Managing Financial Resources: A Case Study of Clariton Antiques Ltd

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This report provides a comprehensive analysis of financial resource management, focusing on a case study of Clariton Antiques Limited. It begins by identifying various sources of finance, including incorporated and unincorporated business options like venture capital, equity, debentures, bank loans, hire purchase, and retained earnings, along with their implications. The report then delves into the cost of these financing sources, such as dividends and interest, and emphasizes the importance of financial planning, including budgeting, for the company. A cash budget is prepared, and unit cost calculations are performed to aid in purchase decisions. Furthermore, the report evaluates project viability using investment appraisal techniques like payback period, ARR, and NPV. Key components of financial statements, including income statements and cash flow statements, are discussed and compared to partnership business formats. Finally, the report includes an interpretation of financial statements using ratios to assess the company's performance. The report concludes with references and an index of tables.
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Managing financial resources
& Decision
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1Identifying sources of finance which are available to business.............................................3
1.2 Implications of the sources of finance..................................................................................4
1.3 Appropriate source of finance..............................................................................................6
TASK 2............................................................................................................................................7
2.1 Cost of source of finance.......................................................................................................7
2.2 Importance of financial planning for Clariton ltd.................................................................7
2.3 Information requirement of the decision markers.................................................................8
2.4 Impact of finance on the financial statements.......................................................................9
TASK 3............................................................................................................................................9
3.1 Cash budget for Clariton ltd..................................................................................................9
3.2 Calculating unit cost of production to take purchase decision............................................10
3.3 Evaluating the viability of project using investment appraisal techniques.........................11
TASK 4..........................................................................................................................................13
4.1 Discussing the key components of financial statements.....................................................13
4.2 Comparing formats of financial statements of Clariton with partnership business............13
4.3 Interpreting the financial statements of selected company using ratios..............................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16
Index of Tables
Table 1 Preparation of cash budget.................................................................................................9
Table 2: Payback ...........................................................................................................................11
Table 3: ARR and NPV.................................................................................................................12
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INTRODUCTION
Financial management is considered as an important part of business that is highly
required for achieving success in competitive market. It is essential for companies to adopt
appropriate sources of finance in order to expand the business. Further, businesses are required to
focus on making optimum use of financial resources (Bernstein, 2015). Present report is based on
Clariton Antiques Limited which offers unique items to the customers. The business is started by
four partners in London and they planning to expand their and open new branch in Birmingham
with the purpose of generating high level of profit. Further, this report provides clear
understanding of different sources of finance which are used by company for expanding the
business. It also covers the preparation of cash budget that helps business to take proper actions
in order to make improvement in the level of performance. Apart from this, the report also
discussing the key components of financial statements including income statements, cash flow
statements which helps in identifying the level of performance of the business.
TASK 1
1.1Identifying sources of finance which are available to business
Every business firm is different from other in terms of condition in which it is operating
its business, expansion plans, business size and capital structure. It have to select an appropriate
source of finance to fund its projects on large scale and to maintain control on finance cost as
well as managing its burden on the cash flows. There are two sort of business firm’s namely
unincorporated and incorporated business. There is difference among both in terms of type of
business firms that fall in the mentioned two categories. There is major role played by finance at
Clariton Antiques Limited in which the company needs 0.5 million pound in order to expand the
operations of business. With respect to this there are some of the sources of finance which can be
beneficial for the stated business as mentioned below:
Incorporated business- This type of business give different types of benefits and it also involves
the liabilities and reduction in the additional taxes (King and Carey, 2017). Venture capital- It is considered as internal source of finance for the new business and it
mainly comes from the firms of venture capital. It provides funding to the start up or growing
business in exchange of equity. Equity: Equity is the source of finance from where most of business firms like to raise fund
to finance business operations. Under this Clariton needs to approach regulatory authority
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and require to feel a form. Apart from this it is also necessary to submit necessary documents
like 5 year income statement and balance sheet to SEC. After completion of entire procedure
firm can launch its IPO in the market. Debenture: Debenture is usually issued by the large size business firms in order to raise
capital in millions and billions. Relevant company have to apply for debenture issuance to
regulatory authority and require to obtain approval from same. By issuing mentioned
financial instrument business firm obtain debt from the general public and institutional
investors.
