MFRD: Analyzing Financial Resources and Decision-Making Report

This report focuses on the financial resource management of Clariton Antiques Ltd. It begins by exploring various sources of finance available to both unincorporated and incorporated businesses, evaluating the implications of using internal and external funding, and identifying the most appropriate sources. The report then delves into the costs associated with different financing options, emphasizes the importance of financial planning, and assesses the information used in financial planning. It also analyzes the impact of financial statements on the business. Further, the report includes a cash budget analysis, calculation of cost per unit, and an examination of investment appraisal techniques. Finally, it discusses the key components and format of financial statements and interprets their implications for the company's financial health and decision-making. The report concludes with a summary of the findings and recommendations for effective financial management.

MANAGING FINANCIAL
RESOURCES AND
DECISION
MFRD

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance .................................................................................................................3
1.2 Implication of using external and internal sources of finance ..............................................4
1.3 Most appropriate sources of finance .....................................................................................5
TASK 2............................................................................................................................................6
2.1 cost of two sources of finance ...............................................................................................6
2.2 Importance of financial planing ............................................................................................7
2.3 Assessment of information of financial planning .................................................................8
2.4 Impact of financial statements ..............................................................................................9
TASK 3..........................................................................................................................................10
3.1 Cash budget .........................................................................................................................10
3.2 Calculation of cost per unit .................................................................................................12
3.3 Investment appraisal techniques .........................................................................................12
TASK 4 .........................................................................................................................................15
4.1 Key components of financial statements ............................................................................15
4.2 Format of financial statements ............................................................................................15
4.3 Interpretation of financial statements. .................................................................................16
CONCLUSION .............................................................................................................................18
REFERENCES..............................................................................................................................19
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INTRODUCTION
Strategic and systematic approach is required for managing the financial resources of the
organization. Many critical and complex situations are faced in the enterprise while managing
the funds and due to that overall performance of the business in effective way (Malmi and
Granlund, 2009). Present report is based on Clariton Antiques Ltd which was founded by joint
efforts given by business partners. The report describes about different sources of finance that
are available for unincorporated business and incorporated business. In addition to that
assessment of implication for using internal and external sources of finance has been mentioned.
Moreover, evaluation of appropriate sources of finance has been done and analysis of cost of the
two sources of finance has been done in the report.
TASK 1
1.1 Sources of finance
Different sources of finance are available for unincorporated business and incorporated
business. Various sources of finance supports for executing the business functions in effective
way. Wide range of sources are as described :-
UNINCORPORATED BUSINESS :- These types of business are explained as commercial
undertakings that are closely held by different groups (Khan and jain, 2006). Cited firm Clariton
Antiques Ltd has been established as an unincorporated business and all the operational activities
of the entity are performed in the same manner. Prominent sources of finance that are available
for the business includes sourcing off monetary resources with the help of investors (Hayre,
2013). Under this method allocation of capital is done with objective to achieve financial returns
in the future.
There are many advantages for using this source and it provides a method for arranging
funds for carrying out business activities in by gathering funds in cost effective manner. For
starting a new business funds can be arranged and allocation of capital can also be done in
effective way (Thakur and Chakraborty, 2015). Along with this Venture capitalist method can
also be used for collecting sources of funds for running out business activities. By making use of
this method tax benefits to investors can also be gained. However, it is required that clear exit
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strategy for investors should be made and shared control should be done so that required funds
can be collected properly (Strange, 2015).
INCORPORATED BUSINESS :- Business organizations that are registered formally are
included in the category of incorporated business. There are many advantages for starting the
operations of entity as an incorporated business (Prakash, 2014). Benefits are received in
deduction of taxes and it also supports for getting protection of liabilities. Shares can be sold and
funds can be raised for carrying out business activities in effective way. By making use of this
method more funds can be collected for carrying out business functions (Vimpari, Kajander,
and Junnila, 2014). In addition to that large scale investments can also be made possible by
making use of this method.
However, there are some disadvantages of this method and share values can rise and fall
and due to that company values will also get fluctuated. This technique is also expensive to set
up and shared control is a difficult task to achieve. Bank loans can also be taken and larger sums
can be received for investing and expanding the business (Lapsley, Miller and Panozzo, 2010).
