Financial Resources and Decisions Report: Clariton Antiques

This report provides a comprehensive analysis of financial resources and decision-making for Clariton Antiques Ltd, an unincorporated business. It begins by exploring internal and external sources of finance, including owner capital, business loans, retained earnings, and equity shares, along with their implications. The report then delves into the costs associated with different financial sources, such as interest, dividends, and taxes, and emphasizes the significance of financial planning, including budgeting and economic forecasting. The information required for effective decision-making by partners, venture capitalists, and finance brokers is detailed. Furthermore, the impact of financial sources on accounting statements is examined, followed by an overview of cash budgeting, unit cost and pricing decisions, and investment decisions using NPV, ARR, and payback period calculations. Finally, the report analyzes the key components of financial statements, financial formats for sole traders and partnerships, and a comparison of financial ratios to assess Clariton's financial performance.

Managing Financial Resources and
Decisions

Contents
Introduction.................................................................................................................................................4
Task 1..........................................................................................................................................................4
1.1 Sources of finance.............................................................................................................................4
1.2 Implications of financial sources........................................................................................................5
1.3 Appropriate source of finance............................................................................................................6
Task 2..........................................................................................................................................................6
2.1 Cost of financial sources....................................................................................................................6
2.2 Financial planning and its significance..............................................................................................7
2.3 Information requires to make effective decision................................................................................8
2.4 Impact of financial sources on accounting statements.......................................................................9
Task 3..........................................................................................................................................................9
3.1 Cash budget.......................................................................................................................................9
3.2 Unit cost and pricing decisions........................................................................................................11
3.3 Investment decisions........................................................................................................................12
Task 4........................................................................................................................................................14
4.1 Key components of financial statements..........................................................................................14
4.2 Financial formats for sole traders and partnership firm...................................................................15
4.3 Comparison of financial ratios.........................................................................................................15
Conclusion.................................................................................................................................................18
References.................................................................................................................................................19

Introduction
Financial management is the planning and monitoring tool through which an entity can
make effective control over its monitory resources. It support in taking such decisions which
can maximize the value of organizations. Management of economic activities assist in selecting
effective source of finance otherwise entities can expose to higher risk. Current assignment is
based on Clariton Antiques Ltd, it is an unincorporated business which is founded by four
partners. Report will discuss the internal and external sources of finance and their implications
on business (Herzallah, Gutiérrez-Gutiérrez and Munoz Rosas, 2014). Cost of several sources
will be discussed and impact of sources will be illustrated in the study. In addition to this
calculations of NPV, ARR and pay back period will be done for making investment decision. At
the end of report financial performance of Clariton will be analyzed.
Task 1
1.1 Sources of finance
Selection of appropriate source can protect firms from suffering higher risk (Newman, Borgia
and Deng, 2013). Raising money for earning higher profit is difficult task. Sufficient funds can
support in running business smoothly.
a) Unincorporated business
These are commercial enterprises which are ruled by owner of partners. As such type of entities
have not been granted corporate status, so owner is responsible for debts of the company.
Sources of finance for such type of business are as following:
 Owner or partner capital: Clariton is the partnership firm, there are four partners in the
organization and all of them are having equal rights in the organization (Infelise, 2014). Cited
firm is aiming to raise its funds for further development for that all partners can invest their
capital in the business. For increasing cash inflow they can introduce one more partner in it. As
new person will also invest own capital in entity that would help in raising funds.
 Business loan: It is another available source of finance for unincorporated businesses, they can
take support of financial institutions. Bank charges interest and grand loan to start up firms sot
that they can run their operations well (Huang, Rice and Martin, 2015).
b) Incorporated business

