Managing Financial Resources and Decisions Report

This report provides a comprehensive analysis of financial management, focusing on the sources of finance available to businesses, the implications of using internal and external funding, and the most appropriate sources for Clariton Antiques Ltd. It delves into the costs of finance, the importance of financial planning, and the information needed for financing decisions. The report includes a detailed cash budget, unit cost calculation, and an evaluation of investment appraisal techniques. Furthermore, it examines the key components of financial statements, compares different formats, and interprets the financial statements of Clariton Antiques Ltd using ratio analysis. The report concludes with a summary of the findings and recommendations for effective financial management.

Managing Financial Resources and
Decisions

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 The sources of finance available to .......................................................................................3
1.2 Assess the implication for using............................................................................................4
1.3 Most appropriate sources of finance for Clariton Antiques Ltd............................................4
Task 2...............................................................................................................................................5
2.1 Costs of finance......................................................................................................................5
2.2 Importance of financial planning...........................................................................................5
2.3 Information needed to make decisions on financing.............................................................6
2.4 Impact on financial statements...............................................................................................7
Task 3...............................................................................................................................................8
3.1 Preparation of Cash budget....................................................................................................8
3.2 Calculation of unit cost..........................................................................................................9
3.3 Investment appraisal techniques..........................................................................................10
Task 4.............................................................................................................................................12
4.1 Key components of financial statements.............................................................................12
4.2 Comparison of formats of financial statements...................................................................12
4.3 Interpretation of financial statement of Clariton Antiques Ltd............................................13
Conclusion.....................................................................................................................................16
References......................................................................................................................................17
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INTRODUCTION
Financial management is the major part of the businesses, it includes planning, directing
and controlling of monitory resources. For raising funds in an organization it is essential to take
appropriate decisions regarding financing, investment and returns. The main objective of
financial management is to ensure adequate supply of funds so that business can run smoothly. It
supports to utilize the available resources effectively. Maintaining proper cash flow,
minimization of capital cost and wealth maximization are major areas of financial management.
Present report is based on Clariton Antiques Ltd, it started as unincorporated business but later
on it grown well (Acquaah, 2012). Current assignment will discuss the various sources of finance
available for the entity and their implications. Importance of economic forecasting will be
covered in this study. To make effective pricing decisions, unit cost calculation will be done in
this report.
TASK 1
1.1 The sources of finance available to
a) Unincorporated business
It is defined as an commercial undertaking that is closely-held by different parties.
According to the case Clariton Antiques Ltd. was started as unincorporated business whose key
disadvantage was that it results in unlimited liability for their proprietor as it is not been
registered formally as the corporation (Strange, 2015). The key sources of finance that is
available for unincorporated business is sourcing monetary resource with the help of investor in
which they allocate capital with the key expectation of attaining financial return in the future.
The key advantage of this source of finance is that it is cost effective source through which the
investor can easily invest certain amount of funds to the newly start up in the region.
b) Incorporated business
Incorporated business is defined as organized corporation that is been formally registered.
Along with this it also give certain benefits such as protection of their liabilities as well as
deduction in the tax etc. it has been also assessed that source of finance that is available to
incorporated business include raising fund with the help of selling share of the company through
enabling equity financing. Under this source of finance equity share has been allotted to the
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individual and they become shareholder within the company that have key right to engage in
voting within the company (Nersesian, 2014).
1.2 Assess the implication for using
a) Internal sources of finance
The internal sources of finance are consider as effective sources as they are found in the
internal environment of the business. For instance, the key internal source of finance is personal
saving. The positive implication for using this source of finance is that it ensure no repayment
costs as under this source owners invest their savings in the business. Along with this, it has been
also assessed that negative implication for using this source is it ensure limited funding by the
individual or partners (Lazonick, 2012). Along with this, another internal sources of finance
include selling the discarded assets within the company for raising the funds. It has been assessed
that implication for using this source is that with the sale of assets it diminishes the overall worth
of the organization.
b) External sources of finance
There are some other sources of finance that include using external source that is through
engaging in taking bank loans, venture capital, equity share capital etc. all these sources are used
by the organization for raising the finance. With the help of bank loan business can easily raise
the finance that would carries some financial implication that is it focuses on interest payable by
the owner for the taken loan that act as the risk or financial expenses for the firm. On the other
hand, another external source of finance is engaging application of equity share for raising the
finance (O’Sullivan and et.al, 2013). The financial implication that has been assessed for using
this source is that it increases the cost of organization as they have to return or pay certain
amount to shareholder in form of dividends.
