Financial Resource Management Report: Clariton Antiques Ltd Analysis

This report analyzes the financial resource management of Clariton Antiques Ltd, a partnership firm aiming to raise funds. It examines various sources of finance for both incorporated and unincorporated businesses, evaluating the most appropriate options for Clariton, including bank loans and retained earnings. The report delves into the implications of different financial sources, such as internal and external funding, and assesses the costs associated with venture capitalists and finance brokers. It emphasizes the importance of financial planning, including budgeting and the avoidance of overtrading. Furthermore, it outlines the information stakeholders need for effective decision-making, considering the perspectives of partners and potential investors. A cash budget is prepared, unit cost calculations are illustrated, and investment decisions are evaluated using NPV, ARR, and PBP methods. Finally, the report reviews key components of financial statements for different business structures and analyzes financial ratios relevant to Clariton Antiques Ltd.

Managing Financial
Resources and Decision

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Sources of finance..................................................................................................................3
1.2 Implication of financial sources.............................................................................................4
1.3 Appropriate source of finance................................................................................................5
Task 2...............................................................................................................................................6
2.1 Cost of financial sources........................................................................................................6
2.2 Importance of financial planning for Clariton Antiques Ltd.................................................7
2.3 Information that need to make effective decision..................................................................8
2.4 Impact of sources on financial statements.............................................................................8
Task 3...............................................................................................................................................9
3.1 Cash budget............................................................................................................................9
3.2 Unit cost calculation............................................................................................................11
3.3 Investment decisions............................................................................................................11
Task 4 ............................................................................................................................................14
4.1 Key components of financial statements.............................................................................14
4.2 Financial statement of sole trader and partnership firms.....................................................14
4.3 Financial ratios of Clariton Antiques Ltd............................................................................16
Conclusion.....................................................................................................................................18
References......................................................................................................................................19
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INTRODUCTION
Financial management is the strategy-forming process which is used by firms as primary
evidence to make effective economic decisions. Sound capital management is the necessity of
business that assist in avoiding risk of insolvency (Tian and et.al, 2014). It is essential that firm
has capability to generate sufficient cash for enhancing profitability of the corporations. Present
report is based on the case study of Clariton Antiques Ltd. Firm is having strong reputation in the
market and aiming to raise its funds. Assignment will discuss the sources of finance available to
incorporated and unincorporated business. Evaluation of most appropriate source for cited firm
will be done in this study. Importance of financial planning with reference to budgeting, over
trading will be discussed in this report. Impact of venture capitalist and finance broker on
financial statement will be explained in this report. Cash budget for Clariton Antiques Ltd will be
prepared and to improve its economic position suggestion will be given (Coleman and Kariv,
2013). As Cited firm is not engaged in the production so unit cost and pricing decisions will be
illustrated in this study. NPV, ARR, PBP will be calculated for taking appropriate investment
decisions.
TASK 1
1.1 Sources of finance
a) Unincorporated business
Unincorporated businesses are those entities which are not having separate legal
identification. Owner is the person who is completely liable for the business liabilities. Clariton
Antiques Ltd is the partnership firm and work as unincorporated entity (Dinovitzer and Hagan,
2014). Sources of finance available to such type of entities are as following:
 Personal saving (capital of owner and partners): It is kind of internal source in which
owner or partners are the persons those who invest their capital in the business for
getting high profit. It is appropriate financial source, advantage of this source is that as
company needs not to repay this amount and no interest has to be paid (Roehrich, Lewis
and George, 2014). So economically it is good for the entity like Clariton which is
working as startup company. But drawback is that owner and partners have to ensure
that they can generate profit otherwise they will have to face huge financial loose.
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 Bank loan: It is external source of finance in which companies borrowed money from
financial institution at an agreed rate of interest for particular time period. Banks grant
loan on the bases of financial position and repay capacity of the organization. Advantage
of this source is that firms have to repay set amount as installment which is easy and
good for the budgeting (Weil, Schipper and Francis, 2013). But on other hand interest
rates and security amount can enhance economic burden of the Clariton.
b) Incorporated business
These are called as corporation and having legal identification. In his owner or partners
are not responsible for company's debt amount. Sources of finance available to such type of
business are as following:
 Retained earnings: It is the source of finance which is available for the entities those
which are running their operations for more than one year (Musamali and Tarus, 2013).
