Financial Resource Management and Decision Making Report

This report, focusing on Clariton Antiques Ltd, comprehensively addresses financial resource management and decision-making. It begins by exploring various sources of finance for both unincorporated and incorporated businesses, evaluating their implications and suitability for Clariton. The report then delves into the costs associated with different financial sources like dividends and interest, emphasizing the importance of financial planning and the information needed for effective decision-making. It includes the preparation of a cash budget, an analysis of unit costs and pricing, and financial analyses of two investment projects. Furthermore, the report examines key components of financial statements, comparing financial formats of sole traders and partnerships, and evaluating Clariton's financial ratios. The report concludes with a detailed analysis of Clariton's financial performance and provides recommendations for future financial strategies.

Managing Financial Resources and
Decisions

Contents
Introduction.................................................................................................................................................4
Task 1...........................................................................................................................................................4
1.1 Sources of finance..............................................................................................................................4
1.2 Implications of different sources.......................................................................................................5
1.3 Appropriate source of finance for Clariton Antiques Ltd...................................................................6
Task 2...........................................................................................................................................................6
2.1 Cost of financial sources....................................................................................................................6
2.2 Importance of financial planning.......................................................................................................7
2.3 information require to make effective decision.................................................................................8
2.4 Impact of sources on financial statements........................................................................................9
Task 3.........................................................................................................................................................10
3.1 Prepare cash budget .......................................................................................................................10
3.2 Unit cost and pricing decisions of Clariton Antiques Ltd..................................................................11
3.3 Financial analyses of two investment projects................................................................................12
Task 4.........................................................................................................................................................14
4.1 Key components of financial statements.........................................................................................14
4.2 Comparison of financial formats of sole traders and partnership firm............................................15
4.3 Financial ratios of Clariton Antiques Ltd..........................................................................................15
Conclusion.................................................................................................................................................18
References.................................................................................................................................................19

Introduction
Efficient management of funds and controlling over economic activities activities are
main aspects of business. Availability of sufficient funds is the life blood of any business, it is
possible with the help of financial management (Osei-Assibey, 2013). It assists in determining
the capital composition, selecting appropriate source of finance and in taking investment
decisions. Present report is based on the Clariton Antiques Ltd, it is engaged in selling of
antiques item. Before five years cited firm was started by four partners and currently it has
developed its unique image in the corporate market. Current assignment will discuss the
unincorporated and incorporated business and sources of finance for these business units.
Discussion upon appropriate source of finance for Clariton will be done in this study. Cost of
dividend, interest and tax will be illustrated in this report. Impact of venture capital and finance
broker on accounting statements will be described in this assignment. Cash budget and financial
analyses of two investment projects will be done in this report. In addition, report will compare
year2016 financial ratios of Clariton with previous year (Bahar, M.N. and Kheradmand, 2013).
Task 1
1.1 Sources of finance
Every enterprise needs money to get going and to run their operations well. There are
many options available of raising money but firms have to select suitable option (Jirka, Woolf
Solomon and Lehmann, 2015).
Unincorporated business
These are commercial entities which do not require any formal legal registration with the
government. Owner is the person who is responsible for liability of the organization. Clariton
Antiques Ltd is formed by four partners, it is working as unincorporated business (Xiang,
Worthington and Higgs, 2015). Sources of finance available for such firms are discussed as
below: Personal savings: As Clariton is the partnership firm so all four partners can invest their
own capital in the business. It is cheaper financial source as partners need not to repay
this amount to any lender so no economical cost is attached with it (Agrawal, Catalini and
Goldfarb 2014). For raising money they can also introduce one more partner in the firm,

