HND Business - Unit 2: Managing Financial Resources and Decisions

This report, prepared for an HND in Business course, delves into the critical aspects of financial resource management. It begins by identifying and assessing various sources of finance, differentiating between unincorporated and incorporated businesses, and evaluating the implications of internal and external financing. The report then analyzes the costs associated with different financing options, emphasizing the importance of financial planning, including budgeting and the implications of inadequate financing and overtrading. Furthermore, it examines the information needed for financing decisions, considering the perspectives of partners, venture capitalists, and finance brokers. The analysis extends to the impact of financing choices on financial statements, followed by a detailed examination of cash budgets, unit cost calculations for pricing decisions, and the application of investment appraisal techniques. Finally, the report discusses the key components of financial statements, compares formats, and interprets financial statements using ratio analysis, offering a comprehensive overview of financial management principles and practices.

UNIT 2
MANAGING FINANCIAL RESOURCES
AND DECISIONS
NAME: GABOR FEHER
ID: 13825
COURSE: HND IN BUSINESS
TUTOR NAME: RANSFORD GREY
1

CONTENTS
INTRODUCTION …………………………………………………………………………………………. 3
TASK 1 ……………………………………………………………………………………………………… 3
1.1 Identify the sources of finance available to a.)unincorporated and b.) incorporated business
……………………………………………………………………………………………………………….. 3
1.2 Assess the implications for using a.) internal and b.) external sources of finance …………………. 4
1.3 Evaluate the most appropriate sources of finance for Clariton Antiques Ltd. …………………….. 7
TASK 2 ……………………………………………………………………………………………………… 8
2.1 Analyse the cost of the two sources of finance under consideration with reference to: a.) dividends, b.)
interest and c.) tax. …………………………………………………………………………………………. 8
2.2 Explain the importance of financial planning for Clariton Antiques Ltd. With reference to: a.)
budgeting, b.)implications of failure to finance adequately and c.) overtrading. ……………………… 8
2.3 Give an assessment of the information that will be needed to make decision on financing the takeover
by: a.) the partners, b.) venture capital [We Finance Limited] and c.) finance broker.
……………………………………………………………………………………………………………….. 9
2.4 Explain the impact on the financial statement if Clariton Antiques Ltd. Choose to go with: a.) venture
capitalist, b.) financial broker. ……………………………………………………………………………. 9
TASK 3 ……………………………………………………………………………………………………. 10
3.1 Prepare an analyses of the cash budget for Clariton Antiques and advice on decision that can be taken
to improve their financial position. ……………………………………………………………………… 10
3.2 Explain how unit costs will be calculated to make pricing decision giving suitable example. …… 11
3.3 Assess the viability of the projects using investment appraisal techniques and state whether the
options satisfy Peter’s criteria for investment. ………………………………………………………….. 12
TASK 4 …………………………………………………………………………………………………….. 13
4.1 Discuss the key components of financial statement. ………………………………………………… 13
4.2 Compare the format used by Clariton to presenting their financial statement with that of a sole trader
or partnership or both. …………………………………………………………………………………… 14
4.3 Interpret the recent financial statement of Clariton using appropriate ratios and making comparison
with the previous year. ……………………………………………………………………………………. 15
CONCLUSION …………………………………………………………………………………………… 16
REFERENCES ……………………………………………………………………………………………. 17
2

INTRODUCTION
Finance is a fuel of business. Managing financial resources in terms of time efforts and money is a
crucial task for success and accomplishment of goals for the business. Every Business organisation whether
small or large, incorporated or unincorporated requires finance at every stage to excel. Finance can take the
business from ice cream's van to dragon den. Finance can be raised through various internal and external
sources of finance. Various sources comes with distinct risks and costs associated with it. In order to make
efficient choice of funds or source options should be critically evaluated on basis of length of available funds,
risk of control and costs involved in the same. Clarion Antiques being a partnership accommodating 4 partners
is an excelling firm and growing at good speed. However finance sources vary for partnership firm and
company, influenced by various factors. Financial planning including preparing budgets and capital budgeting
plays a major role in presenting a clear picture of the project and its future profitability. Budgeting gives a
portray of company's liquidity and cash status in future. Capital Budgeting techniques such as NPV, IRR and
payback period offers a comparison of various projects and their selection and rejection based on it.
TASK 1
1.1
Finance being one of the major functions of the organisation. It is a crucial business decision to be taken on
from where to raise the funds to fulfil the business requirement. Also feasibility of various sources depends
upon the type of business such as incorporated or unincorporated. (Caglayan and Demir, 2014).
a.) Unincorporated business/sole traders and partnership: this the business where individual comes together
to perform the operation to earn profits. This does not have its own legal entity. Therefore all the risks and
liabilities of business belong wholly to the persons and individuals who are owner of the business(Bishop,
2015). These firms can raise finance from undermentioned sources:
 Venture Capital / New Partner: Unincorporated firms who are not legally registered as a separate
entity can raise funds in form of investments from venture capitalist who are interested in the idea of
business. Venture capitalist are individuals or group of individuals who have surplus funds and want to
invest them in some profitable business to multiply the savings. These are risk takers and by investing in
business reap profits therefrom. Also capital of the business can be raised by admitting a new partner
who in turn will bring cash as charge against goodwill and finance into the business in return of sharing
profits.
 Bank Loans: Raising of funds by receiving a bank loan is also a good option available with the
business. Long term loans can be raised from banks or financial institution. Loans involve interest cost
and scheduled repayments at particular intervals. However loans affect the financial risk and liquidity of
the business.
3