There are some disadvantages of this method also and it may be vulnerable to change interest
rates. Government grants and loans can also be taken and it will help for running out operational
activities of a new startup business (Li and Chi, 2013). Government grants loans at a cheaper
rates and some grants given by government are non repayable. There are some disadvantages
also and these grants given by government are limited in size and they are stricted.
1.2 Implication of using external and internal sources of finance
There are some implications for using internal sources of finance and using external
sources of finance. Evaluation of both the sources is as mentioned :-
External sources of finance :- There are many sources which can be used for funding the
operational activities of the entity. Bank overdrafts can be taken and it will support for getting
and maintaining short term flows, no security is needed for taking bank overdraft and it will
support for gaining required money for carrying out required business activities (Lazonick,
2012).
Internal sources of finance :- Internal sources of finance includes sale of assets and sales of stock
. Organization can make use of these medium for financing the operations of business and it will
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support for carrying out business operations in effective way. Other than that there are various
benefits for using these sources for funding the operations of business. Liabilities of the entity
reduces and it will help for enhancing profitability and financial revenues of the enterprise.
Personal savings can also be used for starting the operations of business. There are some
advantages of using personal savings for running business functions and there is no need for
paying repayment cost (Jones, 2012). There are some disadvantages also and limited funds are
available and investments are restricted. Other than this money can be borrowed from family
members and friends and existing profit of the business can be used for funding the financial
activities of the entity. There are some advantages of making use of this method and it provides
method for using cheaper loans for carrying out business activities.
In addition to that Bank loans can also be taken which will help for investing large sums
to invest in the business activities. However, there are some disadvantages of this method and
sometimes it becomes vulnerable for changing interest rates (Mina, Lahr and Hughes, 2013).
There are some other long term external sources of finance that are available for carrying out
business activities. Remortgage of property can be done and it will help for enabling payments
over long term. However, there are some disadvantages also for making use of this method and it
may become vulnerable for changing interest rates (Buchner, Abramskiehn and Mazza, 2014).
Funds can be collected from investors and shareholders and it helps for enabling long term
investments. Moreover, there are disadvantages for making use of these methods and it may
become expensive to set up the shareholding and shared control can also become difficult. Share
values can rise and fall and due to that overall company value can get affected. Grants and loans
received from the government also provides a method for availing cheaper loans. Loans provided
by government are cheaper than loans provided by other sources. Venture capitalist method also
provides medium for financing the business activities. Venture capital provides tax benefits for
the investors and it requires clear exist strategy for investors.
1.3 Most appropriate sources of finance
It is required by Clariton Antiques Ltd to finance the business activities. Company can
make use of internal and external sources of finance for funding the starting operation of the
enterprise. Existing profit and retained earnings of the entity can be used as an internal source of
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finance. Similarly, external sources of finance includes taking bank loan and overdraft. There are
many advantages of taking bank loan and it will support for short term cash flow in the
enterprise. No security is needed for taking overdraft. There are some disadvantages also and it
includes repayable on demand and often high rate of interest is charged by banks for giving bank
overdrafts (Acquaah, 2012). Moreover, Bank loans are also appropriate and effective sources
that can be used for funding the financial resources of the organization. It provides a medium for
making investments by taking large sums and loans from the bank. However, there are some
limitations also that are associated with this method and it includes changing and higher interest
rates that are charged by banks (Balaman and Selim, 2014). All the above mentioned methods
provides an effective medium for funding the existing financial activities of the entity. Clariton
Antiques Ltd company can make use of any of the mentioned sources for carrying out the
required activities and funding for business operations can be made possible through this.
TASK 2
2.1 cost of two sources of finance
There are some significant cost of finance that occurs for Clariton Antiques Ltd in
carrying out financial activities of the entity. It is required that cost of finance should be properly
understood and analyzed so that better and effective decisions can be taken for carrying out
business activities.
Share capital :- Share capital is type of capital that is received by the organization by
issuing shares. Investors and shareholders invest money for running the business activities and it
helps for executing required business functions in effective way (Driver, 2015). Return on
money needs to be given to the shareholders so that they should receive positive returns on the
money invested by them. Expected amount is desired financial outcome that is expected by
investor on money invested by them. Past financial documents and profitability record of the
enterprise gives details to the shareholders on the basis of that shareholders expects about
expected outcomes that are likely to received by shareholders.
