications
Sale of assets cited entity can generate funds
through selling out its assets.
The sale proceeds can be used
as the source of finance. But
cited entity needs to analyse
the use of assets before selling
them. So that working capacity
of cited entity cannot be
affected.
It doesn't attracts any legal
implications.
Account receivables Further debtors and other
account receivables can also
be classified as internal source
of finance
Debtors and other account
receivables are outsiders hence
they have certain legal
implications.
External Sources :

Bank Loan and mortgage Cited entity can acquire funds
through loan from bank and
other similar financial
institutes. In mortgage cited
entity can get funds by
securing their debt through
some movable property. It
means, bank and financial
institutions will carry rights
over such property.
It has certain legal
implications. Cited entity
needs to meet out all the
requirements of banks and
they need to get verify their
financial statements.
Equity Financing Cited entity can issue equity
shares among the public to get
fulfil their financial
requirements.
Equity financing carry many
legal implications. An entity
which wants to issue shares
among public needs to get
itself registered in stock
exchange. Hence Clariton
Antiques Ltd needs to get itself
registered in UK stock
exchange. They also needs to
bring Initial Public Offer(IPO)
which has many conditions
which are mandatory to fulfil
for issuing shares among
public.
1.3 Evaluation of the most appropriate sources of finance for Clariton Antiques Ltd.
There are number of sources of finance that can be used to finance requirements and
needs of an entity. But that financial source must be appropriate in respect to the repayment
capacity of cited entity and it should be cost effective so that cited entity can get better return on
the investment. If the cost of finance is high then it requires high return from the project in which
it is employed. Hence, through less cost of finance, cited entity can maintain relatively a good

margin(Loorbach and Rotmans, 2010). Most effective and appropriate source of finance can be
classified as that source which bears minimum cost of capital and it should also carry minimum
obligations. Clariton Antiques Ltd cannot find perfect source of finance because each and every
source of finance contains some advantages and disadvantages. As per the given case study,
Clariton Antiques Ltd wants to purchase a new building in Birmingham to expand its business.
For such expansion plan, the management of the cited entity has estimated a total amount of
investment at £0.5 million. They are previously using some internal and some of external sources
to finance requirements or activities of the business enterprise. They used to take loan from bank
and other similar financial institutions. But particularly for this expansion plan, management of
the cited entity has been suggested to acquire funds through public sources. It simply means that
for funding building in Birmingham, the management has decided to use external source of
finance(McDonald-Madden and et.al., 2010). Cited entity can finance its expansion plan through
venture capitalist. Venture capital funds invest funds in SMEs which cannot get financial
resources easily. Venture capitalist manages the money of investors who seeks private equity
stakes in start-up and small to medium-sized enterprises with strong growth potential. These
investments are generally characterized as a source(Mehran and Peristiani, 2010)
. On the other hand, Clariton Antiques Ltd can finance its expansion plan through bank loan.
Cited entity needs to pay a fixed rate of interest for a certain number of years. As interest is a
charge against profit hence cited entity is obliged to pay interest weather there is profit or not. If
bank loan is compared with venture capitalism, then it can be assessed that venture capital
financing has many advantages. Hence, it is advised to the cited entity to finance its expansion
plan of £0.5 million through venture capital financing(Kaplan and Atkinson, 2015).
TASK 2
2.1 Analysis of the costs of the two sources of finance under consideration
As Clariton Antiques Ltd has decided to expand its business by establishing a building at
Birmingham. That building will cost £0.5 million to cited entity. Earlier management of Clariton
Antiques Ltd used to finance their business needs regarding working capital and projects,
through sources of finance and some of external sources like bank loan. But this time cited entity
have been approached by We Finance Ltd, which is a venture capital organisation. It is providing
£0.5 million to cited entity and in return of this amount it is asking for 20% stake in cited entity.
They also have an option to acquire this amount through loan from financial institutions. For

such bank loan, broker will charge brokerage fees of 1% of total amount of loan which means
cited entity requires to pay £0.005 million to the broker as his fees. Other then this cited entity
also requires to pay 2% APR which is payable over a period of 10 years(Moser and Ekstrom,
2010).
a) Dividend Cost : when shares are issued in public. Then at the end of financial year,
cited entity requires to pay dividend to its shareholders out of the total profit. This amount of
dividend considered as the cost of equity as dividend paid to equity share holders is known as
dividend cost. If cited entity will opt for the first option then it requires to pay We Finance Ltd
20% of total profit as a dividend to We Finance Ltd. As per the data given in the case study,
Cited entity has earned £33000 as a profit for the last financial year. In previous year 2015
company has earned £23000 as profit. It can assessed that cited entity has a growth trend in its
profits. Further after expansion plan it surely possible that entity will earn a profit more than
£33000. So it can be concluded that cited entity requires to pay at least £6600 to We Finance Ltd.
So this can be considered as the cost of equity or dividend cost.
b) Interest : Interest is a charge against profit. When an entity acquire loan from a bank or
any other financial institutions. In the given case against an amount of £0.005 million cited entity
requires to pay interest.
c) Tax : Interest amount can be considered as tax benefit for the cited entity. As interest
amount is available as deduction out of the profit. Hence this will reduce the amount of profit
and as a result cited entity requires to pay less tax.
2.2 Explain the importance of financial planning for Clariton Antiques Ltd
Financial planning is always considered beneficial for any entity. As it allows a proper
maintenance of finance to the cited entity. Financial planning can be considered as task through
which an entity can utilize its fund appropriately and effectively. Financial planning allows an
entity to achieve its goals and objectives in an effective way. In general, organisations used to
prepare a financial plan before making out any activity regarding any newly established project.
The Importance of financial planning can be understand through the undermentioned points :
a) Budgeting : Clariton Antiques Ltd have focused over the preparation of budget. It
allows the cited entity to allocate the finance properly so that the projects can yield maximum
results. Further through budgeting techniques which are used by cited entity assist the