These are those firms which are having corporate status and they are legally registered
companies. Owner has benefit of limited liability as if corporation defaults to earn profit then
owner needs not to use personal assets for repayment of debts. Sources of finance available for
incorporated firms are as below:
 Retained Earning: It is the amount of profit which is retained by the business for further
development. Many start up businesses like Clariton believes that it does not have economic
cost so it is effective source of finance (Tsai, 2015). It avoids the situation of loosing controlling
power so most of the organizations opt this source of finance.
 Equity share: Corporations can issue equity shares in public for raising funds. It can enhance
brand name of the company. Ownership gets transferred and person becomes equity holder in
the organization (Mancusi and Vezzulli, 2014).
1.2 Implications of financial sources
a) Internal sources
Many times due to heavy costs of external sources, organizations prefer to use internal funds for
development of the company.
 Sales of assets: It is one of the common source of finance which can help in raising
capital of the company. Clariton can use this source and sales its tangible assets in
market. This money is not necessary to be paid by the cited firm so no economic
implication is here. But for selling assets they have to follow legal guideline and have to
make a legal contract between purchaser and seller. That is legal implication of sales of
assets (Avdeitchikova and Landström, 2016). No possession cost is associated with it so
controlling remain in the same hands, no need to share it.
 Retained Earning: It is retained part of profit of the organization so can be used in the
business operations. No economic, legal and possession cost is associated with this
source of finance. This is own profit so no one will ask for repayment.
b) External sources
Some time due to requirement of large funds, entities collect money from external sources.
Implications of these sources are as below:
 Bank loan: It is appropriate financial source and can raise capital of the company. As if
Clariton goes with this source then it will have to make legal contract with bank this

legal consequences are implications of this source. Interest cost is associated with it that
can increase economic burden of Clariton. But ownership and power need not to be
shared with others (Abascal, Alonso and Pacheco, 2015).
 Venture capitalist: Cited firm can make connection with big investors those who invest
large amount in start up entities. As they have to involve them in business decision and
have to give them power so ownership gets diluted. Apart from this dividend cost is
economic implication of this source. Legal agreement form between owner and investor
as both have to follow laws and conditions of the contract.
1.3 Appropriate source of finance
Cariton is new to this industry, for meeting competition and to achieve its objective of
opening new branch, cited firm is required a lots of funds. But it is necessary to calculate cost of
each source then they have to make their decisions. Bank loan can be suggested as most
appropriate financial source, I can fulfill monitory needs of the company easily (Boyer and
Blazy, 2014). Interest rates of business loans are nominal and repayment is also easy. Banks
grants loan to such type of entities quickly by looking upon their growth and market reputation.
Though long term liability can get increased but with the help of this Clartion can easily meet
its objectives.
Retained earning can also be suggested as good source of finance for Clariton Antiques
Ltd. As it does not create financial burden on the firm so it is good and can give higher return to
the cited firm. Partners can take their decisions easily, they need not to involve outsiders like
investors in the business decisions (Hossain and Kauranen, 2016).
Task 2
2.1 Cost of financial sources
For running business smoothly, organizations are required to have sufficient monitory
resources. But their cost has to be beard by the firms. For instance if entity raise money by
investors then possession cost and dividend cost are associated with it. Equity shares are result
oriented tools or source but owner has to share ownership with the equity holders. Same as
Clariton can choose venture capitalist, “We finance limited” has approached to cited firm. But
company is demanding 20%stake that can create financial burden on the organization

