Clariton Ltd: Financial Sources, Planning, and Decision Making Report

This report analyzes the financial strategies of Clariton Antiques Ltd, focusing on its expansion plans and the need for funding. It explores various sources of finance, including personal savings, sales of assets, bank loans, venture capitalists, and government grants, evaluating the implications of each. The report identifies venture capitalists and bank loans as suitable sources, comparing their advantages and disadvantages. It further analyzes the costs and tax implications of these financing options, including dividends and interest. Financial planning, including budgeting and cash management, is highlighted as crucial for success. The report assesses the information needs of different decision-makers, such as partners, venture capitalists, and finance brokers. It also examines the impact of chosen financial sources on the company's final accounts, including profit and loss statements and balance sheets. A cash budget is prepared and analyzed to aid in decision-making, followed by the calculation of unit costs for pricing decisions and an evaluation of proposed investments. The report concludes with a discussion of financial statement components and the interpretation of Clariton's financial statements using ratio analysis.

MFRD

Table of Contents
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
1.1 Sources of finance available to Clariton Ltd....................................................................3
1.2 Evaluating the implications of different sources of finance.............................................4
1.3 Identifying the suitable financial source of business.......................................................5
TASK 2......................................................................................................................................6
2.1 Analyse the cost of two source of finance with their tax implications............................6
2.2 Importance of financial planning for Clariton Antiques..................................................7
2.3 Assessing the information need of different decision makers.........................................7
2.4 Impact of financial source on final accounts....................................................................7
TASK 3......................................................................................................................................8
3.1 Preparing and analyzing cash budget for the purpose of decision making......................8
3.2 Calculating unit cost for taking pricing decision.............................................................9
3.3 Evaluating the viability of proposed investments..........................................................10
TASK 4....................................................................................................................................12
4.1 Discussing the components of financial statements.......................................................12
4.2 Comparison of the formats used by Clariton Antiques to present their financial
statements.............................................................................................................................13
4.3 Interpreting the financial statements of Clariton using ratios of current and previous
year.......................................................................................................................................13
CONCLUSION........................................................................................................................15
REFERENCES.........................................................................................................................16

INTRODUCTION
Management of financial resources is the main tasks or activity of the firm which lays
high level of emphasis on the assessment of deviations. By using monetary tools business
entity can identify the causes of deviations and thereby becomes able to develop highly
competent framework. This assignment is based Clariton Antique Ltd which is planning to
expand business operations and functions with the motive to widen the research. For
expansion purpose, business entities require fund for the establishment of another unit. In
this, report will describe the financial sources that can be undertaken by the owner to raise
funds. In addition to this, the main focus on such study is to highlight the manner in which
monetary tools and technique facilitate better and effective decision making.
TASK 1
1.1 Sources of finance available to Clariton Ltd
Unincorporated business
 Personal savings: By using own savings sole trader can start venture more effectively
and efficiently. In this, business entity is not entitled to pay any kind of interest to
others which in turn may result into high savings.
 Sales of fixed assets: Business entity of Clariton Ltd can enhance fund by selling
unused assets such as land, plant etc at their scrap value.
 Short term lease: It is the most suitable source that can be undertaken by an
entrepreneur for fulfilling financial needs. On the basis of this aspect, by taking assets
like machinery, land & buildings, furniture’s and fixtures on lease entrepreneur can
implement the business idea within the suitable time frame.
Incorporated business
Clariton Ltd comes under the category of incorporated business that can raise funds
by considering following sources:
 Bank loan: Entrepreneur can meet financial requirements by approaching to financial
institution. Interest is the major sources of income for banking institutions (Bergbrant,

Bradley and Hunter, 2017). Due to this, firms operated in banking sector are always
ready to offer financial assistance on the basis of collateral security.
 Venture capitalists: With the aim to get higher returns now there are several venture
capitalists firm which offer financial advice to the firm (Abor, 2017). Such firms offer
both monetary and non-monetary advice to the entrepreneur and thereby make
contribution in the attainment of goals.
 Government or European Union grant: To encourage entrepreneurial activities now
European Union provides monetary assistance to the business entities at cost effective
rates. Hence, by presenting plan to European Union committee firm can raise fund to
the significant level.
1.2 Evaluating the implications of different sources of finance
Sources of
finance
Financial Bankruptcy
(priority in
getting back
money: High to
low)
Legal Dilution of
control
Internal source of finance
Personal savings Opportunity cost
in the form of
loss on interest
on capital.
Least No legal
obligations
Low
Sales of assets Expenses in
relation to
registry,
advertisement
are considered
as financial
expenses.
Least Transfer of
ownership rights
Low
External sources of finance
Bank loan Interest on bank
loan
First priority Fulfillment of
documentary
formalities (Kim,
Song and Wang,
Moderate