1.3 Most appropriate sources of finance for Clariton Antiques Ltd
As Clariton Antiques Ltd needs to generate funds in the organization to open more
branches. So it can be possible if it selects equity shares as source of fiance. By this way aim of
the firm will be achieved easily. As with this type of sources there is no cost of repayment is
attached so not burden occur on the organization. It should select public issue of equity share so
that it will be able to accomplish its objective to great extent.
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Apart from this Bank loans will be another best suitable source of fiance for the
organization by this way it will be able to gather huge amount easily and repayment schedule is
quit easy (Jones, 2012).
TASK 2
2.1 Costs of finance
Share capital is the part of capital which comes by issuing shares of the company or it can
be explained as invested money by shareholders.. After investing amount in the organization,
capitalist expects some positive return on its money. So expected return is the amount which an
investor expect to get. It is based on the previous profitability records of the company. Dividends: As venture capitalist has approached to the Clariton Antiques Ltd, here it is
We finance limited. Cited firm will have to give share against the invested money and
also investors become the shareholders of the company. So entity will have o pay
dividends to them it is cost for the organization. As We finance company is asking for
20% stake which is too high (Freitas, Geuna and Rossi, 2013).
 Interest and Tax: As Clariton Antiques Ltd has taken loans from the financial institutes
so it will have to pay time o time interest to banks. That is cost for the company and
increase liability for longer duration. As finance brokers arranges loans for the cited firm
but they charge commission or brokerage which is 1%, so it is cost for the organization.
Whenever entity borrow money as loan from banks then tax benefits are attached with it
which is good for the organization.
2.2 Importance of financial planning
Financial planning (FP) is the most required activity in an organization, its a process of
framing the policies which can assist to take proper decisions related to investments. As Clariton
Antiques Ltd wants to raise funds, it can only possible by proper economic forecasting.
Importance of FP are as below: Reduce uncertainties: With the help of effective financial planning Clariton Antiques
Ltd will be able to minimize business risks this chances of getting failure will get
minimized to great extent (Gatti, 2013). As cited firm will be able to access the risk
involved in investments and will take proper decisions so that such kind of uncertainties
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will be reduced to great extent. So it will be able to measure that venture capital will give
returns or not.
 Budgeting: budget can be explained as economic plan for future period. Estimation of
income and expenditures of the organization in particular accounting period is called as
budget.
◦ It is beneficial tool and helps to entity in achieving goal of the company. It assists in
measuring performance of the entity. As it provides guidance for future activities
thus, company can make strategies accordingly.
◦ By preparing budget Clariton Antiques Ltd will be able to forecast the things thus, it
would be able to minimize future uncertainties. Effective control is the main benefit
of budget Financial planning can be done effectively with the help of budgeting and
issues like shortage of funds or surplus can be minimized to great extent. Financial
planning is very essential for the Clariton Antiques Ltd as it is a medium sized
company so for each activity it has to decide budget and allocate funds. With the
assistance of economic forecasting accurate budget will be prepared by the finance
manger. This will help to manage cash well, as not over or shortage will take place.
As with the help of economic forecasting Clariton Antiques Ltd will be able to make
effective control over the financial activities, this will be beneficial in taker
appropriate investment decisions (Prakash, 2014).
◦ Implication to failure to finance adequately: With the help of financial planning cited
firm will be able to utilize its funds well thus, chances of getting failure will get
reduced. Without planning organization can not assume future uncertainties thus it
can affect the business, economic forecasting assist to forecast the future thus
effective utilization of sources can be minimized. Minimize over trading: It is very important for Clariton Antiques Ltd to analyses the each
activity effectively by proper financial planning it will be able to run business smoothly.