(Jindrichovska, 2013). Finance brokers charge commissions that is another economic cost for
the organization.
a) Dividend:
it is associated with venture capitalist, as Clariton will have to give dividend to the We finance
limited. It increase economic burden of the company to great extent (Rupeika-Apoga, 2014).
b) Interest
Whenever organization borrow money from banks then they charge interest on it. For
instance if annual interest rate of financial institutes is 2% and cited firm has taken loan
of 500000 then cost of interest would be:
=500000*2%+ 1% brokerage
=10000+5000=15000
. This financial cost will have to be faced by the Clariton for longer period.
c) Tax:
Cited firm will have to pay tax on its earned income. Tax rate of government is fixed and
for registered business it is compulsory to pay corporate tax and they have to show tax amount
in income statement (Dutescu, Popa,. and Ponorîca, 2014).
2.2 Financial planning and its significance
Economic forecasting is the mechanism through which organization can forecast future
and can identify upcoming uncertainties. It suggests the projects in which investment can give
higher returns. It is important and gives positive result to the corporations. Budget preparation,
utilization of funds can be done significantly by proper economic planning. It helps to avoid
uncertainties of business and by this way owner can make strategies to making successful to
business (Hsu and et.al, 2014).
a) Budget:
It is the estimated projection of income and expenditures. Economic forecasting is the
tool which assists and guide in making cash and sales budget. By this way owner will be able to
allocate funds in each task and activity. With the help of this evaluation of financial
performance can be done effectively. Cot control can be done by proper budgeting easily that
can enhance revenues of the company (Zheng, X., Xu, Y. and Gu, L., 2013).

b) Implication of failure:
Financial planning is the tool that supports in reducing the circumstances of failure of the
business. Sometimes wrong decisions can revenues of the company. As Clariton is
engaged in selling of antique items so it is essential for the cited firm to purchase right
products and as per the demand. So that operational cost remain in control otherwise it
can create situation of failure for the organization (Dutescu, Popa,. and Ponorîca, 2014)..
c) Overtrading:
It is another importance of financial planning, by looking upon the previous sales records
partners of Clariton can estimate future sale. That would help them in making balance between
demand and supply thus issues related to over trading can be minimized. This will be beneficial
for the organizations as they will be able to make proper control over their expenditures that
will help in accomplishing the objectives of the company (Zheng, X., Xu, Y. and Gu, L., 2013)..
2.3 Information requires to make effective decision
There are many persons those who are involved in the business, all they need verity of
details so that they invest their money in the entity accordingly. If persons invest in wrong
business then it may be possible that individual fails to get its return (Jindrichovska, 2013).
a) The partner: As Clariton is the partnership firm, it has four partners. To raise capital is their
objective and personal saving is one of the best cheaper source of finance through which they
can increase their cash inflows. They need information like solvency ratio, efficiency ratio,
assets value, profit percentage, previous liabilities etc. These details help them in taking
significant investment decisions and they will be able to gain estimated profit on their
investments (Rupeika-Apoga, 2014).
b) Venture Capitalist: We Finance limited is the capitalist which has offered to Clariton for
investment. But before offering cited firm investors look upon the profit history, worth of
products, market position, dividend policy, net profit ratio, assets turnover ratio etc. These
details help them in making good decisions (Hsu and et.al, 2014).
c) Finance broker: Individual is the person who has good connections with financial institutions
and persons can provide loan to start up firms. But broker need information like profit history,
solvency ratio, total current liabilities, repay capacity, credit worthiness of partners etc. These

details can help banks in giving loan to right persons and banks ensure that their loan amount
will be repaid by borrower easily (Jindrichovska, 2013).
These all information can be gathered by looking upon financial statements of the cited firm.
Income statements gives detail about profit history and expenditures, Balance sheet provides in
depth knowledge about assets and liabilities of the organization. Deep study of these data can
help in taking effective decisions which can give positive results to the enterprise (Tsai, 2015).
2.4 Impact of financial sources on accounting statements
Organizations prepare accounting statements to analyze their performance and to keep
records for future. For raising funds they have to take support of financial sources, these source
have some economic cost which impacts on the financial statements of the company.
a) Venture Capitalist
As We Finance limited is the capitalist and is taking interest regarding investment in the
Clariton. This investment can increase capital of the cited firm and it will reflect in the balance
sheet of the organization. As cash inflow will get increased so it will also impact on the cash
flow statement (Hossain and Kauranen, 2016). On other hand cited firm will have to involve
capitalist in the decision making process and necessary to give dividend to them so it will
defiantly impact on the income statement in expenditure side. By adding dividend in the profit
and loss account, net profit will get calculated.
b) Finance broker:
Broker always charge commission that is economic cost for the Clariton. As 1% brokerage and
2% annual bank interest will reflect in the income statement. That will reduce net profit of the
cited firm. Bank loan also impacts on the capital side of balance sheet. And also it increases
liability as well so reflects in the same financial statement (Tsai, 2015). .
All sources of finance impact on the financial statements either they create liability or
increases capital side.
Task 3
3.1 Cash budget
Objective of preparing cash budget is to estimate income and payments in specific time
period of an organization. It is an accounting tool which shows the income which is expected to