2017)
Leasing Rent on leased
assets
Lessor has right
to demand for
leased assets at
the time of
bankruptcy.
According to
legal aspects
business entity
is obliged to
make use of
assets in line
with the
contractual
terms.
Limited to
leased assets
European union
grant
In this, business
entity is obliged
to pay interest to
government
authority.
However,
interest rate is
negligible in the
case of
government
grant.
Government
authority also
has right to
demand for
monetary
assistance
provided when
business unit
becomes
bankrupt.
Disclosure of
suitable
information
regarding
business plan
Limited
Venture
capitalists
Dividend
imposes cost in
front of business
unit and thereby
affects
profitability
margin of firm
(Mehri, Jouaber-
Snoussi and
Hassan, 2017).
Least priority Offering of
shareholding
right to investors
such as
participation in
decision making
through voting.
1.3 Identifying the suitable financial source of business

Clariton Antiques Ltd can meet monetary funds and requirements by undertaking
venture capitalists and bank loan source. Both such sources have following advantages and
disadvantage is enumerated below:
Venture capitalists
 Advantages: In venture capitalists source, business entity offers dividend to investors
only when it earns enough amounts of profit. Thus, such source does not impose fixed
burden in front of company.
 Disadvantages: Interference of investors in decision making is high in the case of
venture capitalists source (Mishra, Bag and Misra, 2017). Moreover, venture
capitalists have right to take part in the decision making aspect because they have
more concern towards the monetary aspect.
Bank loan
 Advantages: In the case of bank loan, company enjoys tax exemption. This in turn
helps company in enhancing the profitability aspect to a great extent. Along with this,
in bank loan business unit repays the amount of loan in the form of installment
(Houston, Itzkowitz and Naranjo, 2017). In this way, such source offers high level of
convenience to the organization.
 Disadvantages: In the case of loan, business entity to make payment of interest at
fixed rate which in turn affects working capital and financial position of firm.
TASK 2
2.1 Analyse the cost of two source of finance with their tax implications
Either collecting capital in the form of debt borrowings or going to public charges
several financial costs which are presented here as under:
Dividend: It is the monetary return which is required to be paid by Clariton Antiques
by distribution of profitability. With the current case, it is stated that company can gather
capital by transferring 20% stake to the venture capitalists and in return, firm has to distribute
a proportion of their net profitability in the form of dividend to their investors.
Interest: Clariton can also raise long-term debt borrowings from the commercial banks
and for such financial risk, bank will charge a fixed interest rate (Gilbert and et.al., 2017).

Here, it is presented that Clariton can borrow required fund at 2% interest rate and also have
to pay brokerage at 1%. Thus, its cost can be computed here as under:
Interest: 500,000*2% = 10,000
Brokerage: 500,000*1% = 5,000
Cost of debt: 15,000/500,000*100 = 3%
Taxation: With respect to dividend, there is no tax benefits or relief will be exists to
the Clariton. In contrast, interest payment offers taxation allowance to the business because in
UK, regulatory body, HMRC provides tax relief to the establishment.
2.2 Importance of financial planning for Clariton Antiques
Financial planning is an important area of corporate growth and success which refers to
the procurement of required capital, its optimum & efficient utilization of the fund, cost-
curtailment, cash management and so on. The significance of monetary planning for Clariton
Antiques Ltd is enumerated below:
Budgeting: It is the most critical and important aspect which is regarded as the process
of estimating or anticipating potential capital requirement and possible cost that it will incur
in the forthcoming years. By making budgets for every year, Clariton can detect possible
monetary consequences and design remedial strategies accordingly (Bonaimé, Hankins and
Jordan, 2016).
Consequences of failure to manage funds: Not only the collection of fund is sufficient
for the Clariton to support its expansion plan but also it is essential to make sure that the
funds has been utilized in an efficient and proper way at minimal cost in order to drive better
return. Lack of funds may cause serious cash problems and affects corporate functions in an
adverse manner.
Over-trading: Aggressive expansion and sudden increase in the borrowed capital can
cause excessive cash shortfall due to shortage of cash and affects day-to-day activities of
business in an adverse way (Gilbert and et.al., 2017). It may liquidity and working capital
problems, therefore, Clariton must take extra care to eliminate such situation.
2.3 Assessing the information need of different decision makers
 Partners: They are highly concerned towards the financial performance and position
of firm. Hence, after making assessment of monetary aspects partners decide whether
they need to invest additional funds or not.
 Venture capitalists: Firms like ‘we finance limited’ evaluates the viability of business
plan. Thus, venture capitalists make assessment of market trend, competitor’s strategy