It will help to generate funds and manage cash flow well in the organization. By this way
issue of over trading will be minimized to great extent. Over trading: It is the situation
when firm produces goods more than its actual demand. It is the big issue and can
decrease profitability of the company. To reduce such type of problems it is very
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important to make balance between demadn and supply which can be done by effective
financial planning.
 Supports in coordination: Economic forecasting is very important to make coordination
between several departments such as sales and production etc. So that all activities will
be run in systematic manner.
Thus, financial planning is very essential for Clariton Antiques Ltd as it will help
the cited firm to measure the progress and take appropriate decisions of investment to generate
funds in the organization. Cash management is the major part of financial planning, so entity will
be able to manage and control over its cash flow (Mollick, 2013).
2.3 Information needed to make decisions on financing
It is very important to have sufficient information regarding the financial performance of
the company so that individual and stakeholders can take appropriate judgment of investment in
the company. Assessment of information are discussed as below:
The partner: In Clariton Antiques Ltd equity partners of the company are customers,
stakeholders etc. They all needed different types of details of the company. Such as employees
needed information regarding solvency, liquidity, efficiency, growth, profit of the firm so that
they can identify their career path in the organization. Partners needed detail about financial
position of the entity, dividend policy, process, debt, assets of the corporation so that they can
take their decisions of investment in the firm (Li and Chi, 2013).
Venture capitalist: As per the give scenario We finance limited has approached to the Clariton
Antiques Ltd by offering £0.5m for a 20% stake in the business. They needed information such
as profitability ratio, debt ratio, dividend policy, previous performance of the firm, reputation in
market. By this way We Finance Limited will be able to identify the return on investment thus, it
will be able to take appropriate investment decisions in the Clariton Antiques Ltd equity. By
looking upon the income statement of the Clariton Antiques Ltd. Investors can identify that
profit of the company is growing so investment in such firm will be beneficial for them.
Finance broker: There are many commercial brokers those who have good linked with lenders.
They have good knowledge and they give good advice to borrowers. As they need information
related to interest bearing capacity of the Clariton Antiques Ltd, financial worthiness of the firm
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so that they can take their decisions whether to grant loans to company or not (Lutz and et.al,
2013).
As Clariton Antiques Ltd wants to expand its business and wants to raise funds so that it
can open more branches to increase profit. So several related persons need various information
of the worthiness of the firm so that they can make effective decisions which can give them good
returns on their investments.
2.4 Impact on financial statements
As Clariton Antiques Ltd has to follow the norms of international accounting standards
so it has to prepare balance sheet, income statement, cash flow statement every year at the end of
march. These records are being influenced by several sources, as bank loans increases liability of
the company for longer period, as they have to pay interest regularly so profit of the firm can get
minimized. By borrowing money Clariton Antiques Ltd can increase make strong the side of
cash inflow in the cash flow statement but it will impact on the income statements as will
increase liability of the corporation.
Venture capitalist: If Clariton Antiques Ltd chooses to go with venture capitalist source then it
impacts the shareholder equity side in the balance sheet thus, cash will be raised in the
organization so it will reflect in the cash flow statement of the cited firm (Danford, 2013). So
assets side will get strong. But Clariton Antiques Ltd will have to pay dividend to such investors
so it will reflect on the income statement of the cited firm. As it will increase expenditures of the
organization. And also it will add management sitting free row in the profit and loss account.
Finance broker: If Clariton Antiques Ltd chooses this source of fiance then it will impact on the
income statement of the company. As it will have to pay commission to the broker so it will
reflect as finance cost in the profit and loss account and it will reduce overall profit of the
company. They play the role of intermediaries so they charge brokerage from borrower.
TASK 3
3.1 Preparation of Cash budget
Cash inflow is the income of the organization which is earned by entity by selling assets
or credit collection. For instance when firm sales its products then it receives cash that is called
cash inflow. Cash outflow is the paid money for running its operations. Organizations have to
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bear some expenses such as fixed or variable expenditures. This flow of money is called cash
outflow, for example payment done for investment activities etc.
