TOP025 Finance Report: Clariton Antiques Limited Company Analysis

This report provides a comprehensive analysis of financial management for Clariton Antiques Limited. It begins by exploring various sources of finance, including unincorporated and incorporated businesses, detailing their implications, and assessing their suitability for the company. The report then delves into the cost of different financing options like dividends and interest, emphasizing the importance of financial planning, including budgeting and the consequences of inadequate financial planning. Furthermore, it covers the assessment of information for financial statements, examines the impact on the company's financial statements, analyzes a cash budget, calculates unit costs, and discusses investment appraisal techniques. Finally, the report examines key components of financial statements, compares financial formats, and interprets financial statements to provide a holistic view of financial management within the context of the case study.

TOP025-MFRD

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Different sources of finance ..................................................................................................3
1.2 Implication of sources of finance ..........................................................................................4
1.3 Appropriate sources of finance .............................................................................................4
TASK 2............................................................................................................................................5
2.1 Cost of two sources of finance ..............................................................................................5
2.2 Importance of financial planning ..........................................................................................5
2.3 Assessment of information for taking financial statements .................................................6
2.4 Effect on the Financial statements of Clariton Antiques limited company..........................7
TASK 3............................................................................................................................................7
3.1 Cash budget analysis .............................................................................................................7
3.2 Calculations for unit cost ......................................................................................................9
3.3 Investment appraisal technique .............................................................................................9
TASK 4 .........................................................................................................................................13
4.1 Key component of financial statements ..............................................................................13
4.2 Comparison of financial format ..........................................................................................13
4.3 Interpretation of financial statements ..................................................................................13
CONCLUSION..............................................................................................................................16
REFERENCES .............................................................................................................................16
2

INTRODUCTION
Organizations working in different industries need to manage their financial resources for
carrying out business activities in effective manner. Proper and effective strategies supports in
carrying out required business functions in sequential and systematic manner (Shenming and
et.al., 2011). It is vital that financial planning should be done in the enterprise for running
business activities in effective way. Present report describes about diverse sources of finance that
can be used in the company for starting financial operations. The report describes about
appropriate sources of finance that can be used in the enterprise for carrying out business
functions. Moreover, cost of different sources of finance and significance of financial planning
also have been described in the report.
TASK 1
1.1 Different sources of finance
Clariton Antiques limited company is looking for funding different operations. There are
many sources of finance that can be used for funding the business activities. These are following
sources for the organization :-
Unincorporated business :- Business which do not have any legal identity are considered in this
category (Shepherd, 2015). Owner deserves all the liabilities and responsibilities of his debt.
Company can adopt method of selling the assets of the organization and it will provide a medium
for funding the operational activities of the entity. Unused goods and services are sold by making
use of this method and it provides a method for raising funds to carry out business activities
(Thompson, 2012). In addition to that profits and personal savings of the enterprise can also be
used for raising funds to carry out business activities. Organization can adopt method of selling
the stocks and internal stock of the company can be sold in market. Other than this owner's
investment can be used which will help for funding the financial activities of the enterprise. In
this method no cost is needed to be paid and due to that profitability of business does not
decrease and financial performance does not get affected.
Incorporated business :- These types of firms have legal identity and rules and norms are
imposed on it. These business gets benefited by taxation rules and it supports for carrying out
business activities. Bank loan and Bank overdraft can be taken for funding the business activities
3