capital of new partner will help in expanding the business and this amount will be used to
open another branch.
 Bank loan: Unincorporated business like Clariton can also apply for bank loan. Financial
institutes provide money to start up firms at lower interest rate. Cited firm can get tax
benefit on it. It is the best way to collect huge amount and repayment is also easy
(Chugan and Singh, 2014).
a) Incorporated business
These are formally registered entities, owner is not liable of firm’s liability.
Sources of finance are available for such kind of business are as following:
 Retained earning: It is internal source and profit of the company which is retained
by the firm for further development of the business. As internal funds are its own
capital so there is no burden of repayment (Mancusi and Vezzulli, 2014).
 Venture capital: Investment of investors can raise capital of the organizations.
They invest their money for getting high returns and firms have to pay dividend to
them. But they become equity holders in the entity and get rights to take decisions
in the organization, by this way ownership get diluted (Newman, Borgia and
Deng, 2013).
1.2 Implications of different sources
a) Internal sources
Internal sources are funds which are available inside the business and used by
owner for expansion of the business. Retained earnings is one of the major economic
internal source. In this organization needs not to repay this amount so no economic
implication is of this sources. Apart from this no legal consequences have to face by
entity while using this source (Rupeika-Apoga, 2014). As it is own capital so ownership
does not get diluted. This financial source can generate more earnings in the corporation.
Personal saving is another internal source of finance, no economic cost is attached with it.
The positive implication of this source is that possession remain to the owner and
controlling power does not get shared to others (Tsai, 2015). No legal agreement is
required to form by owner. Sales of assets is another source in which owner will not need
to pay amount and controlling remains in the same hand. Firm has to give advertisement
in new paper regarding selling and have to make contract with purchaser.

b) External sources
These are such funds which are collected by the firms from outside sources. It is
called equity financing in this organization share their possession with lenders. One of the
most common external source is venture capital in this owner of the entity has to share
ownership with lenders. They have to give stake in the business and have to pay dividend
to them it is economic implication of this source (Zheng, Xu and Gu, 2013). Legal
agreement form between both parties and both have to be agree. Bank loan is another
type of external source it is debt financing in which company pays interest to banks
against loan. Legal contract between lender and borrower made in which they clarify
terms and conditions of loan. Ownership and controlling remain in same hand (Boyer and
Blazy, 2014).
1.3 Appropriate source of finance for Clariton Antiques Ltd
Expansion of business is main objective of the Clariton which can be fulfilled by
taking loan from banks. It would be appropriate source of finance. As interest rate for
startup business are low so it is affordable and partners will be able to take their decisions
without any third party influence. This economic source can help in raising capital of the
cited firm significantly. Borrowing money from financial institute is easy and cited firm
can open new branch easily with this money (Herzallah, Gutiérrez-Gutiérrez and Munoz
Rosas, 2014).
Retained earning can also be used by Clariton for further development of the
company. In this no economic cost is attached so economically it is another appropriate
source of finance available to the business. Power and possession will be in control of all
partners and they will not have to share it. So it would be suitable source of fiancé for the
cited firm. With the help of both source organization will be able to raise money and
would be able to open another branch easily (Hossain and Kauranen, 2016).
Task 2
2.1 Cost of financial sources
Every source has some economic or legal cost attached with it. It is the responsibility of
financial manager to opt the suitable option which can raise capital with minimum cost.
For instance if Clariton goes with bank loan then interest cost is associated with it, as
cited firm has to pay annual interest on borrowed money (Herzallah, Gutiérrez-Gutiérrez

and Munoz Rosas, 2014).. If it opts venture capitalist then dividend cost is associated
with it as it would be necessary to pay dividend to investors. Same as possession cost is
also associated with this source of finance. If it tries to raise capital with the help of sales
of assets then advertisement cost has to bear by the organization. “We Finance Limited”
has approached to Claritoin for investment and it has demanded 20% stake in the
business. Finance brokers are another source of finance which can be chosen by cited
firm. Cost of venture capital and finance broker are as below described:
a) Dividends: It is the cost which is attached with venture capital. As Clariton will have
to pay dividend to “We Finance limited” (Hossain and Kauranen, 2016. Apart from
this entity will get rights to attend board meetings and its decisions will have to
consider by partners. As it is equity financing, We finance is demanded 20% stake
means every year organization will have to pay 20% dividend of its profit (Boyer and
Blazy, 2014)..
b) Interest: It is another cost which is associated with finance broker, as bank will
charge 2% annual interest and broker will charge commission of 1%. So it will create
economic burden on cited firm (Herzallah, Gutiérrez-Gutiérrez and Munoz Rosas,
2014). It is also called as debt financing. For instance Clariton wants loan of 500000
then cost of interest would be :
Interest= 2%* 500000 + 1% brokerage
Interest= 10000+5000
Interest cost= 15000
c) Tax: It is another cost which is associated with both the sources, as cited firm will
have pay tax on its profit. Then can reduce net profit of the organization. For instance
30% corporate tax is to be paid by them then cost of tax will be calculated as:
Cost of debt = 2% * ( 1- 0.3) * £500,000 = £7000
Plus 1% Admin fee = 1% * £500,000 = £5,000 which means total debt cost is 12000.
2.2 Importance of financial planning
Economic forecasting is the process of determining the future capital requirement in the
business. There are several reasons due of this it is very important (Herzallah, Gutiérrez-
Gutiérrez and Munoz Rosas, 2014).The main reason is that it helps in taking investment
decisions and by this way organizations will be able to ensure adequacy of funds. Long term

