Financial Resource Management and Decision-Making Report Analysis

This report provides a comprehensive overview of financial resource management, exploring various sources of finance accessible to business firms, including incorporated and unincorporated business models. It delves into the implications of these funding sources on legal, financial, and bankruptcy grounds, analyzing the costs associated with each, such as dividends, interest, and taxes. The report emphasizes the significance of financial planning, including budgeting, and the consequences of inadequate financial management, such as overtrading. It also examines the information needs of different stakeholders, like partners, venture capitalists, and finance brokers, and assesses the impact of financial decisions on financial statements. The analysis includes a case study on Clariton Antiques, assessing appropriate financing options, and evaluating project results to determine the best alternatives. The report concludes with an analysis of financial statements to judge the organization's profitability.

Managing Financial Resources
and Decisions
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INTRODUCTION
Finance is the vast field and in order to manage it better it is necessary to understand its
varied aspects. In the current report, an attempt is made to understand varied areas from where
finance can be raised and their cost. Implications of these funding sources are also explained in
the report. Apart from this, cash budget is presented in the report and comments are done on the
fluctuation of cash flow amount. Along with this, unit cost is also computed for Clariton
antiques. Best alternative is selected on the basis of results that are generated from project
evaluation methods. At end of study, financial statements are analyzed and profitability of the
organisation is judged.
TASK 1
1.1 Sources of finance accessible to the business firms
There are number of financing options that are available to the firms. Managers can select
any source of finance for the firm whichever they think is most suitable for the business firm.
The alternatives from where funds could be raised can be classified in to two categories namely
unincorporated and incorporated business (Lo, Wong and Firth, 2010). Unincorporated business
encompass venture that are operated by individual or by group of few people together. On other
hand, incorporated business encompass corporate that have separate entity from their owners.
Sources of finance for mentioned type of business are as follows.
Incorporate business
 Venture capital: under this method funds are collected for long period of time. It helps
to attract majority of amount of fund from the institutional investors. Moreover, those
who cannot launch their IPO in the primary market also resort to VC firm in order to
collect relevant amount of fund for project finance. Equity: There are some important characteristics of equity and it must be noted that its
nature is highly similar to venture capital. However, there is some difference between
both. In case of equity there is a market regulator which look after entire share issue
process (Cochrane, 2011). Whereas, in case of venture capital there is no regulator and all
terms of conditions are determined by VC firm and company which intends to raised fund
from former entity.
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 Debenture: It is another long term source of finance through which debt can be raised
from the general public. At specific interest rate usually debt is taken from the general
public and institutional investors (Sources of Finance,2017). This source of finance is
usually used by those firms who wants to take huge amount of debt in the business which
cannot be received from the single bank.
Unincorporated business
 Bank loan: This source of finance is often used by small and medium sized business
firms because there is less amount of cash flow in their business. Hence, due to less
availability of cash in the business firms compelled to raise fund from banks.
 Retained earnings: It refer to the inside source of finance and frequently used to meet
operative capital needs of the business (Diamond and Vartiainen, 2012). Retained
earnings is the moderate or small portion of earning and due to this reason not finance
cost is charged on same.
1.2 Implications of sources of finance
Financing
options
Implications on
legal grounds
Implications on
Financial
grounds
Implications on
Bankruptcy
grounds
Dilution of
control
Venture capital In case of
investment
capital it is
compulsory to
ink an
agreement
between VC
firm and
company that
wants to raise
fund from the
market.
Portion of profit
that is paid to
the venture
capitalist and fee
that they charge
for taking
participation in
management
meetings
altogether
construct finance
cost (Powell,
Lovallo and Fox,
2011).
If any company
is declared
bankrupt then in
that case all debt
related liabilities
are paid and then
capital amount is
paid to the
owners of the
business firm.
Control get
altered and with
addition of new
one control of
previous
shareholders
reduced.
Equity It is obligatory
to make
available some
specific
documents to the
SEC and Stock
exchange for
Portion of profit
that is paid to
owners of the
firm is the
finance cost of
equity
(Custódio,
Same of venture
capital.
Same of venture
capital.
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initiating process
of launching of
IPO.
Ferreira and
Laureano,
2013).
Debenture Approval of
governing body
is needed.
Fixed rate
interest that is
credited to
relevant entity
bank account is
cost of
debenture.
Same of venture
capital.
Control of
existing
shareholders will
not altered.
Bank loan Necessary to
give any
valuable
property to the
bank.