and it will aid for financing the business functions (Claxton and et. al., 2011). It is assertive that
specific interest rates charged by banks should be paid on due time. In addition to that equity
shares can also be used as a method for funding business operations. By making use of this
method firms can raise funds by issuing shares. Venture capital is an external source of finance
that can be used by business and it provides finance to the companies for expanding operations
of the enterprise. It also imposes financing cost in terms of stake on the business which also
creates financial burden on the company.
1.2 Implication of sources of finance
It is assertive that Clariton Antiques limited company should assess and evaluate
implication of different sources of finance. Implications of various sources of finance is as
described :-
Sources of finance Financial implications Legal implications Dilution of control
Internal sources of
finance
Sale of assets Assets of the
organization reduces
No any legal
implication
-
Investment of owner No financial impact is
observed on the
company
- -
External sources
Venture capital Company is required
to give financing cost
in terms of stake
Company need to
provide financial
position along with
return on investment
Owner losses control
on his firm
Internal sources :- Organization can choose method of selling the assets and when an
organization adopts this method than impacts are observed on the financial position and
performance of the organization (Doğan, 2013). It is not required by company to pay any type of
cost for raising funds by making use of this method. In addition to that legal implication is also
observed and it is not required to follow any legal rules. When personal savings are used by the
enterprise than past profits are used by the company and no cost occur by the firm for making
4

use of this method (Fadare, 2011). Legal formalities are not used and vary low dilutions of
control occurs. There is very low dilution of control in this method.
External sources :- Equity is a method in which shares are sold by the organization for raising
funds to carry out business activities. It is required that dividends should be paid to the
shareholders and due to that overall financial performance of the enterprise gets influenced. It is
required that company should be listed in stock market and high dilution of control occurs
because there are interference among stakeholders (Baker and Ricciardi, 2014). In addition to
that Bank loans are also an medium for raising funds for carrying out business activities. It is
required that interest amount should be paid to brokerage and due to it financial performance of
the enterprise gets affected.
1.3 Appropriate sources of finance
Clariton Antiques limited company uses bank loans as a source of finance and due to that
it becomes possible for raising funds for carrying out business activities. There are many
advantages of using bank loans as a source of finance and it is required that advantages and
disadvantages of this method are as mentioned :-
Advantages :- It provides a method for enhancing profit of the organization by providing a
medium for making investments in business activities. It also helps for making improvements in
financial performance of the enterprise. Company need not to loose after raising funds for
carrying out business activities (Bandarchuk, and Hilscher, 2013).
Disadvantages :- It becomes difficult for the firm to pay bank loans and to raise finance from
banks loans are most typical source of finance (Bierman and Smidt, 2012). It is required that
particular interest rates charged by the firm should be paid on due time and due to that financial
performance of the enterprise gets affected. Other than that company can adopt following
sources :-
Venture capital :- Clariton organization can use this method for raising finance for the
organization. This source provides proper and better financial services. Financial charges are
lower than compared to another sources. However, it is required that high amount of dividend
should be paid due to which profitability of the business gets affected.
5

TASK 2
2.1 Cost of two sources of finance
Clariton Antiques limited company need to raise funds for executing required business
activities. The company is raising funds through bank loans and equity shares and it is required
that cost of different sources of finance is as follows :-
(a) Dividends :- Venture capital is a method through which funds are raised by organizations for
carrying out business activities (Brigham & Ehrhardt, 2013). It is required that dividends should
be paid to shareholders and it gives impact on the overall financial performance of the
organization. Cited firm require to give dividends against the invested money and it is a cost for
the company. We finance is needing 20% stake which is too much high for the company.
(b) Interest and taxes :- It is required that interest and taxes should be paid on bank overdraft and
bank loans that are taken by banks. Assistance from brokers is taken by banks and it helps for
financing the operations of the enterprise (Chandra, 2011). Company needs to pay annual pay
rate of 2% for next 10 years and it will help for financing the operations of the entity in effective
way. It is cost for the organization and due to that liability is increases for longer duration.
Financial brokers arrange loan for the organization and they charge money which is 1 % due to
which it becomes cost for the organization.
(c)Tax :- is a type of deduction that is given by banks for company for financing its operational
activities (Davies And Crawford, 2011). In addition to that banks are giving relaxations on tax
burden and it is helping for making increments in financial revenues earned by the entity. Tax
benefits are attached which is good for the organization.
2.2 Importance of financial planning
(a) Budgeting :- Financial planning supports for running the operational activities of Clariton
Antiques limited company in effective way. Different functions including human resource
management, financial, operational and marketing related functions can be accomplished in
better way by making use of appropriate financial planning (Cumming, 2007). Two major ways
for which financial planning is important includes Budgeting in which plans related to future
financial activities are made. Plans are made for cash inflows and cash outflows and incomes and
expenditures are also estimated by making use of financial planning (Arnold, 2014). Company
6