 Retained earnings: Business can use the undistributed parts of profits retained by owners in the
business and this is best internal source as does not involve any cost and scheduled repayments.
 Reduction in Working Capital Cycle: Short terms funds can be raised by reducing the working capital
cycle in terms of reducing the credit period extended to debtors or better stock selling activities for
improving liquidity.
b.) Incorporated Business/ Private or Public Limited Companies: It is the form of business that have their
individual legal status. All the risks and liabilities associated of the business are only responsibility of the
business and business and owners have separate legal entity. Some of the following sources of incorporated
business are as follows.
 Issuing Share capital: can raise funds by issuing share capital to the public and receiving funds on the
same. Equity shares are financial instruments which transfers the ownership of the business to the
shareholder and appropriation of profits against them. Shareholders have right over the profits of the
business and business distribute the profits in the form of dividends.
 Issuing bonds or debentures: can raise funds against floating debt instruments such as debentures or
bonds in the market and receiving debt against the same from public. Debentures are financial debt
instrument that acknowledges the company against debt provided by the debenture holder.
 Retained earnings: it is that part of profits which are not distributed as dividends to the shareholders
and instead plough back into the business to multiply the amount by using as source of finance. It does
not involve any financial costs or risk associated with them.
 Raising loans from Banks or Financial Institution: can raise funds by applying and receiving loans
from Banks and financial institution for longer period of time. However loans have fixed rescheduled
payment of interest and principal which affects the liquidity of the company. Dividends which are
appropriation of profits.
4

1.2
a.) Internal sources of finance:
Financial implications
& legal formalities
Bankruptcy /
dilution of
control
Advantages Disadvantages
Retained
earnings
These are undistributed
parts of profits and
carries no cost (Gilchrist,
Sim, and Zakrajšek,
2013). Retained earnings
have no legal formalities
to be complied with.
Since this part of
business profits.
In case of
liquidation of
companies
retained earning
does not have
any
implications.
It has inherent
benefit that no cost
is involved in and
also no obligation to
repay. However
appropriate returns
are to be generated
on the retained
earnings to do
justice to the owners
of capital.
Major limitation is
that retained
earnings are limited
and cannot be
regarded as single
source therefore it
can be preferred
only in combination.
Sale of
Fixed
Assets
It is a good source of
finance and cost attached
to it such as selling costs
or commission cost paid
to the intermediary for
sale or disposal cost,
transport cost,
advertisement cost etc.
Involves legal
agreements and
contracts.
No implications
at the time of
liquidation
Sale of fixed assets
already held by the
entity can be sold
therefore creating
the huge funds and
also removal of
unwanted assets.
Moreover it does
not carries financial
cost.
This sources is not
available with all
the firms. As sale of
fixed assets can be
possible only when
assets are held
merely as
investment such as
land, building etc.
Owners
capital
It is the capital invested
by partners or owners. It
carries cost in the form of
interest on capital and
share in profits in the
profit sharing ratio. For
At the time of
liquidation
owners have last
preference over
the residual
assets of the
Owners capital is
trustworthy source
and no liability
attached for
repayment. Also no
legal compliance is
Introducing owners
capital in the
business increase
the liability side of
balance sheet and
therefore
5

