Financial Analysis and Decision-Making for Clariton Antiques Limited

This report examines the financial management of Clariton Antiques Ltd, a company seeking to raise capital for expansion. It analyzes various sources of finance, including internal and external options like bank loans and equity. The report explores the implications of different financing methods, including costs like dividends and interest, and emphasizes the importance of financial planning, budgeting, and assessing the impact of overtrading. It includes a cash budget analysis, unit cost calculations, and investment appraisal techniques to evaluate project viability. Furthermore, the report covers the components and interpretation of financial statements, comparing Clariton's format with sole trader or partnership models. The report aims to provide a comprehensive understanding of financial decision-making and resource management within the context of a growing business.

Managing Financial
Resources and Decisions

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Sources of finance.................................................................................................................1
1.2 Implications for using internal and external sources of finance...........................................2
1.3 Appropriate sources of finance for Clariton..........................................................................3
TASK 2............................................................................................................................................4
2.1 Costs of the two sources of finance.......................................................................................4
2.2 Importance of financial planning..........................................................................................5
2.3 Assessing the required information to make decision in financing the takeover..................6
2.4 Impact on the financial statements if Clariton Antiques Limited chooses to go with..........7
TASK 3............................................................................................................................................8
3.1 Analysis of cash budget........................................................................................................8
3.2 Unit cost calculation............................................................................................................10
3.3 Assessing the viability of projects using investment appraisal techniques.........................11
TASK 4..........................................................................................................................................13
4.1 Components of financial statements...................................................................................13
4.2 Comparing the format of Clariton with sole trader or partnership or both.........................14
4.3 Interpretation of financial statement ..................................................................................15
CONCLUSION..............................................................................................................................17
REFERENCES .............................................................................................................................19

INTRODUCTION
Financial management is considered as an effective source of managing funds in such a
manner that helps in accomplishing the objectives of firm. It is also considered as crucial
function which is directly interconnected with the top management. Therefore, it is essential for
firm to take crucial decision in relation to manage the financial resources and decision making so
that best results can be attained (Arnold, 2014). Proper planning of finance helps management to
identify different sources through which funds could be collected and thus assist firm to carry out
its operations in market. Present study discusses the case of Clariton Antiques Ltd which was
founded five years ago as an unincorporated business and also grown slowly and steadily. Firm
developed as good reputation in market and aims to raise £0.5 million. However, there are varied
options available with firm such as they could go public and raise the money so that business
operations could be carried out effectively.
TASK 1
1.1 Sources of finance
Each and every business organization is looking for obtaining funds from different
sources of finance so that functions of could be carried out significantly. Following are the
different sources of finance such as- Unincorporated business- It assesses that businesses in such category does not have any
legal identity. Here, owner of the business possess all the liabilities and responsibilities of
his debt and need to focus in order to pay the same on time. Management also sell the
unused assets so that cash can be generated which is useful for firm to carry out business
activities (Baker and Ricciardi, 2014). Also, profits and personal saving could be invested
in order to grow the business towards success. Further, business could also use the
method of selling the internal stock and raise funds. Also, personal investment of owner
in the form of capital could be invested and thus use within firm so that business
activities could be carried out effectively. Such method helps in raising profitability and
thus increases financial performance in order to attain desired results (Bandarchuk and
Hilscher, 2013).
 Incorporated business- It is also called as corporation business and possess legal identity
that helps firm to offer varied benefits over being a sole proprietor, partnership etc. It also
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provides liability protection and additional tax deductions that helps firm to raise capital
through selling shares of firm (Bierman Jr and Smidt, 2012). Here, businesses raise
finance through bank loan and bank overdraft so that funds could be raised. For such loan
given by banks that charge interest on fixed or floating rates and thus businesses need to
pay the same on due time. Venture capital is also considered as one of the main sources
of external finance which could be used by firm and thus helps in expanding the business
operations.
1.2 Implications for using internal and external sources of finance
Following are the different implications for using internal and external sources of finance
upon Clariton company such as-
 Internal sources- Such sources of finance are obtained from trading of the business. It
also impacts upon financial position of firm and thus influences the business
performance. There are varied internal sources available with Clariton to obtain funds
such as day to day cash from sales of antiques, owner's investment, retained profit, debt
collection etc (Brigham and Ehrhardt, 2013). There is certain legal implications upon
internal sources of finance such as they need not to consider any legal obligations.
Business could also use its personal savings or profit earned in past years for the growth
and success of business. There is no legal formalities occurred within business and thus it
minimizes the rate of dilution of control.