and position, current performance, customer base etc (Abor, 2017). By evaluating all
such aspect venture capitalists firm take investment decision.
 Finance broker: To prepare sound plan finance broker requires information regarding
the profitability, liquidity and solvency aspect. Thus, after making assessment of all
such aspects broker can make competent plan.
2.4 Impact of financial source on final accounts
Selected sources of finance have following impact on final accounts in the following
manner:
 Venture capitalists: In the case of venture capitalists Clariton Ltd will offer return to
the investors in the form of dividend. Hence, it is cost for the company so dividend
expenses are recorded in the debit side of profitability statement. In addition to this,
venture capitalists fund is recorded in liabilities side because firm has to repay this at
the time of dissolution of firm (Mehri, Jouaber-Snoussi and Hassan, 2017). Further,
cash side of balance sheet will also increase with the similar amount that is invested
by venture capitalists firm such as ‘We Finance Ltd’.
 Bank loan and Finance broker: Interest and brokerage are the main expenses which
are associated with such source. Hence, both these expenses are recorded in the debit
side of income statement. Along with this, bank loan is recognized as liability or long
term obligation which business unit has to fulfill after specific time period. In
accordance with dual side effect cash side of balance sheet will incline significantly.
TASK 3
3.1 Preparing and analyzing cash budget for the purpose of decision making
Cash budget may be served as a framework which exhibits monetary inflow and
outflow (Abor, 2017). Budget acts as a guide which in turn provides assistance to the
personnel in spending money more effectually.
Cash budget from the period of January to June is enumerated below:
Particula
rs
Januar
y (in £)
Februar
y (in £)
Marc
h (in
£)
April
(in £)
May
(in £)
June
(in £)
Opening
cash 110000 -539750
-
39200
-
76750 48500
16625
0

balance or
position 0
Cash sales
received
in similar
month 15000 22500 30000 15000 15000 3750
Amount
of sales
received
from
debtor (in
one
month) 120000 240000
36000
0
48000
0
24000
0
24000
0
Cash
Received
(in two
months) 22500 22500 45000 67500 90000 45000
Total
cash
receipts 267500 -254750 43000
48575
0
39350
0
45500
0
Cash outflows
Suppliers
payment 807250 137250
11975
0
43725
0
22725
0
21975
0
Closing
cash
balance
or
position
-
539750 -392000
-
76750 48500
16625
0
23525
0
The above mentioned cash budget shows that Clariton Antiques Ltd received higher
cash from debtors after one month. Further, total cash receipts of firm inclined from £267500
to £455000 at the end of June. During the period of 6 months total cash receipts of firm
fluctuated. Further, supplier’s payment also declined after the month of April. Thus, it can be
stated that business unit is required to make proper estimation of income and expenses after
making evaluation of each business activity.
3.2 Calculating unit cost for taking pricing decision
For the determination of suitable price firm is required to assess unit cost which it is
going to offer customers (Unit cost, 2017). Hence, by adding margin in unit cost entrepreneur
can determine suitable price Clariton antiques Ltd can get desired level of profit.
Calculation of unit cost

Particulars Amount (in £)
Rent of store 2000
Electricity expenses 900
Miscellaneous
expenditure 1200
Maintenance expenses 800
depreciation on fixed
assets 1600
Transportation charges 800
Personnel salaries 10000
Promotional expenses 2000
Total cost 19300
Assessment of price
Particulars Figure (in £)
Total cost 19300
units of antique items 120
unit cost 160.8
Gross profit margin 18%
Price per unit 189.78
Business entity wants to attain 18% profit margin by selling per unit of antique item.
On the basis of this aspect, by selling each antique item @ £189.78 Clariton antiques Ltd can
earn £29 from individual unit. In this way, concept of unit cost helps in making suitable
pricing decisions.
3.3 Evaluating the viability of proposed investments

In order to evaluate the return and profitability aspect business entities of Clariton
Antiques Ltd have undertaken following techniques:
Calculation of payback period, NPV and ARR
Payback period
Yea
rs
Proje
ct A
(in £)
Cumulati
ve cash
flows
Proje
ct B
(in £)
Cumulati
ve cash
flows
1 1.6 1.6 0.8 0.8
2 2.8 4.4 1.4 2.2
3 3.4 7.8 2 4.2
4 3.6 11.4 2.4 6.6
5 4 15.4 2.3 8.9
6 4.2 19.6 2.6 11.5
Project A: 3 + 2.8 / 3.6 = 3.2 years
Project B: 3 + .2 / 2.4 = 3.1 years
NPV and ARR
Years
Project
A cash
inflow
(in £)
PV
factor
@14
%
Discounte
d cash
inflow (in
£)
Project
B cash
inflow
(in £)
Discounte
d cash
inflow (in
£)
1 1.6 0.877 1.40 0.8 0.70
2 2.8 0.769 2.15 1.4 1.08
3 3.4 0.675 2.29 2 1.35
4 3.6 0.592 2.13 2.4 1.42
5 4 0.519 2.08 2.3 1.19
6 4.2 0.456 1.91 2.6 1.18
Total
discounte
d cash
inflow
(TDCF) 11.98 6.93
Initial
investmen
t (II) 8.6 4.4
Net 3.38 2.53