raising owners capital
internally there are no
such legal formalities.
However deed or
agreement is entered for
the provision of profit
sharing ratios or interest
in capital.
firm. If more
partners are
admitted into
firm for the
funds in form of
capital it dilutes
the control of
existing partner.
required and interest
on capital is a tax
deductible expense.
unbalancing the
debt equity ratio.
Further amount is
not sufficient
generally to support
big projects.
b.) External source of finance:
Financial
implications & legal
formalities
Bankruptcy/
dilution of
control
Advantages Disadvantages
Equity
Share
Capital
It does not have
particular costs
involved as the
dividends are
appropriation against
profits. However
floatation cost and
underwriting
commission forms
major part of issue.
Issue of equity shares
needs strict
compliance of
Companies act (Mina,
Lahr, and Hughes,
2013).
In case of
liquidation of
companies
equity
shareholders
will have last
preference and
will have all the
rights over the
residual part left
after
distribution to
all other
stakeholders.
Equity share capital is
best source of finance
if the amount required
is huge and profits are
not ascertainable.
Equity is payable only
at the time of
liquidation.
Equity has risk
attached with it
therefore higher
rate of return is
expected by the
equity shareholders
in the form of
dividends or bonus
shares.
Long term
loans
It carry interest as the
financial cost. As
scheduled interests
In case of
liquidation debt
issuers have
Long term loans is the
cheapest source of
finance and also
It have risk of
failure no repaying
capital or interest.
6

and capital repayments
are fixed it affects for
firm liquidity
first preference
over the assets
of the business.
provides tax benefit
on the interest
payments.
Scheduled
repayment affects
the liquidity
adversely.
Hiring and
Leasing
These have attached
cost in the form of
hiring and lease
rentals payable in
instalments. The legal
contracts entered by
the agency and client
for hiring the asset or
leasing.
In case of
liquidation
hiring and
leasing rentals
will be paid
with high
priority.
Leasing or hiring the
asset avoids huge
spending on the fixed
assets which requires
huge cost. Lease
rentals are tax
deductible.
Hiring and leasing
are costly and
depreciation is not
allowed. Further
Lease rental
payments at fixed
intervals affects the
cash flows of the
company.
Overdraft It has interest as its
financial cost. It is
payable for the
duration of drawing
overdraft. It is based
on relationship and
past records of
customer with bank.
In case of
liquidation
overdraft will
be paid at
preference.
Overdraft is a cheap
source of finance and
satisfies the urgent
financial requirement.
It is for short term
and also affects the
reputation of
company in eyes of
banks and further
once taken cannot
be drawn time and
again.
Governmen
t grants
It carries no financial
cost as they are the
financial assistance
from the government
to promote business. It
has specific conditions
to be fulfilled for
receiving the grant.
No effect at the
time of
liquidation.
Government projects
are of great help to
finance huge projects.
Government grants
are attached with
complex conditions
which are to
strictly complied.
1.3
Clariton is a partnership firm however thinking of conversion into Public Limited Company. If examine
7

the possible internal source can be seen that none of them good enough. The Retained earnings: no cost but the
amount is too low for the investment. The Owners capital: is also low because of only two owner and no
vendible fixed assets as well. If examine the external sources can be seen that the Government grants here is not
an option, the Overdraft: is good for short term goal and urgent cases with limited amount. Hiring and Leasing:
is can good for buying assets but not good for increase capital and cash flow. Therefore, best sources of finance
available for Clariton is selling shares and raising the finance. The required amount be obtained and the
liquidity is provided. The next best alternative for raising funds are long-term borrowings from the bank.
Since the Clariton is operating from quite a long time they don't have issue regarding liquidity therefore can
easily pay of the scheduled repayments on time.
TASK 2
2.1
As stated the most appropriate sources of finance for the company are Issue of Equity Shares or
borrowing funds from bank. Both these sources allow long term funds and amount involved may be large.
Therefore for major financial decision such as expansion or in terms of product diversification these sources
should be preferred.
In raising finance, clariton is face with the choice of debt finance vs equity finance . debt finance refers
to the borrow cost, this normally cheaper, the major cost to debt financing is interest , this normally refer to as
the after tax interest (1-t), this is because interest on business borrowings exempt from tax, this makes
borrowing cheaper for business purposes, in the case of clariton.
a) Dividend: It is the cost which is attached with venture capitalist source of finance. As per the case “
We Finance limited” is the venture capitalist and entity wants 20% stake in the business against its investments.
It is kind of equity financing in which Clariton will have to pay dividend of 20% to the investor and capitalist
will get rights to influence decisions of cited firm. Every year 20% dividend will increase economic burden on
the entity and it will reduce profit as well.
(Cost of Equity = (Next Year's Annual Dividend / Current SHARE Price) + Dividend Growth Rate)
For instance:
Cost of equity=(25/60)+3%
Cost of equity=3.4%
b) Interest: It is associated with the bank loan and kind of debt financing. As if Clariton takes loan from
financial institutes then it will have to pay interest on it. Bank charges 2% annual interest and 1% brokerage
charged by broker, that would increase cost of the cited firm. For instance; Clariton is taking loan of 5,00,000
then cost of interest would be calculated as below:
=500000*2%+1%*500000
8