 External sources- It comes from individuals or businesses that doe not trade directly
with the business such as banks, financial institutions, mortgage, hire purchase, trade
credit etc. Clartion could obtain funds from obtaining loan from banks and could be used
for paying to creditors (Jongman and et. al., 2014). Further, if firm is a corporation
business (listed company) then they need to pay dividend to their shareholders and thus
require to raise finance from different external sources. However, if business obtain loan
as a source of finance and then they need to pay interest which is considered as impact
upon financial performance.
Sources of finance Financial
Implications
Legal implications Dilution of control
Internal sources
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Sale of stock Minimizes the dead
stock
No legal implications No dilution of control
Personal investment It does not have any
financial impact upon
firm (Lapsley, Miller
and Panozzo, 2010).
- -
External sources
Venture capital Business aims to give
financing cost in the
firm of stake
It is essential for firm
to gain return on
investment
It reduces the control
of owner upon firm
1.3 Appropriate sources of finance for Clariton
There are varied sources of finance available for Clariton through which they can obtain
fund in order to carry out business activities- Bank loan- It is the sum of amount which is borrowed by company at an agreed rate of
interest and for a particular time period. They provide short, mid and long term loans.
Therefore, it is essential for Clariton to identify their needs and then obtain loan from
bank. Firm needs to give assurance and guarantee to bank that repayments of amount
would be done on set time frame (Shepherd, 2015).
Advantages- Bank sets a particular time frame in which loan amount could be settled. It is beneficial
for firm for making effective budget.
Disadvantages-
 Bank loan are expenses for firm due to high interest rate (Thompson, 2012).
 Bank also require guarantee or security on the loan taken.
 Owner's investment- It is considered as long term investment that comes from owner
himself and thus uses such amount in order to expand the business operations in market.
Advantages-
 The amount does not to be repaid. Also, no interest is paid (Vimpari, Kajander and Junnila, 2014).
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Disadvantages-
 Main limitation is that there is a limit for the amount which could be invested.
 Sale of stock- It is another source of finance that could be obtained by them through
selling stock and using the amount for further expansion (Balaman and Selim, 2014).
Advantages-
 It is the quick way of raising finance. Through selling unsold stock it helps firm to minimize the cost linked with holding them.
Disadvantages-
 Sometimes, firm needs to sell the goods at reduced price. Additional partners- It is another source of finance which is suitable for partnership
business. Thus, through involving new partners it helps firm to contribute extra capital
which can be used as a source for business expansion (Braun, Tietz and Harrison, 2013).
Advantages-
 Doesn't to be repay the amount. No interest to be paid except if agreed.
Disadvantages-
 It involves diluting control upon partnership.
 Profits needs to be shared among more partners (Danford, 2013).
TASK 2
2.1 Costs of the two sources of finance
It is essential for business to obtain funds for carrying out different business activities.
Clariton obtains cost of different sources of finance for raising funds through bank loans and
equity shares which are as follows- Dividends- Venture capital is considered as the crucial method through which business
could raise funds for business expansion. However, firm needs incurs cost in the form of
paying dividends to shareholders and thus it also impacts upon financial performance of
firm (De Feo and et.al., 2016). Clariton pays dividends to the investors against the
amount they invested within firm and thus it is the cost for firm. However, firm aims to
take loan from We Finance which is demanding 20% stake in firm which is too high to be
given.
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 Interests- It is another type of costs which is incurred by business upon sources of
finance. Clariton is required to pay interests upon bank loan and overdraft facility and
thus it is considered as an expense to firm. For instance, in order to expand the business
operations, cited firm requires amount of £0.5 million and thus they need to pay 2% rate
of interest annually for next 10 years (Lazonick, 2012). Hence, it is considered as the cost
upon source of finance that increases the liability of firm. Further, financial broker also
arranges loan for business and in lieu of that they charge money which is around 1%
which is also considered as cost to the firm.
 Tax- Further, it is another cost to sources of finance which needs to be given by Clariton
for getting finance. However, if firm registered as a corporation business then certain
additional relaxation in the form of tax is being provided and thus enhance the finance
revenues of cited organization. While, at certain point of time tax benefit given to firms
are crucial and thus raise the performance of firm in market (Li and Chi, 2013).
2.2 Importance of financial planning
Financial planning is also considered as the main source that helps in managing financial
resources so that appropriate funds could be raised in order to utilise the same. It is as follows- Budgeting- It is one of the main significant factor of financial planning which helps in
supporting the business activities so that desired actions could be attained. Financial
manager of Clariton aims to prepare appropriate budget so that proper inflow and outflow
could e assessed and thus financial planning could be done (Lutz and et.al., 2013).