In this company's profit ploughed back into business so that it can generate cash by
reusing money. Advantage of this source is that no need to repay and no need to pay
interest on it. But it may be possible that firms do not have enough profit which can be
reused.
 Share issues: it is most common source of fiance for the limited firms in which entity
issue share to public to obtain money. No interest need to be paid on it but divide needs
to be paid to all shareholders. Apart from this, organization will have to share ownership
with them that can be negative for the corporation (Kale and Niosi, 2017).
1.2 Implication of financial sources
a) Internal financial sources
There are many internal sources of finance, these are internal funds and reused by the
firms for further development. Retained earning is the most common source, no economic
implication is attached with it as company needs not to pay interest to any lenders. But it is
necessary to use this amount in appropriate manner so that profit can get generated otherwise
firm will have to face opportunity cost (Ince and et.al, 2013). As it is internal funds so no legal
implications are attached with it. Ownership and controlling power need not to be transferred to
any shareholder.
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Personal saving is another financial source in which firms need not to pay interest and
installment to any lender (Van Auken and Carraher, 2013). But limited funding is the major
negative economic implication of this source. Ownership does not get diluted and controlling
remain in the hand of owner or partners. No legal formalities need to be followed by the
organizations so no legal implication is of personal saving source.
b) External financial source
Issuing shares and bank loan are two major external economic sources. Ownership gets
diluted as owner has to share possession with stakeholders. Legal agreement formed between
both parties and they have to follow regulations (Wonglimpiyarat, 2017). Dividend is the main
economic implication which is necessary to be paid by the company to all equity holders. Bank
loan is the source through which Clariton can collect huge amount, but interest paid and
repayment of all funds after certain period are economic implication of this source. Legal
contract made between lender and borrower, in his financial institutes get rights to cease the
property of the company if repayment does not take place on time. Ownership and controlling
power remain in the same hand (Pahnke, Katila and Eisenhardt, 2015).
1.3 Appropriate source of finance
As Clariton Antiques ltd is performing well and has developed its good reputation in the
market. Cited firm needs to raise funds £0.5 million and it wants to open another branch for that
it needs huge money. For that it can go with bank loans, set repayment will help in controlling
over budget and company will be able to collect huge amount which can fulfill its monitory
needs (Nandan, 2013). Fixed interest and repayment scheduled will not create unnecessary
burden of the organization so it would be able to afford it. Ownership will be in control of all
partners it can be said that bank loans will be suitable option for the corporation.
Apart from borrowing from financial institution, retained earning will be another
appropriate option for the Clariton. As cited firm can be able to reused internal funds
significantly for further development. By this way liability of the company will be in control,
ownership and controlling power will not get diluted (Savva and Scholtes, 2014).
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TASK 2
2.1 Cost of financial sources
As per the given scenario “ We finance limited” is the venture capitalist and has approached to
Clariton. Capitalist is offering 0.5m finds against 20% stake in the business. Finance broker is
another source of finance which assist cited firm in taking loan from banks. But broker is
charging 1% brokerage from the borrower. Cost of both these sources are as following:
a) Dividends b) Interest c) Tax
It is the cost which is
associated with venture
capitalist. As Clariton will
have to give dividend to the
investor. 20% stake in the
business means 20% dividend
every year that can create
burden on the cited firm
(Lowendahl, 2014).
It is another cost which is
associated with the bank loans
via finance brokers. As if
Clariton borrows money from
financial institutes then
company will have to pay 2%
annual interest every year to
the banks. Apart from this 1%
brokerage charges by broker
that is also cost for the
organization (Lazzarini,
2015).
For instance:
10,00,000 loan taken by the
Clariton at 2% annual interets
then cost of interest would be :
=£1000000*2%+1% brokerage
=£20000+£10000
=£30000
It is associated with both
sources, when company raise
funds then it has to pay
corporate tax to government
on overall profit. Cost of Tax
can be calculated as below:
For instance: Current tax rate
is 30%
=£1000000*(1-0.3)*2%+1%
admin fees
=14000+10000
=£24000
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2.2 Importance of financial planning for Clariton Antiques Ltd
Economic forecasting is the ongoing process of making sensible decision related to
monitory activities. It is the estimation tool through which organization can determine future
capital requirement against its goal (Neubauer and Lank, 2016).
