Managing financial resources & Decision

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

1.1 Identifying 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 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 necessary for the firm to sign contract with the VC firm (Christensen, 2013).

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 holders, banks and thereafter payment is made to the shareholders.

Existing Directors control on the firm reduce because shares are issued to 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.

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 financ

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