Unincorporated business- In this business there is no separate legal entity between the owner
and business as it is started by one or more than one person with an aim of achieving different
objectives. Bank Loan- It is considered as an appropriate sources of finance in which the firm take loan
from bank and for meeting the requirement of business (Dhankar and Maheshwari, 2016).
The company can generate money through carry out the formalities of banking institutions. Hire purchase- Sole traders can also consider the source of finance of hire purchase for
fulfilling the requirement of business. At the time of starting the business they can take
possession of assets by making down payment. The payment is made through instalments for
carry out the activities in an appropriate manner (Khan, 2015).
Retained earnings: Retained earnings is widely used to finance large scale business
operations. This is because retained earnings is the part of the revenue that is earned by the
firm in its business. Due to this reason there is no cost of retained earnings.
1.2 Implications of the sources of finance
External source of finance
Source of
finance
Legal Financial Bankruptcy Dilution of
control
Venture capital Mandatory to
submit financial
statements to the
venture capital
firm. Apart from
this, it is also
There is high
value of dividend
and seating fee in
case of this source
of finance.
If any firm get
bankrupt then in
that case first of all
capital amount is
paid back to the
lessor, debenture
Existing
Directors
control on the
firm reduce
because shares
are issued to
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necessary for the
firm to sign
contract with the
VC firm
(Christensen,
2013).
holders, banks and
thereafter payment
is made to the
shareholders.
the venture
capital firm.
Equity Mandatory to
submit relevant
forms and
income
statement as well
as balance sheet
to the SEC.
In order to bring
IPO firm have to
pay some fee to
the SEC and it
acts as cost of
equity. Apart
from this,
dividend is also
paid to the
shareholders and
it also comes in
the cost of equity.
Same of venture
capital.
Same of
venture capital.
Debenture Approval from
the governing
body is required.
Debt is taken by
the firm from the
general public and
due to this reason
interest is paid to
the debenture
holders (Zhikui,
2010).
Same of venture
capital.
Control remain
constant.
Bank loan Inevitable to
mortgage
specific asset to
bank for getting
debt amount.
Cost of bank loan
and debenture is
same.
Same of venture
capital.
Same of
debenture.
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Hire purchase Mandatory to
sign contract
with the lessor.
Rent that is paid
by lessee is the
cost of this source
of finance
(Luthuli, 2016).
Same of venture
capital.
Same of
debenture.
Internal source of finance
Source of finance Legal Financial Bankruptcy Dilution of
control
Retained earnings It is necessary
to show retained
earning
separately in the
balance sheet.
It is generated
from the
performance of
business
operations and
due to this reason
there is no cost of
retained earnings.
Amount of
retained earnings
is used to make
payment to the
creditors and
shareholders.
Same of
debenture.
1.3 Appropriate source of finance
Lots of alternatives are available to the business firms and it is very important to evaluate
all of them to find out best source of finance for the Clariton Antiques. While evaluating sources
of finance it is very important to consider some factors like firm existing capital structure,
business size and burden of finance cost and its major components in the business. Clarion
Antiques is operating at moderate level and due to this reason it will be better to take bank loan
to fund proposed business operations (Beard and Leahy, 2013). Venture capital is not suitable for
the Clariton antiques because VC firms most often purchase 35% portion of equity in the firm.
This means that after purchase of equity VC firm is in position from where it can largely
interfere in the Clariton decision making process. Thus, it can be said that it will not be wise
decision to raise capital through venture capital firm because existing Directors will lose their
decision making process. In case of bank loan no change will happen in the decision making
power of the Directors and cost of finance will also remain in control of the firm. Thus, due to
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this reason bank loan seems best option relative to venture capital for the Clariton. Hire purchase
and retained earnings are the other options by using which firm Clariton can reduce its
dependency heavily on the external source of finance in the business. Due to uncertain economic
conditions there is high possibility of under subscription of IPO (Sawant, 2010). If same happen
then it is not assumed better for the business firm. Hence, on the basis of overall discussion
retained earnings, hire purchase and bank loan is assumed best source of finance.