can forecast things and it supports for measuring performance of the company. Effective control
on the financial performance of the enterprise can be maintained shortage and surplus of funds
can be minimized.
(b) Implication of Failure of finance adequately :- Allocation of financial resources becomes
easier and it supports for carrying out business activities of Clariton Antiques limited company.
It also provides a medium for management to make reduction in expenses and enhancing sales of
the entity so that profitability and revenues of the enterprise can be enhanced (Jongman and
Ward, 2014). Moreover, implication of failure to finance adequately also gives impact on the
financial activities that are performed in the enterprise. It is required that wages should be paid to
staff members and it is also required that investments should be made for purchasing raw
material and other equipment's that are required for carrying out business activities. Funds can be
properly utilized and chances of getting financial losses can be reduced. Future uncertainties can
be reduced and due to that effective utilization of resources can be maximized.
(c) Over-trading :- In addition to that over trading is also a situation which occurs when outputs
produced by organization becomes more than inputs. In addition to that over trading gives
impact on the overall business activities that are performed in the organization. More sales and
profits are earned by the enterprise and firms becomes capable for doing optimum allocation of
resources of carrying out business activities (Lapsley, Miller and Panozzo, 2010). In addition to
that it also becomes possible for receiving more outputs from the investments that are being
made in the entity. Financial planning supports for carrying out business activities in effective
and advanced way and it also helps for accomplishing the desired goals and functions of the
enterprise in better way. Financial planning supports for minimizing over trading and it supports
for carrying out functions of business in smooth and effective way. Over trading is situation in
which firm produces more goods than demands and due to that overall profitability of the
business can be reduced.
2.3 Assessment of information for taking financial statements
(a) The partners - Business partners of the organization provides meaningful information that is
required for carrying out business activities in better way. Employees require information
regarding solvency, liquidity, efficiency, growth and profit of the organization. Partners require
7

information regarding financial position of the company including dividend policy, assets, debts
and assets of corporation.
(b) Venture capitalist - It is required that company should pat required dividends to the
stakeholders of the entity. In addition to that finance brokers provides assistance for executing
required business functions and they help in taking business decisions for buyers (Baker and
Ricciardi, 2014). Information is required about profitability ratio, dividend policy and financial
performance of the business. In addition to that by looking at the income statement of business
investors can identify about profits earned by the company and it supports them in taking
decisions for making investments in the organization.
(c) Financial broker - It is required that Clariton Antiques limited company should collect
required information about financial brokers so that better and effective decisions can be taken
for the entity. Bank provides specific period of time in which the money needs to be returned. It
is required that required sum and money should be returned by organization. They need
information related to interest bearing capacity of Clariton and financial worthiness of the
organization can be identified through this.
Clariton Antiques limited company needs to do assessment of information that is
required for taking better and effective decisions for the enterprise. Company is making use of
various resources such as bank loans and venture capital for funding the operational activities of
the business. Venture capital and bank loans are two different mediums that are required by the
enterprise for carrying out business activities (Vimpari, Kajander and Junnila, 2014).
It is required that funds should be collected and allocation of resources should be done in
a better way so that business activities should be carried out in effective way. If losses are
suffered by the business than these losses are shared among the business partners. Venture
capitalist is also a source of finance that is used for funding the operations of business and it is
required that dividends should be paid to shareholders (Fadare, 2011). When company takes
finance and funds through this medium than it is required that dividends should be paid to
shareholders.
8

