Financial Resource Management and Decision Making Analysis Report

This report delves into the financial resources and decision-making processes of Clariton Antique Ltd. It begins by identifying and evaluating various sources of finance, including bank loans, equity shares, retained profits, and leasing options, for both unincorporated and incorporated businesses. The report then assesses the implications of using internal and external sources of finance, considering factors such as dividend payments, taxes, and interest rates. Financial planning, budgeting, and investment appraisal techniques like payback period, ARR, and NPV are analyzed to determine the viability of expansion projects. Finally, the report examines the key components of financial statements, comparing formats and interpreting financial ratios to assess the company's performance and aid in informed decision-making.

Managing Financial
Resources and
Decision
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
1.1 Identifying the sources of finance available to unincorporated and incorporated business. .4
1.2 Assessing the implication of using internal or external sources of finance...........................5
1.3 Evaluating the most appropriate sources of finance for Clariton Antique Ltd......................6
TASK 2............................................................................................................................................7
2.1 Analyzing cost of two sources of finance under consideration of dividend, tax and interest7
2.2 Importance of financial planning for Clariton Antique Ltd..................................................7
2.3 Assessing information need for different decision making on financing the takeover by
different parties............................................................................................................................8
2.4 Impact of finance on financial statements.............................................................................9
TASK 3............................................................................................................................................9
3.1 Preparing and analyzing the cash budget...............................................................................9
3.2 Assessing unit cost for making pricing decision.................................................................10
3.3 Evaluating the viability of proposed by using investment appraisal techniques.................11
TASK 4..........................................................................................................................................14
4.1 Discussing the key components of financial statements......................................................14
4.2 Comparing format used by Clariton Antiques Ltd to presenting their financial statements
with sole trader...........................................................................................................................15
4.3 Interpreting the financial statements of selecting company by using ratios........................15
Conclusion.....................................................................................................................................16
REFERENCES..............................................................................................................................18
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Index of Tables
Table 1: Cash budget for six months.............................................................................................10
Table 2: Payback period of investment 1 & 2................................................................................11
Table 3: ARR and NPV.................................................................................................................12
Table 4: Ratios...............................................................................................................................15
Illustration Index
Illustration 1: Financial statement for limited company ...............................................................15
Illustration 2: Financial statement for sole trader..........................................................................16
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INTRODUCTION
The performance of the corporation is based on selection of most suitable sources finance
to operate varied activities of business. It involves several activities related to acquiring the
finance and paying off the same on time. Present report is based on Clariton Antique Ltd which
provides different kind of antique show piece to large number of buyers for meeting their
requirement in a most effective manner (Clariton Antiques Ltd, 2016). The report under
consideration focuses on selection of ways to finance the expansion project of the business and
select the most suitable one in accordance with cost and other related aspects. Apart from this,
cost of finance has been analyzed along with importance of financial planning for business. In
addition to this, budgeting has been explained with different kind of techniques applied for
selecting the most suitable project. Moreover, financial statements are interpretated so as to take
the appropriate decision for the business and asses its performance.
TASK 1
1.1
Every business has varied choice to select the financial resources in accordance with own
requirement and set pattern. The below mentioned sources are available for business.
a) Sources of finance unincorporated businesses
Unincorporated business is considered as the non-registered which does not have
authority to issue the equity share and other similarly kind of procedure for raising fund. These
can generate money by accessing following sources of finance- Bank loan-Bank loan is served as the most important source of finance which assists
businesses to meet their financial requirement in relatively less time span. Here, securities
must be deposited in bank so on behalf of the same loan can be granted. However,
purpose or business is required to be communicated to banks so as to acquire money in
less time span (Adrian and Shin, 2014). Financial institutions-It is also favorable source of finance for unincorporated business
as financial institutions generally support small projects but after assessing the plan and
objectives associated with the same. It provides finance on relatively low cost.