TASK 2
2.1 Cost of source of finance
There are wide variety of alternatives that are available to the business firms and cost of
same are described below on the basis of following categories. Dividend: Equity and venture capital are the sources of finance where one by making
investment in the firm become its owner. Due to this reason shareholders receive a dividend
on the units of shares they hold in the specific firm. Often high amount of dividend per share
is declared by the business firms. Thus, dividend payment amount goes in millions. Due to
this reason it is assumed that cost of equity is high. Interest: Interest is the return that is paid to the creditor for the amount of fund that it make
available to the Clarion for the specific time period. Interest percentage may by static or non-
static in nature. Percentage of interest on bank loan and debentures usually remain nearby to
8% and 11%. Thus, it can be said that cost of equity is always greater then cost of debt and
due to this reason most of business firms often issue debenture in the market or take loan
from the banks instead of bringing FPO in the market.
Tax: Tax amount is only charged on equity then debt. This is because shareholders are
considered as owner of the company and due to this reason payment made to them is not
included in category of cost (Faboyede, Moses and Onochie, 2013). Thus, even any company
pay dividend to the shareholders it have to pay tax to relevant department.
2.2 Importance of financial planning for Clariton ltd
Significance of financial planning is explained below by considering relevant factors. Budgeting: Financial plan is the instrument by using which allocation of fund is done
among different business activities in systematic way. The output of financial plan acts as
input for the budget preparation. This is because under financial plan allocation of cash is
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already done among different items. In the budget allocated amount is further divided
among varied expenditures and target amount for each of them is determined to keep
same in control (Mestry, 2016). Thus, it can be said that financial plan help Clariton in
preparing budget in systematic way. Implication of failure to finance adequately: Cash of limited amount is available in the
business and it is very important to make its best use so that maximum amount of cash
remain in business to finance core activities. It is the financial plan which ensure that
sufficient amount of cash will remain in business for financing business tasks. Thus, there
is significance of financial planning for Clariton.
Overtrading: In the financial planning managers can determined higher amount of sales
that will be made on credit basis in the business. In this way curb can be maintained on
the elevation of bad debt in the business. Thus, it can be said that financial planning have
significance for the Clariton ltd.
2.3 Information requirement of the decision markers
There are number of prospective stakeholders that Clarion have in its business in relation
to takeover of the other company. Information needs of the different decision makers is
explained below. Partners: These are the one of the main stakeholders of the business firm. Information of
the company whose takeover Clariton intended to do is required by the partners in order
to make decision. Information may be related to the other firm current business
operations and profitability as well as capital structure. Venture capitalist: Venture capitalist may also fund takeover deal but in order to make
final decision it requires lots of information. It must be noted that profit of the VC firm is
linked to the amount of profit that will be earned by Clariton after acquisition of other
firm in its business (Sen, 2012). Thus, they needed information related to the profitability
and capital structure of the Clariton and other relevant company.
Finance broker: Finance broker are the one who will arrange debt amount for the
Clariton in respect to the acquisition deal. It does not need any information because it is
charging minor percentage on the deal value.
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2.4 Impact of finance on the financial statements
Finance affects the financial statements because value of transaction is entered in the
income statement and balance sheet. Impact of finance on the financial statements is explained
below. Venture capitalist: Venture capital is the source of finance under which million dollar of
amount is raised by the firm from the market. The value of the raised amount is mentioned in
the cash section of current assets (Makar and Wang, 2013). Firm is liable to pay dividend
amount to the shareholders and due to this reason its liability comes in existence. Hence,
shareholder equity value enhanced by the raised amount in the statement of financial
position. Dividend is expenditure and its value is included in the income statement by which
profit amount decline. Thus, income statement and statement of financial position get
affected by the relevant source of finance.
Finance broker: Finance broker is not providing equity to the Clariton and due to this reason
on receipt of amount long term loan amount will be elevated by relevant value. Traction will
also be observed in the value of the current assets in the statement of financial position (Ray,
2012). Fee amount will be mentioned in the statement of income and by value of same
profitability of the business firm will be curtailed. It can be said that finance affects financial
statements.