Interest and tax :- it is required that loan and bank overdraft that has been taken by
Clariton Antiques Ltd should be properly paid on due time. Financial revenues and profitability
of the enterprise gets affected due to it (Freitas, Geuna and Rossi, 2013). Liabilities on the
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business increases for long period. It is vital that dividends should be paid to shareholders on
proper-time. Financial brokerage arranges loans for the enterprise and commissions are taken by
them for arranging necessary funds for the business. Tax benefits are associated when the
organization takes loan from banks and other financial institutions (Buchner, Abramskiehn and
Mazza, 2014).
Dividends :- Shareholders invest money for carrying out required operations of the
enterprise and it supports for funding the business activities. It is required that Clariton Antiques
Ltd should give dividends to the shareholders of the organization. It is vital that shareholders
should be provided with required dividends. Organization is asking for 20% stake and it is too
high (Mina, Lahr and Hughes, 2013). Company have to give shares against the money that is
being invested by the shareholders and it becomes responsibility of the organization to pay
required dividends.
2.2 Importance of financial planing
Clariton Antiques Ltd required to do proper financial planning so that required activities
of the firm can be carried out properly. It is assertive that appropriate financial plans should be
formulated in the enterprise so that required functions can be performed in effective manner.
Policies and strategies are made on the basis of financial plan and it supports for taking proper
decisions for making investments in the entity. Company requires financial funds for executing
the required business operations (Li, and Chi, 2013). Economic planning can be done in the
enterprise and it will help for doing financial planning in effective way. There are various
positive benefits that are reaped by the organization by doing systematic financial planning and it
supports for gaining required outcomes of business in organized and systematic way.
Clariton Antiques Ltd will become capable for minimizing the business risk that are
faced by the enterprise and it will support for reducing the negative impact of risk. Profitability
and financial revenuers earned by the enterprise will get affected and due to that better outcomes
will be gained (Lazonick, 2012). Uncertainties in the enterprise will reduce and better and better
decisions and outcomes will be received by the enterprise. Moreover, budgets are also prepared
and on the basis of that funds are allotted in the enterprise. It is type of future plan that is
prepared for carrying out required business functions In planned way. Performance of the
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organization against set standards and targets can be measured and it will help for identifying
weak performing areas of the enterprise in effective way. Forecasting will become easy and it
will help for reducing uncertainties from the organization.
Better and effective control is done on the financial performance of the business.
Budgeting supports for minimizing the surplus in the enterprise and shortage of funds can also be
avoided by making use of this approach. Clariton Antiques Ltd is planning for expanding its
existing business operations and financial planning will help for making economic control over
the financial activities that are performed in the enterprise (Vimpari, Kajander and Junnila,
2014). Optimum utilization of resources of the organization will become possible and it will also
support for avoiding financial failures in the enterprise. Future uncertainties can be easily
foretasted and better and effective utilization of resources of the company can be ensured. Set
targets and goals of the enterprise can be achieved easily and it will help for gaining required
outcomes of business in effective way. In addition to that over trading can be avoided in the
company and it will support for reducing unnecessary steps from the functional activities that are
performed in the entity (Prakash, 2014). This types of plan help in ensuring that business should
be run smoothly and it will also help for managing the cash outflow and cash inflow in the
enterprise.
However over trading is defined as situation when products are manufactured in more
number of quantity than the actual demand that is available in market. Profitability of the
enterprise decreases and it will support for making balance between demand of the product in
market and supply of the product (Strange, 2015). Effective financial planning will support for
developing coordination between different activities that are required to be performed in the
entity. All the departments that are working in the organization will develop effective
coordination and smooth functioning of the organization will be ensured through this.
Performance and progress of the entity can be measured against the set standards. It will help for
taking effective measures for reducing and eliminating flaws from the operational activities that
are performed in the entity (Hayre, 2013). Better financial outcomes can be gained and
profitability of the enterprise can be enhanced by taking effective and better financial decisions
for the enterprise.
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2.3 Assessment of information of financial planning
Clariton Antiques Ltd needs to have proper information for taking financial decisions for
carrying out and executing business activities in effective way. It is vital that sufficient
information should be made available with the business so that systematic and strategic decisions
can be taken for the enterprise (Malmi and Granlund, 2009). Primary and secondary data
provides required data, facts, figures and information that is required for carrying out required
business functions in effective way.