=10000+5000
=15000 cost of interest would have to be beard by Clariton if it goes with bank loan.
c) Tax: It is another cost of source of finance in which cited firm will have to pay corporate tax on its
income. For instance currently tax is 30% then cost of tax would be:
=2%*(1-0.2)*£5,00,000
= £7000 +1% of £500000 admin fees
=£7000+£5000
=12000 would be cost of tax which has to be beard by Clariton antiques Ltd.
 Loans from Bank: it is a long term obligations for the business to be repaid in fixed repayment
schedule agreed between the parties. Clariton if took loan from banks at 2% interest rate for the term of
10 years it will be liable to pay 1% broker fee. Also interest paid is tax deductible for the business and
tax benefit is generated by business on the same. But interest is charge against profits unlike dividends
which are appropriation of profits. It implies that company will have to pay interest on loans.
 THE COST OF EQUITY FINANCE REFERS TO THE RETURN INVESTORS WILL NEED
FROM INVESTING IN THEBUSINESS , THIS IS SIMPLE SENSE REFERES TO DIVIDEND ,
TO MEASURE THIS THERE ARE DIFFERENT MODELS USE , THE MOST COMMON IS
THE DIVIDEND GROWTH MODEL (Cost of Equity = (Next Year's Annual Dividend /
Current SHARE Price) + Dividend Growth Rate) , THIS MODEL CALCULATES THE COST
OF EQUITY BY ASSUMING THAT DIVIDEND WILL GROW AT A CONSTANT RATE , THIS
BECAUSE INVESTORS WILL REQUIRE THEIR INVESTMENT TO GROW OVER TIME .
 Equity Share Capital: Finance can be raised by issuing equity shares to the public. We Finance is
providing 5 Million towards 20% ownership in the business. Owners of the equity shares becomes the
owners of the company and has rights over the assets and residual profits of the company.
Dividends are distributed to the shareholders as return to their investment. Dividends are appropriation
of profits which implies that if profits are earned by the company, dividends will be declared otherwise
not. Company do not to pay tax on dividends. Therefore We Finance invest for 20% ownership in the
business it will be paid dividends out of the profits earned by Clariton.
◦ From the above discussion it can be said that all financial sources have some cost so organizations
need to select most appropriate source which has less cost and can give long term benefit to the
entity.
2.2
Financial planning is a major function of the business organisation to manage its functions smoothly
and in orderly manner. FINANCIAL PLANNING HAS MANY POSITIVE EFFECTS ON A BUSINESS , AS
9

PART OF FINANCIAL PLANNING THE BUSINESS WILL CARRY ON BUDGETTING :-
a.) Budgeting is detailed plan to forecast expenses and incomes to be incurred in future (Board, 2015).
Budgeting is an important functions incorporated in financial planning which will assist Clariton in depicting
the expected future inflows and outflows or sales and revenue and all other financial aspects which helps the
organisation to determine the future surplus and deficit. Further Clariton is planning to open a new branch
which will have projected sales and related expenses which are to be considered in budgeting. Financial
planning is very important and supports firm in preparing budget by this way issues related to inadequacy of
funds can be minimized. It gives positive results to entities by this way unnecessary expenditures can be
minimized and firm can achieve its economic goal.
b.) Implications of failure to finance adequately: Financial Planning helps in allocating the financial and non-
financial resources effectively and efficiently for proper utilisation. It will help Clariton to focus on availability
of cash and effective utilisation of all the hard and soft assets of the business in form of intellectual property
rights or human resources. (Babajana, and Phillips, 2015) Through focussed and concentrated efforts, failure of
inadequate finance can be detected and actions can be taken to improve the situation and reverse the decision at
the initial stage of branch opening.
c.) Overtrading refers to trade affected over and above the budgeted or planned. In case of it Clariton will have
to allocate the resources effectively and convert the threat of over trading into opportunity of making higher
profits. Overtrading can be effectively managed by financial planning. Overtrading generally leads to excessive
trade payables or trade receivables therefore causing crunch of working capital (Hope, and Fraser, 2013). This
situation can be handled by financial planning of transactions and setting appropriate limits for all the
operations and functions.
2.3
a.) The Partners: In order to finance the takeover decision if the partners are approached by business it
will be a favourable decision. Partners of Clariton can finance the decision by bringing into additional capital
for long terms and utilising their personal savings, without much procedural delay and implications. Partners
can easily pinch in the capital into the business and interest on capital is to be paid on the same (Hull, 2014).
For making effective financial decisions partners need information like profitability ratio, assets value, total
liabilities, sales revenues, total employees and customers in the firm etc. By getting all these details they will
get to know the real position of the firm and accordingly then will make plan and will invest their own capital in
the business.
b.) Venture Capitalist (We Finance Limited): Venture capitalist are risk takers and always ready to
invest in innovative projects therefore venture capitalist can aid the takeover by providing financial assistance
against the share in ownership and profits in the Clariton (Ozmel, Robinson, and Stuart, 2013). Venture
10