2.4 Effect on the Financial statements of Clariton Antiques limited company
(a) Venture capitalist :- Financial statements of the enterprise gets affected due to the various
accounting and financial activities that are performed in the enterprise. Company raises funds for
its financial activities through equity and by taking bank loans (Thompson, 2012). It is required
by organization that dividends should be paid to shareholders so that liabilities of organization
can be completed. Financial statements of the enterprise gets influenced and from both sources
of finance that have been chosen by organization for raising funds for carrying out its business
activities. Venture capitalist provides medium for raising funds to carry out business activities in
effective way. Income statement and balance sheet of the organization gets affected and due to
that overall financial performance of the entity gets hampered (Doğan, 2013).
(b) Finance broker :- In addition to that finance brokers also gives impact on the financial
statements that are being used in the enterprise. Funds that are collected from liabilities side in
statement and it also provides details about assets side. Bank loan and financial brokers gives
impact on the financial statements of the entity.
For example: If Clariton borrows money from banks 5,00,000 and bank charges 2% annual
interest. Apart from this 1% commission is charged by broker then
=500000*2%+500000*1%
=10000+5000
=15000 this amount will be reflected in the income statement in the expenditure side. Provision
for loan is the colum in this amount will be reflected. Company will have to pay tax on total
revenues that would be deducted from the gross revenue.
9

TASK 3
3.1 Cash budget analysis
Cash budgets are prepared in the organization for forecasting income and expenditure for
next upcoming year. Budget details for the organization are as follows :-
10

It has been observed from the above budget details that company was unable to recover
their incurred expenditure in month of January. Performance of the organization have improved
after this and financial revenues of the organization have improved. Organization has the positive
improvements in their financial performance and it has supported for increasing profitability of
the enterprise. Cash budget shows that Clariton company can not remain consistent. Negative
cash balance is there in the month of January, February, march and it shows that excessive
amount of payment has been done by the company and it is 807250. It is required that company
should reduce its debts. It will help for enhancing liquidity of the organization.
Management of the organization has option for making improvement in performance of
the enterprise by making use of innovative techniques such as Six sigma, Lean production, Just
in time inventory and other effective approaches for making improvement in existing
performance of the enterprise. Other than this closing balance of the organization have increased
from January to June and it is showing and reflecting positive improvements in performance of
the enterprise. It reflects that total investment cost of the enterprise have reduced. Budget
analysis for Clariton is reflecting that organization is making positive growth and due to that
financial performance of the company is improving. It is required that managers of Clariton
company should evaluate and monitor every functional activity that is performed in the entity. In
addition to that opening cash sales also have been decreased in the enterprise and due to that
performance of the organization has gone affected.
3.2 Calculations for unit cost
Unit cost is defined as cost incurred for manufacturing a single unit of products. It is the
cost which is evaluated by calculating total expenses and cost incurred to produce different types
of goods and services (Chandra, 2011). Unit cost is the cost that occurred for manufacturing a
single unit of product. It becomes easier for the entity to take pricing related decisions and due to
that overall performance of the enterprise gets influenced. Major key elements that are included
in calculating unit cost are Total cost and Total output and due to that overall manufacturing
related activities of enterprise gets affected.
11

Unit cost for manufacturing a product
Fixed cost for the product £40000
Variable cost for the product £20000
Total cost of the product £60000
Production volume 600 units
Cost per unit for making single unit of
product £100
Profit margin 20.00%
Price per unit £120
It has been observed from the above table that unit cost provides details about cost incurred by
the enterprise for manufacturing a single unit of product.
For example: Expenditures of Clariton are as following:
Salaries £20000, rent on premises £15000, utility bills £18000, transportation cost £25000 and
cited firm wants to produce 10000 unit then
Unit cost =£20000+ £15000+ £18000+ £25000 /10000
Unit cost = £7.8
Pricing decisions: If Clariton is aiming to get return of 20% then it can set selling price
accordingly.
Selling price= Unit cost+ unit cost * desired profit
Selling price =£7.8+£7.8*20%
Selling price= £9.36
Hence, if cited firm keeps 9.36 per unit price then it would be bale to generate 20% profit on its
investments.
12