Through carrying out effective budgeting it assists in forecasting the requirements of
finance in order to improve the performance of firm. However, through preparing budget
it helps in identifying the shortages or surplus of finance so that it can be managed
accordingly. Implications of failure to finance adequately- It is another significance of financial
planning and thus assesses that allocating financial resources becomes easy and thus it
helps in supporting business to carry out its activities. Further, implication of failure to
finance adequately also impacts upon financial activities performed within firm.
Therefore, it is essential for business to make investment and purchase raw material and
equipment's so that expansion could be done (Thakur and Chakraborty, 2015). Hence, it
is essential for firm to manage the funds effectively and thus overcome the losses. It also
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assists in overcoming future uncertainties and thus minimize the losses so that available
resources could be used effectively.
 Overtrading- Over trading is the situation that occurs when output increases as compared
to inputs. Hence, it impacts upon the business activities as it increases the stock of firm.
Clariton gets affected due to such activity. Additionally, it is essential for firm to become
possible for receiving more outputs from the investment which is being made by firm.
Hence, cited firm needs to carry out effective financial planning and thus support the
business activities so that desired targets could be accomplished. It is the situation in
which business aims to produce more number of products than demand and thus reduces
the overall productivity of firm (Fixed Asset Turnover Ratio, 2016).
2.3 Assessing the required information to make decision in financing the takeover
Following are the different individuals that need to be involved in order to make required
decision in financing the business takeover such as- The partners- It involves different partners within firm and thus Clariton carries out the
business activities through involving different partners. It is essential for firm to provide
crucial information to each and every partner such as dividend policy, assets, debts and
assets of firm (Inventory Turnover Ratio, 2016). Hence, Clariton is a partnership based
business and therefore, it is essential for firm to involve all of them in regard to make
effective decisions regarding financing the business expansion. Venture capitalist (We Finance Limited)- Business is also required to involve venture
capitalist within business decision and thus require to pay proper dividends to the
shareholders of the firm. Clariton is also required to involve venture capitalist within
business decision and thus raise the profitability ratio of firm. It also helps in supporting
the business decision through making investment in business. Different information
which needs to be provided to them regarding profitability ratio, dividend policy and
financial performance (Arnold, 2014).
 Finance broker- Further, it is also essential for Clariton Antques Limited to collect
information regarding obtaining funds from different sources for business expansion and
thus it is crucial for firm to involve such person in business decision so that results can be
attained. Clariton is required to provide information to finance broker regarding interest
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bearing capacity and worthiness of financial ratios that helps in improving performance
of firm in market (Bierman Jr and Smidt, 2012).
2.4 Impact on the financial statements if Clariton Antiques Limited chooses to go with
Following are the different impact upon financial statements if Clariton chooses to go
with following of the individuals- Venture capitalist (We Finance Limited)- It also affects the financial statement of
business due to different accounting and financial activities carried out by firm. However,
business raises funds for expanding its business activities through gaining bank loans and
equity (Jongman and et. al., 2014). Also, it is essential for Clariton to provide dividends
to shareholders so that liabilities of firm could be minimized. However, all such activities
affects the financial statement of firm. However, venture capitalist are considered as the
medium for raising funds in regard to carry out the business activities. Venture capitalist
impacts upon both income statement and balance sheet and thus influences the overall
business performance.
 Finance broker- Further, if Clariton aims to go with finance broker it also impacts upon
financial statement of firm. It impacts upon the funds which are collected from liabilities
side and provide detailed regarding assets side (Thompson, 2012). Thus, it also
influences the financial statement of firm and thus influences the performance of firm in
market.
For instance- If Clariton borrows 5,00,000 money from bank and bank charges 2%
interest annually. Further, broker charges 1% commission (Lapsley, Miller and Panozzo, 2010).
=500000*2%+500000*1%
=10000+5000 =15000
Thus, such amount will be assessed within the income statement in expenditure side.
However, provision of loan is also involved in this column and company needs to pay tax on
total revenue which would be deducted from the gross profit (Shepherd, 2015).
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TASK 3
3.1 Analysis of cash budget
Following is the cash budget analysis which helps in forecasting the income and expenses
for the future such as-
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From the above budget it can be evaluated that Clariton was unable to recover their
financial losses or expenses of the January month. While, performance of firm has been
improved after this month and thus also raises financial revenues. Further, it is also essential for
firm to possess positive improvement in regard to raise business sales and profitability. With the
help of Cash Budget it showcases that Clariton could not maintain its position consistently.
While, there is negative cash balance in the month of January, February, March and thus
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