capitalist receive dividends and control over the working of the business as proposed share is 20 % which is
substantial enough to have influence on decisions of the company. Also venture capitalist will charge sitting fees
for participating in Board Meetings. Venture capitalist need information related to profit history, solvency ratio,
future income, dividend policy, cash management strategies etc. BY this way they can assume returns on their
investment. It will help them in taking better decision and they will be able to get high revenues on their
invested amount.
c.) Finance Broker: Finance Brokers are the persons who organise finance for the company financial
requirements. Once the agreement is done with financial broker company Clariton is not required to worry
about legal and procedural compliances. Everything will be taken care by financial Brokers. Finance Brokers
charge handsome amount of commission for delivering such services. In case of Clariton it is charging 1% as
broker fee for arranging loans at the rate of 2% for ten years. Further due to high competition in financial sector
Clariton will have bargaining powers to renegotiate the quotes offered. Brokers need information related to
assets and liabilities of the firm, solvency ratio, repay capacity, market worthiness, interest bearing capacity,
creditability of each partners, profitability ratio etc. By this way they will be able to make good decision.
2.4
Various financial decisions has distinct impact on the financial statements of the company. Some of them
are illustrated below:
a.) Venture capitalist (We Finance Limited): If funds are raised from Venture capitalist it will affect the
Financial Statement in a substantial manner. Share capital of the Clariton will increase therefore affecting the
Liabilities side of the Position statement of the company (Paeglis and Veeren, 2013). Venture capitalist will
earn dividends which will be affect for income of Clariton. Since it is acquiring 20% ownership it will
charge sitting fees which will be shown in Income Statement of Clariton.
b.) Finance Broker: it arranging loan at 2% for ten years. Loan will be reflected in the liabilities side of the
Position Statement of Clariton and interest thereupon as a charge against profits in the Income Statement of
Clariton. Also commission of 1% charged by finance broker will have to be reflected in Income Statement.
Commission and interest will reduce the profits of the Clariton.
TASK 3
3.1
Table 1: Cash budget from January to July
Particulars January February March April May June
Amounts in Amounts Amount Amounts Amounts in Amounts
11

£ in £ s in £ in £ £ in £
Cash balance in
start of month 110000 -382250 290500 860750 738500 1051250
Revenue 300000 450000 600000 300000 300000 75000
Trade Receivables 15000 360000 90000 15000 240000 11250
Total cash receipt 425000 427750 980500 1175750 1278500 1137500
Payment 807250 137250 119750 437250 227250 219750
Total outflow 807250 137250 119750 437250 227250 219750
Balance at end of
month -382250 290500 860750 738500 1051250 917750
Interpretation
Fluctuation can be observed in the cash balance at end of each month. In the month of January payment were in
excess to the revenues and trade receivable. However in February situation improved as the sales were raised by
adopting the marketing strategies to improve the same. Moreover trade receivables were collected in shorter
duration. In the month of March Payment have declined despite the fact that sales improved since February due
to application of cost control techniques by Clariton. This fluctuation is observed because sales of the firm
declined in the month of April and May. Due to this reason cash balance for months get fluctuate. In the month
of April firm payment liability skyrocketed and due to this reason cash balance decline sharply. Hence, it can be
said that firm needs to prepare strong cash management strategy for its business.
To improve the financial performance of the Clariton and maintain the liquidity in the business. Clariton will
have to take appropriate measures. Receivable collection period can be shortened by offering discounts to the
debtors who makes the payment on early basis. Further sales can be significantly raised by either improving the
quality or initiating the advertising campaign through social media or sources which have least cost. Further
since it is involved in antiques marketing and influencing the customers will play major role to affect and
increase the sales positively.
3.2
Clariton is engaged in the trading business of antique items. Since it deals into products which attracts
customers therefore additional cost is incurred to add beauty to its products. Clariton will determine the cost
price per unit by adding the purchase cost of items, other variable cost incurred such as transportation,
packaging, labour cost etc..Fixed costs such as depreciation, rent and insurance will also form part of total cost
to be allocated to units. Sum of all the three items is divided by number of units purchased from the supplier.
12