profit planning can be done by entities by making effective financial planning. Foreseeable
problems of business can be solved by the corporation easily with the help of economic
forecasting. Company can face external changes through availability of enough funds (Tsai,
2015).
a) Budgeting: It is one of the main reason of making financial planning. Estimation of cash
inflow and out flow is termed as budget. Economic forecasting helps Clariton in making
proper budget so that utilization of funds can be done significantly. By this way issues
related to surplus or shortage will not take place in the cited firm (Rupeika-Apoga, 2014).
b) Implication of failure to finance adequately: Wrong decision related to investment and
any other economic activity can be negative for the organization. Company can get failed
to run their operations well. If firm fails to generate income or profit due to insufficient
funds which means financial planning of the organization is not good (Herzallah,
Gutiérrez-Gutiérrez and Munoz Rosas, 2014).
c) Over trading: Clariton is engaged in selling of antiques items. In this business it should
ensure the cited firm purchase goods from suppliers as per the demand of consumers.
Huge difference between demand and supply can crate problem for the cited firm. Issues
related to over-trading can be minimized with the help of financial planning (Hossain and
Kauranen, 2016).
2.3 information require to make effective decision
Financial information are those details which define the worthiness of the company.
Before granting loan or before investing big amount in any organization, all investors and
banks look upon the economic condition of the organization. These details can be gathered
by looking upon the accounting statements of every year. This information help them in
taking appropriate decisions (Osei-Assibey, 2013.).
a) The partner: Personal saving is one of the cheapest source of finance, as Clariton is
partnership firm so all partners can invest their own capital in the cited firm. But before
investing amount they need information like total assets value, previous profit, dividend,
liability etc. By going through all these detail partners can make their investment
decisions (Hossain and Kauranen, 2016).

b) Venture capitalist: Before investing in Clariton “We Finance Limited” will require
information like profit history, growth ratio, liquidity position of the company, track
record, net assets value, tax paid by firm, dividend policy, solvency ratio etc. These
details help investor in taking their investment decisions.
c) Finance broker: Brokers have good contact with banks they can arrange loan for the
start up firm like Clariton antique Ltd. But before granting loan to them they need
information like market position of the company, repay capacity, previous liability (long
term and short term), assets value, and credit worthineness of partners (Osei-Assibey,
2013.). All these details can help broker in knowing whether given amount will be repaid
by borrower or not. On behalf of that, brokers take their decisions.
All these detail help people in knowing real position of the organization so that
they can decide how much amount should be invested in the organization.
2.4 Impact of sources on financial statements
Venture capitalist and finance brokers are two main source available for Clariton antiques
Ltd. Cited firm can raise its capital by using these sources, but these impact on the financial
statement of the organizations (Osei-Assibey, 2013.).
a) Venture capitalist: Investors invest their money in the business for getting higher return.
Their money increase cash inflow in the business and impact on the cash flow statement
of the organization. As We finance limited is asking for 20% stake in the business which
means Clariton will have to pay 20% dividend to capitalist. That amount will reflect into
income statement in the expenses side. Dividend paid can decrease revenues of the
company. But it enhances capital side of balance sheet that is the positive impact of
venture capitalist in the balance sheet account (Chugan and Singh, 2014).
b) Finance broker: they are mediators and support business in selling their assets and in
granting loan for them. By selling assists balance sheet get affected as it decreases assets
of company. If Clariton takes loan then it will increase long term liability and it will
reflect in the liability side of balance sheet. On other hand it will impact positive on the
balance sheet as capital side will get strong. But cited firm will have to pay tax, brokerage