TASK 3
3.1 Cash budget for Clariton ltd
Table 1 Preparation of cash budget
Particulars January February March April May June
Opening cash 110000 -539750 -
392000 -76750 48500 166250
Sale 15000 22500 30000 15000 15000 3750
Receivables 142500 262500 405000 547500 330000 285000
Total cash inflow 267500 -254750 43000 485750 393500 455000
Payment 807250 137250 119750 437250 227250 219750
Total outflow 807250 137250 119750 437250 227250 219750
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Closing balance -539750 -392000 -76750 48500 166250 235250
Interpretation
Cash budget is the one of the most important statement which is prepared by the firm in
its business. Sales of the Clariton jumped in the quarter which comprises January, February and
March month. After these months sales starts declining till end month of June. Receivables
increased in value up to month of April and then it declined consistently for the months of May
and June. It must be noted that payment amount also elevate up to relevant month then it fall in
the month of May and again in the month of June improvement is observed in payment amount.
Due to carry forward of high amount of negative balance in first three months closing balance
amount is negative and thereafter gradually improvement is observed in value of closing balance
from the month of April to June. Firm needs to make prudent use of cash surplus in its business
and under this 30% portion must be kept aside for venture capital finance, 20% for making
investment in financial securities and 50% for making investment in core business activities. By
doing so best use of cash can be done in the business.
3.2 Calculating unit cost of production to take purchase decision
Cost is considered as the basis for taking pricing decision. It is because before producing
a particular product direct and indirect cost associated with the same is taken into account to
recover it by putting appropriate margin.
Particulars Amount (£)
Purchase 15000
Salaries of staff 5000
Utility expenses 3000
Others 2000
Units sold 500
Total cost per unit 50
Mark up 20% 10
Price 60
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Profit percentage on sales = 10 / 60*100
= 16.67%
According to the given information it can be said that price of product will be kept as £60
per piece whereby cost worth 50£ will be recovered easily along with profit worth 10 per piece.
Owing to this, 16.67% can also be kept on profitability of the Clariton Antique limited and
recovers its cost of production effectively. This tends to meet expectations of all related buyers
as well as business itself. This would be effective to create competitive edge of the business and
ensure its global presence effective with greater success (Adrian and Shin, 2014).
3.3 Evaluating the viability of project using investment appraisal techniques
The investment appraisal techniques are used to assess the effectiveness of single
proposal in term of rate of return and time required to recover initial cost. For this purpose,
techniques like payback period, net present value and accounting rate of return are used (Bain
and Nowak, 2015). These area applied as follows-
Payback period method-The following table is showing information related to payback
period of both investment 1 and 2. It reflects that investment 2 should be selected as it is
taking relatively less time. However, as per the standard criteria both projects can be
accepted.
Table 2: Payback
Particulars
Investment 1
(£m)
Cumulative
Cash inflow Investment2 (£m)
Cumulative cash
inflow
Initial
Years/inves
tment 8.6 4.4
1 1.6 1.6 0.8 0.800
2 2.8 4.4 1.4 2.200
3 3.4 7.8 2 4.200
4 3.6 11.4 2.4 6.600
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5 4 15.4 2.3 8.900
6 4.2 19.6 2.6 11.500
Payback
period
3 + (8.6 – 7.8) /
3.6=3.2 years
3 + (4.4 – 4.2) / 2.4
= 3.01 Years
Standard criteria
Payback-3.5 years
ARR-35%
NPV £2m
Results of investment 1
3 + (8.6 – 7.8) / 3.6=3.2 years
Results of investment 2
3 + (4.4 – 4.2) / 2.4
= 3.01 Years
Net present value (NPV), Accounting rate of return-The below mentioned table contains
information related to net present value and accounting rate of return of both investments.
It has been found that net present value of both projects is 3 whereas standard criteria was
2 million pound only (Benes and et.al., 2015). Hence, both can be accepted as they are
generating higher return. Apart from this, accounting rate of return is to be selected on
the basis of 35% but in the given table investment 1, 2 has return worth 56.98% and
43.56% respectively. Hence both can be accepted but 1 is more beneficial as it generates
relatively higher rate of return.
Table 3: ARR and NPV
Particulars
Cash
inflow (£
m)
Investment
1
PV factor
@14% Present value
Investment
1 (£ m) PV @14%
Present
value
Initial
investment 8.6 4.4
1 1.6 0.877 1 0.8 0.877 1
2 2.8 0.769 2 1.4 0.769 1
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