Venture capitalist :- According to the given case scenario finance limited has given
options to Clariton Antiques Ltd for acquiring 20% stake in business. Finance limited is offering
£0.5m and it is a big benefit for the organization. It is required that information related to debt
ratio, dividend policy, profitability ratio, past performance of the business should be collected.
This information is required for carrying out business functions in effective way (Freitas, Geuna
and Rossi, 2013). Finance limited will become capable for assessing and identifying return on
investment and it will also support for taking decisions to make investments in Clariton Antiques
Ltd. For example income statement and balance sheet of the organization provides required
details and finance limited can take effective decisions for carrying out required business
activities through this information.
Finance broker :- financial brokers work for providing required advice to the borrowers
and they are having links and connections with money lenders. Financial information about
Clariton Antiques Ltd can be collected from financial brokers and it will support for taking
effective and better decisions for carrying out required functions (Jones, 2012). Moreover, details
about financial worthiness of the entity can also be collected and it will help for data and figures
about interest bearing capacity of the firm can also be assessed by making use of information that
is being provided by finance brokers.
The Stakeholders :- Clariton Antiques Ltd have different stakeholders that supports for
carrying out required functions of the entity in effective way. Customers, employees, business
partners and shareholders are key people who are responsible for carrying out the required
business activities in effective way (Prakash, 2014). Staff members need details about financial
performance of the business and it supports them in taking decisions related to financial
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performance of the business. Details about efficiency, growth, solvency and liquidity related
information is required by prominent stakeholders of the enterprise. Shareholders require details
about overall financial performance of the business so that they can take decisions for making
improvements in performance.
2.4 Impact of financial statements
Financial statements of the Clariton Antiques Ltd gets influenced and affected. It is
assertive that balance sheets, cash flow statements and income statements should be prepared by
following international accounting standards (Hayre, 2013). Company uses different types of
internal and external sources for funding the operations of the entity. For example Bank loan and
overdraft increases liability on the company and overall financial performance of the business
gets affected due to it.
Income statements, cash flow statements and other financial statements of the enterprise gets
affected and overall liability on the organization increases due to it. Company has options for
choosing following sources :-
Financial broker :- If this source will be chosen by Clariton Antiques Ltd than due to that
shareholder equity in balance sheet will be affected. It is required that commissions should be
paid to the brokers for work completed by them (Vimpari, Kajander and Junnila, 2014). Overall
profit earned by the enterprise will reduce due to it and financial performance of the enterprise
will get affected due to it.
Venture capitalist :- If this source will be selected by Clariton Antiques Ltd than due to
that shareholder equity side in the balance sheet will get affected. Impact will be observed on the
cash which is being raised in the organization. Cash outflow and cash inflow statements of the
enterprise will be affected and cash statements of the enterprise will get affected due to it.
TASK 3
3.1 Cash budget
Cash outflow and cash inflow are major cash statements of the organization that are used
for preparing cash statements in the organization. Cash inflow is defined as income earned by the
organization by selling current assets and stock and cash outflow statements are defined as
money spent by organization for executing required operations of the enterprise in effective way.
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Cash receipts and payments are depicted by cash budget and it provides a medium for the
organization to measure its existing performance against the set standards. It is required that
Clariton Antiques Ltd should prepare its cash budget in systematic way. Cash budget of the
organization is as follows :-
Details January
month
February
month
March
month
April month May month June month
£ £ £ £ £ £
Cash inflow
details
Information
about Sales
on cash
15000 22500 300000 15000 15000 3750
Data of
credit
collection
142500 262500 405000 547500 330000 285000
Sum of total
cash inflow
157500 285000 435000 562500 345000 288750
Details
about Cash
outflow
Sum of
payments
807250 137250 119750 437250 227250 219750
Complete
outflow of
cash
807250 137250 119750 437250 227250 219750
Net cash
received
(Sum of
Total
inflow- Sum
of total
outflow of
-649750 147750 315250 125250 117750 69000
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cash)
Net
Opening
cash balance
110000 -539750 -392000 -76750 48500 166250
Net Closing
cash balance
-539750 -392000 -76750 48500 166250 235250
IT has been observed from the cash budget that financial performance of the enterprise is
moving in positive direction. Net actual expenses that are earned by the organization are shown
in the cash budget. It can be assessed that financial performance of the company is not consistent
and fluctuations have occurred. Negative cash balance is shown in the cash budget in the months
of January, February and March. Company has made excessive amount of payment in the month
of march. For making enhancements in cash inflows company canm concentarte on enhancing its
existing sales.