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 Bank overdraft-This source of finance is based on credit rating of business where
company need to ensue that whether company is able to pay off its obligations or not. Owner's saving-It is considered as the short term finance under which unincorporated
business can get finance from owner of the business. Here, small amount of money can
be arranged on the basis of specific terms and conditions. Family and friends-This source of finance shows that company can acquire money from
family and friends. However, interest will be paid to these sources also under which firm
target to meet the specific requirement to all related parties. Personal loans-Personal loan is considered as the most convenient source of finance for
unincorporated business under which management can apply for personal loan to start the
operation of the business.
b) Sources of finance incorporated businesses
Incorporated businesses on the other hand are those which are registered and have right to
issue the shares. In this manner, Clariton Antique Ltd can access following source of finance- Equity share- Clariton Antique Ltd can issue equity share for meeting its financial
requirement. It is considered as the most effective source of finance which takes time but
ensure well being of business (Bain and Nowak, 2015). Retained profit-This is another cost effective source of finance wherein business keep
certain amount of profit of further investment. This merely create opportunity cost rather
than creating obligation to payment of cost to outside party. Bank loan-Bank loan is considered as the effective source of finance especially when
business has higher financial burden. Further, credit rating of business is considered so
that accordingly requirement of company can be met (Benes and et.al., 2015).
 Leasing companies-It is another source of finance where firm acquire highly equipped
tools and technologies for the purpose of consistent flow of production. Generally, assets
requirement consume higher fund of the business, owing to this, leasing companies can
be considered as the most effective source for Clariton Antique Ltd.
1.2
The implication of sources of finance through their positive and negative impact. This is
helpful for management of business to select the most suitable source of finance for their
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expansion project. For instance, if firm issue the share then it has to invite shareholders in taking
decision related to growth and development. However, collateral security is required for raising
bank loan and at the same time non-payment of interest and installment tend to affect credit
rating of the business (Bryan, Verles and Santini, 2014). However, Clariton Antique Ltd get
affected in case payment of interest and loan is not made on right time.
Furthermore, retained profit is an internal resource which create issue for business by
increasing opportunity cost. Similarly, sale of old assets is another internal source which has
negative implication in term of selling off assets on lower value. In addition to this, leasing
companies provide highly equipped assets to Cla
riton Antique Ltd but it charges higher repair cost and depreciation charges
.
In addition to this, financial institutions affect internal decision making procedure of
corporation. This is because management requires to involve those stakeholders in the decision
making process by communicating performance of project. Otherwise,business might get
affected due to higher cost of finance (Collins, Hribar and Tian, 2014). Though, dilution of
control and collateral security and opportunity cost are some major aspect associated with
performance of a project. However, bank loan must be paid on right time so as to improve
goodwill of business in the marketplace along with higher level of satisfaction among different
stakeholders. Hence, all financial resources are backed by its positive and negative implication
which aid to take appropriate decision in the growth and development of business.
1.3
The selection of most appropriate source of finance is based on its cost and contribution
towards success of the business in the marketplace. According to the given case study,
management of Clariton Antique Ltd can select below mentioned source of finance- Issue of share-It is the most appropriate source of finance under which management of
business issue the equity share for reducing the uncertainty and ensuring well being of
firm by generating enough fund (Farzanegan, 2013). Furthermore, equity share capital
tend to reduce financial burden as firm does to require to pay its cost to outside party
when it suffers from losses. In addition to this, issue of share although dilute the control
procedure of the business but support corporation in raising fund the expand in the
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marketplace. At the same time, Clariton Antique limited is incorporated business, hence
issue of equity share is the most effective option for its long term growth and
development. This would reduce the burden of debt and make the shareholders happy. Retained profit-It is another most appropriate source wherein Clariton Antique Ltd can
make use of retained profit for expansion of business. However, company needs to raise
£0.5 million so as to acquire a building in Birmingham to open another branch. Owing to
this, retained profit can be considered as the cost effective source for raising higher rate
of return. This proves to be effective to enhance flow of production and reduce indirect
cost by decreasing the finance cost of firm (Flower, 2016). It facilitates to ensure
expansion of firm in the marketplace with increased rate of return. The main advantage of
selecting the retained profit is business does not need to devote much of its time to
arrange the business. In this manner, Clariton Antique Limited access to cost effective
source of finance through which fiancne can be added in the total requirement of £0.5
million.
 Leasing companies-The expansion of business in another building also need to acquire
highly equipped machinery and tools for production purpose. It can made be available for
consistent flow of production (Henderson and et.al., 2015). It proves to be effective to
cater need of different stakeholders and support business to create goodwill in the
marketplace with increased rate of return. Hence, selection of leasing companies facilitate
to expand start the production of antique items in less time span because machinery and
tools are arranged in less time.