Cash budget is the plan of which describe cash receipt and payments. It is very important
tool through which organizations can access that whether activities will give sufficient return or
not. The purpose of preparing cash budget is to identify the cash position of the entity. It helps to
keep track of all transactions so that future uncertainties can be avoided. Budgeting is very
beneficial and helps in setting targets for future. With the help of this finance manager can make
effective control over its expenditures. As Clariton Antiques Ltd has to prepare cash budget to
show the availability of cash in the organization.
Particulars January February March April May June
£ £ £ £ £ £
Cash inflow
Sales on
cash
15000 22500 300000 15000 15000 3750
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
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Closing
cash balance
-539750 -392000 -76750 48500 166250 235250
Cash budget shows the actual expenses and earning of the company which can be
incurred in coming time duration. Estimating future sales and cash inflow is crucial task for the
business units. From the projected cash budget it can be said that Clariton Antiques Ltd can not
remain consistent, In January, February and March there is negative cash balance It is shown that
in January there is excess amount of payment have been done by the cited firm which is 807250.
Clariton Antiques Ltd will have to minimize its debts, by this way it will be able to increase
liquidity in the organization. Cited firm will have to focus on cash sales so that cash inflow can
get enhanced. It can only possible by offering attractive trade discounts to customers (Driver,
2015).
3.2 Calculation of unit cost
Unit cost is the calculation of the expenses which are incurred to produce one unit of the
good. Direct costs are such as building rent, salaries etc. whereas variable expenses are rough
materials required to produce final product.
Unit cost = Total costs (fixed + variable) / total produced units
According to the given scenario Clariton Antiques Ltd is not engaged in production, it is
a manufacturing company. So fixed cost for the organization will be purchase cost of raw
material of antiques from wholesaler and it will add into it transportation expenses, taxes,
commission etc. So cited firm will calculate the unit cost by dividing all costs from number of
produced units. It will help to take appropriate decisions regarding pricing (Braun, Tietz and
Harrison, 2013).
For example- fixed expenses of Clariton Antiques Ltd are 30000 and variables are 55000.
For instance it wants to produce 10000 units of antiques then calculation of unit cost will be done
as below:
= 30000+55000 /10000
= £8.5 unit
By using this unit cost it can make its pricing decision: For instance at the end of year 2017 £8
unit wants to earn 25% profit then it will set its product price by using such calculation:
Selling price = Unit cost + cost * desired profit percentage
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= £8.5 unit + £8.5 *25%
= £10.62
So it can be said that Clariton Antiques Ltd can set selling price of its products 10.62 by
this way it will be able to gain 25% profit as it was expecting to gain (Balaman and Selim, 2014).
Apart from this by calculating this unit cost it will be able to analyses the excess expenses in the
firm and will be able to reduce by proper planning.
3.3 Investment appraisal techniques
Investment appraisals techniques are those methods which are used by the firms to
identify the best project which can give huge return to the entity. There may be presence of many
other projects which have good returns but huge costs are attached with it. So by selecting most
suitable project corporation will be able to increase its profitability.
Pay back period:
It is the method which assists to identify the best project which can be recovered as
compare to other projects in less time duration.
Formula:
Strength:
 It is simple universally used calculative process so managers can easily take their
investment decision. It deals with risk and gives importance to the liquidity thus,
managers can easily invest in such project in which it can recover invested amount soon.
Weakness:
 It gives high attention to liquidity and ignores profitability side. This method consider
cash flow before PBP but do not consider after PBP cash flow which is equally
important.
Investment 1 £m Investment 2 £m
Initial investment -8.6 -4.4
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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
As Clariton Antiques Ltd is planning to recover the initial investment within 3.5 year so
from the above calculation it can be said that both projects are good enough. As in both cited
firm can recover the amount within the expected time duration. But as o select best one,
investment in project 2 will be good for the Clariton Antiques Ltd as in this it will be able to
recover the amount in less time period.
Average Rate of Return
It is the commonly used investment appraisal method, it focuses on actual income which
can be generated by the projects.
Formula:
Strength:
 As it calculates return on percentage so it is easy to compare with other project thus, easy
decisions can be made by the organization. It completely focuses on the profitability.
Weakness:
 It does not give value to time factor and ignores cash flow of the investment. It doesn't
look upon the terminal value of the invested project.
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