be generated by the firm in near future. The purpose of cash budget is to ensure that company
has sufficient cash balance and it can meet with its short term liability. There should not be
unproductive cash balance in the accounts. With the help of cash budget issues like surplus and
shortage can be identified and management would be able to take suitable actions for reducing
such type of accidents (Jindrichovska, 2013). Cash budget of Clariton Antiques Ltd is prepared
as below:
. By looking upon the cash budget it can be interpreted that initially strategies of cash
management of Clariton was not good, as in the month of January its net sales was too low as
compared to its payments. And initially it was not able to meet its short term liabilities. But
later on it has worked and all partners have made good strategies that helped the organization in
achieving its target of raising funds. In the months of February till June its income was higher

than payments (Infelise, 2014). That means cash management strategies have been improved by
the partners for the betterment of the cited firm. Initially net cash balance was negative that is
showing poor performance of the company in its early stage. By this way it can be said that cash
budget is very important and can help in making significant strategies which can help in the
development of the entity (Avdeitchikova and Landström, 2016).
3.2 Unit cost and pricing decisions
Unit cost is the cost of the company which has been incurred in producing one unit. Cost
may be of two types; fixed and variables. Fixed expenditures are those spending which are
necessary to do by organizations for running operations well. Such as salaries to employees is
necessary to pay whether business is earning profit or not. It can be calculated by using
formula:
Unit cost= (direct+ indirect cost)/ total produced units
As Clariton does not manufacture goods it just sales antiques items. So fixed cost for the
cited firm can be as salaries, rent etc. whereas indirect expenditure are utility bills etc (Boyer
and Blazy, 2014). By adding all these costs total payments expenditures can be calculated. For
instance cited firm plans to produce 10000 unit, it salary expenses are 25000, rent 20000, utility
bills are 25000 and other spending are 10000 then
Unit cost = 80000/10000
Unit cost = 8 that means per unit cost is 8 in the Clariton. By using this mount pricing decision
can be taken by the organization (Avdeitchikova and Landström, 2016)..
Pricing decision
On the bases of cost per unit, Clariton can take decision of selling price. For instance
cited firm wants to earn profit of 25% then
Selling price = unit cost+ per unit cost* profit percentage
Selling price= 8+8*25%
Selling price =8+2

Selling price = 10
Which means if Clariton takes decision of keeping selling price 10 then it has great
chance to earn profit of 25% soon. By using unit cost well organizations can reduce their cost
and can make effective strategies to increase revenues of the company. It would help them in
accomplishing their goal in an effective manner (Boyer and Blazy, 2014).
3.3 Investment decisions
It is necessary for the growth of entities that they invest their money in right place.
Organization growth and their future depend upon their investment decisions. Investment
appraisal techniques are those accounting tools which assist owner in taking their decisions.
NPV, ARR, PBP etc. are many calculative techniques which support in knowing about the
feasibility of the projects.
Net present Value (NPV):
It is a calculative technique which focuses on the present cash outflow value and compare
it with future income. If it has huge difference which mean project is not viable and can not get
good returns (Boyer and Blazy, 2014). As it is based on assumption such as PV factor is
assumed by the owner, there is chanced that they may get differed. But is focuses on risk factor
that can give positive results to the entity.
From the above calculation it can be said that both projects are viable and are able to
recover amount soon. Less risk is attached with both projects. Clariton was assuming to invest