TASK 2
2.1
The source of finance considered for this question are; bank loan and equity share which
assists corporation to assess the future performance of business by anticipating the cost of
finance in a clear manner. These are explained as follows- Equity share-This source of finance generate cost in term of dividend, tax and interest.
However, Clariton Antique Ltd give dividend and tax to shareholders and government
respectively. At this juncture, the rate of tax may be higher or lower and accordingly
retained profit of firm suffer along with return left for shareholders (Khan, 2015). In this
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manner, equity share create cost for the business in accordance with return generate in
each financial year. Thus, certain proportion of profit is provided for the shareholders in
term of dividend which is considered as the cost. Dividend is declared in every financial
year as per the standards of the industry.
 Bank loan-Bank loan create cost in term of interest as management need to pay its cost
every month on the basis of agreed terms and conditions. In case of greater interest rate,
companies like Clariton Antique Ltd left with lower profitability (Rondi and et.al.,
2013). Owing to this, it is important to consider cost aspect associated with each source
of finance. Furthermore, higher tax rate further affect rate of return of business in a
negative manner. On the other hand, lower tax rate proves to be effective for business as
it helps in enhancing the ratio of retained profit.
2.2
Financial planning refers to process of handling all task related to acquiring, allocating
and retaining sources of finance required for business. It can be done in many ways which are
explained as follows- Budgeting-The process of budgeting is very effective in financial planning under which
management of Clariton Antique Ltd asssess the requirement of resources need to invest
in the expansion of plan. For this purpose, forecasting is done related to production,
revenue, loan or purchasing etc (Rosenthal and et.al., 2015). This proves to be effective
to provide tentative amount of money needed to maintain higher performance of business
in the marketplace. This facilitates to reduce cost of production as well as uncertainty
associated with Clariton Antique Ltd to a great extent. Implication of failure to finance adequately-It happens becuause of poor forecasting
power of management in the business. For example, Clariton Antique Ltd get affected
because of consequences of Bexit in UK which lower down the rate of currency. Such
kind of situation affect current production activities and affect overall business
performance to a great extent (Sanjani, 2014).
 Overtrading-Inappropriate financial planning leads to over trading which might increase
the liability of business. At this juncture, management of Clariton Antique Ltd need to
ensure to balance between trading activities and allocation of financial resources in an
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appropriate manner. It shows that financial planning is important for success of business
and creation of competitive edge of the same in the marketplace (Chulkov, 2014).
Basically over trading take place because of inappropriate management of the business. It
generally happens because of expansion the production or operation aggressively which
create the liquidity problem for the business.
2.3
There are different parties who are directly or indirectly associated with businesses like
Clariton Antique Ltd. They play vital role in making decision n the direction of growth and
success of firm. Here, case of takeover is taken where financing is done with perceptive of
partners, venture capitalist and finance broker (Lapsley, Miller and Panozzo, 2010). First of all
case of partners can be taken where Clariton Antique Ltd taken consent of partner and ensure to
raise fund from them by anticipating future profitability. On the other hand, venture capitalist can
also be considered for raising fund for takeover of company. At this juncture, management can
organize a meeting with respective provide of finance whereby it becomes easy to meet
expectation of related parties. For example, We finance limited; venture capitalist provide
finance for execution of project through which it becomes easy to increase overall rate of return
and meet long as well as short term objectives of corporation in the marketplace (Prorokowski,
2011).
In addition to this, Clariton Antique Ltd can also contact to finance broker who contact to
different parties for raising fund. Here, business can ensure upward direction and expansion of
the same can be made possible. However, finance broker must be reliable so that management
can easily count on him for expansion of plan of the project (Devaney, 2014). It can be critically
evaluated that selection of appropriate financier make it possible to implement the proposed
project to determine long run success. At the same time, appropriate information related to all
mentioned parties must be acquired to analyze the success of future business strategy.
2.4
There are different sources of finance which affect financial statement of business to a
great extent. According to the given case study, venture capitalist, finance broker are selected for
takeover. These are explained as follows-
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 Venture capitalist-It is considered as the most effective source of finance which assists
corporation to in implementing its potential strategy. It assist corporation to take right
decision so that accordingly its performance will affect (Milner and Rosenstreich, 2013).