Interest paid to
the financial
institution is cost
of bank loan.
It is similar to
that of venture
capital.
It is similar to
that of debenture.
Internal source of finance
Source of
finance
Legal Finance Bankruptcy Dilution of
control
Retained
earnings
There are no
legal
implications for
retained
earnings.
There is no
finance
implication for
mentioned
source of
finance
Retained
earnings overall
value is used to
pay liabilities of
the firm
Same of
debenture.
1.3 Appropriate source of finance
This is the very essential the company have select the suitable source of finance in the
organization because when the company select the source of finance they also determine the
cost and size of the company . Before selecting any source of finance it is very important to
evaluate the current capital structure. Capital structure is basically a mix of debt and equity of the
business. Thus, it can be said that combination of both determine the cost of capital of the
business firm. It is assumed that in order to select an appropriate source of finance first of all
detail evaluation of the existing capital structure must be done in the business (Almenberg and
Säve-Söderbergh, 2011). On this basis firm can easily identified that if any specific source of
finance will be added to the capital structure what changes may come in the finance cost. It will
be better for the Clariton to raise capital through bank loan. The bank loan control remain same
and its finance cost is also lower than other source of finance. Hence, on this basis bank loan is
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assumed best source of finance for the business firm. Venture capital and equity cannot be used
by the Clariton because decision making power get reduced in case of both. Thus, sometimes it
become very difficult to make tough business decisions. On this basis it is assumed that debt is
better then venture capital and equity. Retained earnings is the all-time favorite source of finance
because it is one where no firm needs to pay any amount of finance cost. Debenture cannot be
assumed appropriate for Clariton because in same huge amount of debt is raised from the market.
Thus, interest amount become huge and it became difficult for the firm operating at small level
to bear burden of interest. Hence, debenture is not considered appropriate for Clariton.
TASK 2
2.1 Cost of sources of finance Dividend: Dividend refers to the proportion of profit that is paid to the shareholders in
the year firm earn huge amount of profit in its business. Dividend amount aggregate
value is usually high in the business and thus, cost of equity is very high relative to debt
(Boubakri and et.al., 2011). However, firm keeps a sole right in respect to making
decision in respect of payment of dividend amount to the shareholders. Interest: Bank loan and debentures comes in the debt category and due to this reason
interest is considered as cost of bank loan and debentures. Interest that is charged on bank
loan may be fixed or flexible. By considering economic environment and central bank
outlook on economic growth of nation firms must take loan at specific interest rate.
 Tax: It is commonly known that tax is charged on the income that is earned by the
individual business firm (Huizingh, 2011). Dividend is given to the business owner and it
is income for them and due to this reason tax is charged in dividend. The interest tax
deduction is to be given in case of interest to the business firm
2.2 Significance of financial planning
Financial planning is the most essential element of the organization the every company
apply in the business Budget: It refer to the sort of statement which is prepared by the business firm under
which maximum limit for all sort of expenditures is determined. Moreover, revenue
amount (target value) is also determined in the budget (Mollick, 2014). All these values
are ascertained by considering the financial plan that is prepared by the business firm.
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Thus, we can said that the financial plan also help the manager to preparing the budget.
In the organization Implication of failure to finance business adequately: The most organization
ascertained that they failed to make effective use of cash in their business. It is the
financial plan by using which entire planning is prepared in respect to way in which cash
will be used in the business (Da Rin, Hellmann and Puri, 2011). Thus, finance plan help
firm in ensuring that cash will be used in appropriate way and firm will need to take less
amount of debt from banks to fund its operations.
 Overtrading: Overtrading refers to the excessive trading of goods in the market.
Sometimes firms sell units more than targeted in the market because some portion of
same is made on credit basis. There is heavy amount of risk of increase in bad debts in
the business. In the financial plan a maximum value up to which goods must be sold on
credit basis is determined. Thus, in this way financial plan help firm in ensuring that bad
debt will remain within limit in the business.
2.3 information that require to a decision maker
The requirement of the information different of the stakeholder Partners: The Partners is the person who require the information related to their firm
and other firm . Before acquisition it is important for any company to evaluate its
financial performance. Thus, it is necessary for partners to evaluate their company
financial statements. Partners also needed income statement and balance sheet of the
other firm which Clariton is planned to acquire. On the basis of results of evaluation of
the financial statement of other company managers of Clariton can take acquisition
related decision in better way. Venture capitalist: Venture capitalist almost require same information as needed by the
partners. This is because profit earning of VC firm depends on the Clariton business
performance (Berk, Stanton and Zechner, 2010). It is very important for venture capital
firm to ensure that Clariton fundamentals are strong. It is also necessary for VC firm to
understand the business of the company to which Clariton intends to acquire. Due to this
reason it require financial statement and business related details of other firm.