Illustration 1: Financial planning
Financial Plans)
It is very important tool which supports in making policy and procedures for successfully
completion of financial function. It ensures availability of sufficient funds for smooth working of
business. Uncertainty such as shortage of funds can be minimized with the help of sound
economic forecasting. Effective utilization of funds can be done with the help of this tool, by this
way equilibrium between cash inflow and outflow will be maintained (Tracey, 2016).
a) Budgeting: budget is the quantitative plan of estimating future capital requirements of
companies. It supports in determining the future sales and disbursement. By this way
organization can make effective control over wastage and can raise funds significantly. With the
help of economic forecasting Clariton will be able to prepare good budget plan and can make
effective control over the cash management.
b) Implications of failure to finance adequately: With the help of sound economic forecasting
it would be easy for the cited firm that to manage cash well. By this way it can be able to
estimate future requirements and expenditure. Shortage or surplus of funds can be avoid so
which will reduce chances of failure of the organization to great extent. By this way Clariton can
be able to manage its cash significantly (Tracey, 2016).
c) Over trading: It is the situation when business try to engage in more investment activities
than its working capital capacity. Production more than its capacity can harm financial position
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of the organization. Economic forecasting is very important and help to reduce issue related to
over trading.
2.3 Information that need to make effective decision
Clariton Antiques Ltd has many stakeholders, they all need variety of information before
making effective decisions.
a) The Partnership
Clariton is formed by four partners, they all invest their capital in the business so that
company can grow well. Before investing much amount in the company they need information
about number of customers, number of sales in a month, profit percentage, financial position,
number of employees, litigation history etc (Lazzarini, 2015). By this way partners will be able
to know the actual return on their investments. They will get to know how much to invest and
when they can get return. For instance if company is having any litigation history then
investment may be risky.
b) Venture capitalist (We Finance Limited)
As Clariton has been approached by “We finance limited” for the investment. But before
taking investment decisions company need to know about financial position, profit history,
dividend policy, working practices, total previous investments, solvency ratio etc. By this way
capitalist will be able to make its decision regarding investment in the organization. These details
will help in knowing actual return on its investment so that they can take their decision
(Lowendahl, 2014).
c) Finance Broker
Brokers assist Clariton in obtaining loan from the financial institutes. They need
information related to total assets of company, previous liabilities, profit history, credit history of
owner, solvency ratio, repay capacity etc. By this way broker will get o know the real interest
bearing capacity of the company. So whether loan has to be grant or not they can take their
decisions.
2.4 Impact of sources on financial statements
Financial statements are the records of the organization that shows the real performance
of the entities. Whenever organization opt any financial source then it impacts on the financial
statement of the organization to great extent:
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a) Venture Capitalist: We finance limited invest their capital in the organization then it will
impact on the financial statement of the Clariton. It will raise funds of the cited firm and will
impact on the balance sheet as share capital side will get affected. But company will have to give
20% stake in the business and will have to pay dividend so it will impact on the income
statement of the organization (What is Financial Planning? Meaning Types of Financial Plans,
2011). It will reflect on the expenditure side of the profit and loss account. Cash low statement
also get affected as cash inflow will get increased due to investment done by capitalist and as
company has to pay dividend so expenses will reflect in the cash outflow side in the statement.
b) Finance broker: It is another financial source that impacts on the all economic statements of
the organization. As company has to pay brokerage to the broker. So 1% commission will be
expenses for the cited firm and it will impact on the income statement. Cash inflow will raise up
so it will impact on the cash flow statement of the entity (Savva and Scholtes, 2014). Bank will
change 2% annual interest so it will show in the interest charged by bank in the profit and loss
account. Apart from this liability of the company will get increased so it will affect the balance
sheet as well. Assets side will also get strong and it will affect the balance sheet.