For this purpose, assets side of balance sheet get affected by increasing the cash balance
sheet. In addition to this, venture capitalist tend to increase liability side along with
increasing cash balance of the Clariton Antique Ltd. However, with the use of venture
capitalist it becomes easy for the business to start the operation in relatively less time as
finance is availed on right time. However, it would increase the liability of the
corporation which must be set off in future time span.
 Finance broker-At this juncture, finance broker affect income statement due
commission. It reduces the amount of profitability to a great extent and accordingly
indirect impact can be seen on balance sheet also (Evans and et. al., 2012). In this
manner, corporation integrate all its resources for having positive impact on different
financial statement and increase rate of return or retained profit for further investment.
TASK 3
3.1
According to the case study, it has been found that Clariton Antique is operating its
business for offering different kind of antique show piece. Here, the following cash budget has
been prepared on the basis of give information under which it been found that sales turnover of
firm is decreased with a rapid speed in a initial four months (Adams, Litan and Pomerleano,
2010). However, it was recovered in the month of May and showing the profitability of 166250
which was increased in the next month. Owing to this, it can be said that currently company is
improving its performance of by recovering cost of production and meeting the expectations of
different kind of stakeholders associated with the same.
Table 1: Cash budget for six months
Particulars January February March April May June
Opening cash 110000 -539750 -392000 -76750 48500 166250
Sale 15000 22500 30000 15000 15000 3750
Receivables 142500 262500 405000 547500 33000
0 285000
Total cash inflow 267500 -254750 43000 485750 39350 455000
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0
Payment 807250 137250 119750 437250 22725
0 219750
Total outflow 807250 137250 119750 437250 22725
0 219750
Closing balance -539750 -392000 -76750 48500 16625
0 235250
As per the above mentioned situation of corporation, it can be suggested to management
that focus can be laid on credit collection policy. Here, policy can be modified to maintain higher
rate of return of the business. This is also helpful in increasing overall productivity through
increasing working capital (Benes and et.al., 2015). It can be also be suggested to firm that cost
effective source of finance can be accessed in order to ensure well being and competitive edge in
the marketplace. Apart from this, retained profit can be used as source of capital as currently
company is gaining profit.
3.2
Cost is considered as the most important aspect for firm as it serves as the path for
determining the profitability generated from a particular project (Adams, Litan and Pomerleano,
2010). There are different type of cost associated in selling antique items by the Clariton Antique
limited.. These cost are considered by management along with efforts to reduce the same so that
accordingly profitability can be increased.
Particulars Amount (£)
Purchase 15000
Salaries of staff 5000
Utility expenses 3000
Others 2000
Units sold 500
Total cost per unit 50
Price = 50 + (50*20%)
= 50 + 10
= 60
Profit 10 / 60*100
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= 16.67%
The aforementioned table is showing that cost per unit is 50 pound where total cost of
purchase was 15000 and salaries to staff was given as 5000 along with utility expenses of 3000.
In this manner it can be said that price of product and service is 60 in accordance with mark up
of 20%. On the other hand, profit percentage on sales to derive rate of return worth 16.67%. So
that corporation can accordingly select the profit percentage for setting the price as 16.67 will be
added in 50.
3.3
Investment appraisal technique plays important role in the growth and development of
business as it assists corporation to select the most suitable project on the basis of cost and
profitability (Sanjani, 2014). There are different kinds of techniques associated in the same such
as net present value method, payback period and internal rate of return as well as accounting rate
of return. These are applied on Clariton as follows-
 Payback period method-This payback period method refers to the process of assessing
the time period taken to recover the initial investment (Payback Method, 2017).
According to the following table, investment 2 should be selected by firm as its initial
investment can be recovered in 3.01 years whereas another project take relatively
extensive time such as 3.2 years.
Table 2: Payback period of investment 1 & 2
Particulars
Investment 1
(£m)
Cumulativ
e Cash
inflow Investment2 (£m)
Cumulative cash
inflow
Initial
Years/inves
tment 8.6 4.4
1 1.6 1.6 0.8 0.800
2 2.8 4.4 1.4 2.200
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