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 Finance broker: Finance broker only require information or financial statements of
Clariton. On the basis of evaluation of relevant statements it can ensure that Clariton will
be able to pay fee on time.
2.4 what are the Outcome of finance on the financial statements
Effect of the finance for the financial statement Venture capitalist: Transaction done with the venture capital firm affects the financial
statement of the business firm. Bulk deals takes place venture capital firm and its clients.
Under this venture capital firm buy 30% stake in the company that is owned by other
entity. The amount equivalent to 30% equity is provided to the firm in which investment
is made. Transaction affects both income statement and balance sheet (Fankhauser and
Burton, 2011). This is because through mentioned bulk deal cash is received by Clariton
in its business overall value of current asset get enhanced. At same time liability to pay
dividend also come in existence and due to this reason equity value in liability side of
statement of financial position will also get increased. Thus, it can be said that transaction
or bulk deal that is done with the venture capital firm have significant impact on the
balance sheet. Mentioned bulk deal also have impact on the income statement (Pieper,
2010). This is because dividend amount is paid to relevant entity in respect to shares they
hold in the firm. By the dividend amount profit in the income statement is curtailed.
 Finance broker: In case of finance broker cash amount will be received as debt. Thus,
asset value in statement of financial position will increase. Debt is increased in the
business and due to this reason long term loan amount will increase in the balance sheet.
Fee that is paid to the finance broker is entered in debit side of income statement and by
value of same profit get reduced.
TASK 3
3.1 Preparing cash budget for Clariton Antique
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Interpretation:
The every organization makes cash budget to understand the movement of the cash
inflow and outflow and receipts and payments of the organization . It include the all income and
expenses , Receivables and payment made by the suppliers incurred by the organization . The
major assumption is the cash budget include the sales that is considered as the credit sales and
several categories of the receipts. The performance of the business is demonstrating the negative
position in the initial three months it means increases as the time passes. At last the negative
balance has greater impact on the total receipts of the month following to a significant level.
When the decrease in the present in the cash budget the reason that is fluctuation in the position
of all the receipts in cash which are being produced within all the months. The payment that are
being made by the supplier is more as compared to the receipt that is generated by business over
months in the entire cash budget.
3.2 Way through which unit cost can be calculated for pricing decision making
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Cost per unit (CPU) Selling price (SP)
Marginal costing = TVC/ number of units
= £50000/5000 units
= £10
= £10 + (£10*20%)
= £10+ £2
= £12
Absorption costing = TC/ number of units
= £75000/10000 units
= £7.5
= £7.5+ (£7.5*20%)
= £7.5 + (£1.5)
= £9
Scenario B:
TVC increased by 10% = £50000+ (£50000*10%)
= £50000 + £5000
= £55000
TC = £55000 + £25000
= £80000/10000 units
= £8
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Cost per unit (CPU) Selling price (SP)
Marginal costing = TVC/ number of units
= £55000/10000 units
= £5.5
= £5.5 + (£5.5*20%)
= £5.5 + £1.1
= £6.6
Absorption costing = TC/ number of units
= £75000/10000 units
= £7.5
= £7.5 + (£7.5*20%)
= £7.5 + (£1.5)
= £8.6
On the basis of calculation above in relation with the unit cost of Clariton various
strategies in relation with pricing methods have been chosen in order to set the prices of the
products. These are stated in the manner as below: Cost plus pricing method: This method is followed in the several business in which the
rating of the product is developed by means of action into account all the kind of cost
elements along with the profit element as well (Davies and Drexler, 2010).
 Differentiation: In this method the price offered to greater customer range on the basis
of present negotiating buyers ability. The development of competition will facilitates the
customers by means of offering products at lower prices in comparison with the rival of
the organization.
3.3 Assessment of the viability of the project through investment appraisal method
Pay back period: This is the most important technique related with capital budgeting. It is used
for the sake of making assessment of the time in which the initial investment amount will be
recovered. The project having shorter pay back period would be chosen.
Years Project A Cumulative cash flows
0 8.6 -8.6
1 1.6 -7
2 2.8 -4.2
3 3.4 -0.8
4 3.6 2.8
5 4 6.8
6 4.2 11
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