3.2 Calculation of cost per unit
Unit cost is defined as calculation done for assessing expenses that are being made by the
company for manufacturing a single unit of product. Final products are manufactured through
some investments that are being made in terms of direct cost that includes salaries of employees,
rent of building, cost of furniture (Lapsley, Miller and Panozzo, 2010). In addition to that cost of
variable expenses includes cost od rough material that is used for producing a single unit of
product. The formual which is used for calculating unit cost is as described :-
UNIT COST = TOTAL COST (FIXED+VARIABLE)/ TOTAL NUMBER OF UNITS
THAT ARE PRODUCED
As per the given case scenario Clariton Antiques Ltd works for manufacturing products.
Fixed cost and variable cost are two different types of cost that are incurred by the organization
for making their final products.
3.3 Investment appraisal techniques
Investments appraisal techniques provides effective methods for firms to evaluate best
returns that can be gained from a project. Some methods which are used in Clariton Antiques Ltd
is as mentioned :-
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Pay back period :- In this method initial investment is calculated over cash inflow period. Best
projects are recovered in this method who provide more returns as compared to other projects.
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Formula for calculating pay back period = INITIAL INVESTMENT/ CASH IN FLOW PER
PERIOD
Average rate of return :- in this method actual income that can be received from a project are
calculated. Return on percentage is calculated under this method and it provides a easy medium
for comparing different projects over a given period of time. The formula used for calculating
average rate of return is as followed :-
ARR= AVERAGE ACCOUNTING PROFIT / INITIAL INVESTMENT
Net present value :- In this method present value of investments are calculated with future value
of cash. Clariton Antiques Ltd company can identify increases in investment of the company.
Presently company has NPV of 2.53M. It can be observed from the above mentioned
calculations that both the projects are receiving more values than their set values.
TASK 4
4.1 Key components of financial statements
There are some significant components of financial statements that are needed to be
included while making financial statements :-
Statement of cash flow :- Clariton Antiques Ltd needs to prepare this statement and it will be
divided in two different parts naming cash inflows and cash outflows. It can be assessed from the
cash flow statements about the expenses that have been incurred in the entity.
Income statement :- In this actual profit gained by the organization are recorded under the
financial statements (Freitas, Geuna and Rossi, 2013). Two different sections under this are
profit and loss and earning of the company are also described at the end of financial year.
Statements of changes in gains and equity :- retained earning of the organization and information
about shareholder equity are two main key components that are included under the financial
statements.
Statements of financial positions :- These statements are used for making balance sheet at the
end of financial year. Assets, liability and equity are three major components that are included
under financial statements (Balaman and Selim, 2014).
4.2 Format of financial statements
Two different formats that are used under the financial statements are as follows :-
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Sole trader :- These are business in which all the decisions for carrying out business activities are
taken by single individual. The main comparison that are done is about adding taxes and it is
required that information about taxes should be mentioned in the financial statements of sole
trader. It is not required that specific formats should be followed in preparing financial
statements.
Partnership :- Two or more partners invest money for executing the required business functions.
Profit and losses that are received by the firm are divided among different partners that invest
money in the organization.
4.3 Interpretation of financial statements.
Clariton Antiques Ltd prepares financial statements and manager of the firm do
interpretation of financial statements so that overall financial performance of the enterprise can
be measured.
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Interpretation of ratios is as described :-
Debt to equity ratio :- these ratios are calculated by firms for measuring the financial leverages of
the enterprise. It has been observed from the above table that from year 2015 to year 2016 the
ratios are increasing and it reflects that debts are higher in earlier year.
Current ratio :- It is defined as capability of firm to repay the liability. It has been observed that
in year 2016 debt ratio increased by 2.48%.
Quick ratio :- It defines about capabilities of firm for having sufficient assets for converting them
into cash at the time of requirement.
CONCLUSION
Summing up the present report it can be concluded that financial planning supports a
business for executing their required business functions in effective way. Financial planning
done in a systematic and organized way supports for reducing the risk that are faced by the
enterprise. It is required that managers should do interpretation of financial statements so that
better and effective financial decisions can be taken for the enterprise.
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