and interest to bank and brokers. So this would be expenses for the entity and it will
impact on the income statement of the organization (Osei-Assibey, 2013.).. .
Task 3
3.1 Prepare cash budget
Cash budget is the projection or review of expected cash receipt and payments. By this
way organizations can estimate their future revenues significantly and can make strategies to
enhance cash inflow in the near future. Usually it is prepared by the firms for one year and
then it gets broken down in monthly periods. It has three key components cash inflow,
estimation of outflow and cash balance. Main objective of preparing cash budget is to project
cash position of firm in future period. Proper utilization of ideal cash can be done with the
help of cash budget (Osei-Assibey, 2013.).

From the above cash budget of Clarion it can be analyzed that management of
working capital of cited firm is not good. In the month of January its cash inflow was 157500
whereas in the same month total payments were 807250. This figure shows that cash
management strategy of the organization is poor. Company is not capable to manage their
operations well. But in the month of February it has been shown that Clariton has improved
its performance and in this month it was able to manage its liability as cash inflow was
higher than cash outflow. In further months also it has performed well (Tsai, 2015). Now it
has to look upon increasing sales of the company so that funds can get raised and cited firm
can expand or open its new branch easily. For that it can give trade discounts to customers. It
is good strategy and can help in increasing sales revenues of the entity.
3.2 Unit cost and pricing decisions of Clariton Antiques Ltd
To sell one unit of goods expenditure incurred by the firm is called as unit cost. By this
way cost of company can be measured by the finance measures. Clariton sells antiques items
to end users, for such type of entities it is important to calculate unit cost. For the cited firm
fixed expenditures would be salaries and rent of premises. As these expenses do not get
influenced by demand. Variable cost of the company would be utility bills, transportation
cost etc. As if demand is high then variable cost will get increased (Rupeika-Apoga, 2014).
For instance: rent paid by cited firm 25000, salaries to staff 30000, transportation charges
25000 and utility bill 15000. In addition, Clariton is assuming to produce 100000 units then
calculation of unit cost would be:
Unit cost= 25000+30000+25000+15000/10000
Unit cost = 95000/10000
Unit cost= 9.5
It means cost to sell one unit is 9.5, on behalf of that cited firm can set its prices. If it is
assumed that Clariton wants profit of 30% then
Selling price= cost per unit + unit cost* profit percentage
Selling price = 9.5+ 9.5*30%
Selling price=9.5+ 2.85

Selling price=12.35
So if Clariton set its price 12.35 then it can get profit of 30% easily. Hence, it can be said
that to take pricing decision it is necessary to calculate unit cost. It would help the firm in
making appropriate pricing decisions.
3.3 Financial analyses of two investment projects
Evaluation of the several project’s attractiveness with the purpose of investments are
called investment appraisal techniques. There are many techniques through which evaluation can
be done such as NPV, ARR, PBP etc (Mancusi and Vezzulli 2014).
Net present Value (NPV)
It is the calculative method through which finance manager can measure difference
between present cash outflow with future returns. Discounting factor is involved in it to know the
actual return value. It is effective tool through which it can be measured that whether investment
will increase value of firm or not. It focuses of cash inflow, it may be possible that some projects
would not generate income until three years, it does not mean that investment is not good. It is
based on assumption so actual results may get differed (Mancusi and Vezzulli 2014).
14% PV factor is given, from the calculation it is analyzed that both are viable
investments as both are giving positive results as per the expectation of Clariton. But cited firm
should invest in project2 as it would be more feasible for the organization. Because it can
increase firm’s value more than project1 (Net present value method, 2015).
Average rate of return (ARR)

It is another technique to evaluate the projects, As it concentrates on the specific return
for particular time period. It focuses on net earning on investment. Time, risk factors are
completely ignored by this tool (Mancusi and Vezzulli 2014).
From the calculations it can be said that both projects are good as in both Clariton can get
return more than 35%. But if it has to choose one then defiantly investment in project2 is better
because in this it is able to get high return of 43.56% this can give good return to the
organization and can make capital side more strong.
Pay back period (PBP)
It is simple calculative method and pay focus on the risk factor, It defines that investment
in such project which can give return soon would be more profitable. As company will be able to
recover investment amount soon (Tsai, 2015).