TASK 3
3.1 Cash budget
Estimation of future cash inflow and outflow is known as cash budget. It comprises two
areas; sources of funds and uses of cash. Organizations have to manage its cash well so hat it can
run its business significantly and can earn profit. It supports entities in assuming future income
and help to reduce unnecessary expenditures of the company (What is Financial Planning?
Meaning Types of Financial Plans, 2011). Cash budget of Clariton Antiques Ltd is prepared as
below:
Particulars January February March April May June
£ £ £ £ £ £
Cash inflow
Sales on
cash
15000 22500 300000 15000 15000 3750
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Collection
on credit
142500 262500 405000 547500 330000 285000
Total cash
inflow
157500 285000 435000 562500 345000 288750
Cash
outflow
Total
payments
807250 137250 119750 437250 227250 219750
Total
outflow of
cash
807250 137250 119750 437250 227250 219750
Net cash
(Total
inflow- total
outflow of
cash)
-649750 147750 315250 125250 117750 69000
Opening
cash balance
110000 -539750 -392000 -76750 48500 166250
Closing
cash balance
-539750 -392000 -76750 48500 166250 235250
From the above cash budget it can be interpreted that Clariton has potential to grow and
in near future it can earn good profit. By looking on the cash inflow from January to June it
shows that cash inflow is continuous increasing. As company is having good cash sales income.
But initially cited firm was unable to manage its cash. It shows in its January budget in this, its
cash payments were higher than cash income. That means working capital management of the
company was not good earlier. After that it has improved its strategies and in the month of
February to June cited Clariton is able to manage its operations. As Inflow were higher than
outflow. That shows that company is able to generate good profit (Lowendahl, 2014).
For improving financial position of the cited firm it can be suggested that Clariton should
focus on cash selling of antique items. By this way cash inflow will get increased and it will be
beneficial for the firm to run its operations well. By this way, financial position of the entity will
get strong and it would be able to earn good profit (Lazzarini, 2015).
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3.2 Unit cost calculation
The amount of money which is incurred to produce one single unit is called unit cost.
Generally expenditure of two types fixed and variables. For the company like Clariton which is
not engaged in the production for that, fixed costs are salaried paid to employees, rent of
premises. Variable costs are transportation cost because it is depended upon the total demand,
utility bills are other example of variable costs (Neubauer and Lank, 2016). Calculation of uni
cost in the Clariton can be done by following ways:
Unit cost= total costs/ number of unit produced
For instance:
 Salaries paid= £15000
 Rent of building=£15000
 Transportation costs=£25000
 Utility bills=£20000 and company wants to produce 5000 units then
Unit cost= £15000+£15000+£25000+£20000/5000
Unit cost= £75000/5000
Unit cost=£15 unit
Pricing decisions
Pricing decisions are those decisions which can influence the profit of the organization.
On the bases on unit cost Clariton can set its selling prices and can gain high profit. For instance
cited firm wants to earn profit of 20% then
Selling price= unit cost+unit cost* desired profit percentage
Selling price=£15+£15*20%
Selling price= £15+£3
Selling price=£18
So it can be said that if Clariton set selling price 18 then it would be able to gain desire
profit of its products.
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3.3 Investment decisions
Investment is the important and critical decision, it is necessary that organizations invest
in any project by looking upon all aspects of the projects. Investment appraisals techniques
support the entities in taking their decisions (Tracey, 2016).
Pay back period:
It is the technique through which Clariton can get to know about time length of
recovering of the invested amount. It is simple process and finance manager can easily calculate
the figures. It focuses on risk factors so suggest investing in quick recovery projects. On other
hand it ignores essential factor that is profitability (Lazzarini, 2015).
Formula:
Pay back period = initial investment / cash flow per period
Investment 1 £m Investment 2 £m
Initial investment -8.6 -4.4
1 1.6 -7 0.8 -3.6
2 2.8 -4.2 1.4 -2.2
3 3.4 -0.8 2 -0.2
4 3.6 2.8 2.4 2.2
5 4 6.8 2.3 4.5
6 4.2 11 2.6 7.1
Pay back period 3.22 3.08
From the above calculation it can be said that both projects are vibal and feasible. As in
both company is able to get result according to its expectation. But if Clariton has to go with one
project then it must invest in the project 2. In this company is able to recover its amount within
3.08 year.
Average Rate of return:
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