management to control over the operations. Cited entity used budgeting techniques for the
forecasting of expenses regarding the expansion plan. It can assist the work force which are
currently working there to put steps towards right direction to achieve the predetermined goals of
cited entity. Further it provides a benefit of coordination among various departments of Clariton
Antiques Ltd(Nam and et.al, 2011).
b) Implication of failure to finance adequately : Finance can be considered as the soul of
any business organisation. Without availability of finance an entity cant run its operations
effectively. Adequate finance can help an organisation to attain its objectives. Smooth business
activities helps an entity to earn more revenue which makes such projects profitable in which
finance is employed. Availability of finance helps an entity at each and every process. Cited
entity can acquire its raw materials, further they can convert such raw material in finished goods
with the help of adequate finance. Cited entity requires finance to expand its business by
establishing a new building at Birmingham. If cited entity fails to properly maintain the available
finance then it will not get required and expected results out of such expansion plan(Moynihan
and Pandey, 2010).
c) Over Trading : Over trading is a situation which consists trading of goods and services
without any limit. In such trading broker used buy and sell goods on behalf of investor. In return
that broker will get commission as a remuneration for maintaining the activity of trading. Over
trading is also known as ' churning'. Over trading increases sales but it has certain disadvantages
which cannot be avoided. As over trading is a part of business forecasting. In such, over trading
includes purchase of raw material in high quantity which results in increase in liability and it also
increases account receivables as broker will sale goods on credit to increase sales(Swayne, and
et.al, 2012).
2.3 assessment of the information that will be needed to make decision on financing
Financing decisions must be effective so that they can cultivate higher returns. To make
decisions regarding financing of any project cited entity requires to make a detailed analysis over
the facts and information of its organisational structure. Some informations which is required to
analyse before making any decisions regarding financing are as follows :
a) Partners : Cited entity and its management requires to analyse the information
regarding capital which is contributed by the partners, capital ratio of partners and profit sharing
ratio of partners. Further a detailed analysis is to be made of facts and figures which are

mentioned in the partnership deed. Further they also need to do valuation of companies goodwill
and other such factors which can impact over the financial position of cited entity.
b) Venture Capitalist : Venture capitalist can be considered as an investor who invest in
newly established entity or in new project of any existing entity. In the given case study We
Finance Ltd is a venture capitalist, who offered clariton Antiques Ltd to invest £0.005 million in
its expansion plan and in return of it, a stake of 20% is required by it. We Finance Ltd needs to
get financial information of cited entity through its previous year financial statements. It needs to
assess the liquidity of cited entity. Liquidity could be assessed by it through analysing the total
assets and total liability. After thoroughly analysing assets and liabilities, venture capitalist can
be assured about repayment of its investment.
c) Finance Broker : Financial institutions needs to access the information regarding
indebtedness of cited entity other than this they also need to go through repayment schedule of
previous loan taken. Through this banks and other such financial institutions can get information
regarding the repayment ability of cited entity. Banks needs to use some technical and scientific
methods to analyse financial position of cited entity. Banks should acquire net asset value of
cited entity(Guang Shi and et.al, 2012).
2.4 Impact on the financial statements through Venture capitalist (We Finance Limited) and
Finance broker
a) Venture Capitalist (We Finance Limited) : We Finance Ltd has asked to have a stake
of 20% in the total profit of cited entity, this is actually dividend which is required to pay by
cited entity to We Finance Ltd. 20% of total profit is material amount which can reduce the level
of profit available for owner. But it also increases capital of cited entity. But due to this liability
will also gets increased as the capital is nothing but a liability(Purce, 2014).
b) Finance broker : Banks and other such financial institutions are termed finance
brokers. Bank and financial institutions provides loan to entities. Against those loans they charge
interest. Interest is a charge against profit. Hence it will reduce the profitability that means it puts
an adverse effect over the profitability of cited entity. On the other hand it also consist brokerage
charges. That means 50000 GBP is to be paid by Clariton Antiques Ltd to broker. Interest and
brokerage are indirectly beneficial for cited entity as it will provide tax benefit(Remund, 2010).

TASK 3
3.1
As per the last year budget of Clariton Antiques, it need to improve their financial
performance in order to achieve desired goals or objectives. Its sales are lower than purchase.
Company needs to identify weaknesses through which they can't perform well and not able to
earn profit. Organisation may identify How that much unbudgeted shortcoming risk they can
handle. How they can find their worst condition and get solution of the same. Evaluate the real
cost incurred in every division of the company(Tang and Musa, 2011). Some possible option for
the entity which they can adopt for increase their financial performance are as follows:
 Throw the project- Company can choose this option that time when earning or savings
are lower than the expectation.