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Managing financial resources & Decision

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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 finance

Source of finance

Legal

Financial

Bankruptcy

Dilution of control

Retained earnings

It is necessary to show retained earning separately in the balance sheet. 

It is generated from the performance of business operations and due to this reason there is no cost of retained earnings.

Amount of retained earnings is used to make payment to the creditors and shareholders.

Same of debenture.

1.3 Appropriate source of finance

Lots of alternatives are available to the business firms and it is very important to evaluate all of them to find out best source of finance for the Clariton Antiques. While evaluating sources of finance it is very important to consider some factors like firm existing capital structure, business size and burden of finance cost and its major components in the business. Clarion Antiques is operating at moderate level and due to this reason it will be better to take bank loan to fund proposed business operations (Beard and Leahy, 2013). Venture capital is not suitable for the Clariton antiques because VC firms most often purchase 35% portion of equity in the firm. This means that after purchase of equity VC firm is in position from where it can largely interfere in the Clariton decision making process.

Thus, it can be said that it will not be wise decision to raise capital through venture capital firm because existing Directors will lose their decision making process. In case of bank loan no change will happen in the decision making power of the Directors and cost of finance will also remain in control of the firm. Thus, due to this reason bank loan seems best option relative to venture capital for the Clariton. Hire purchase and retained earnings are the other options by using which firm Clariton can reduce its dependency heavily on the external source of finance in the business. Due to uncertain economic conditions there is high possibility of under subscription of IPO (Sawant, 2010). If same happen then it is not assumed better for the business firm. Hence, on the basis of overall discussion retained earnings, hire purchase and bank loan is assumed best source of finance.

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TASK 2

2.1 Cost of source of finance

There are wide variety of alternatives that are available to the business firms and cost of same are described below on the basis of following categories.

  • Dividend: Equity and venture capital are the sources of finance where one by making investment in the firm become its owner. Due to this reason shareholders receive a dividend on the units of shares they hold in the specific firm. Often high amount of dividend per share is declared by the business firms. Thus, dividend payment amount goes in millions. Due to this reason it is assumed that cost of equity is high.
  • Interest: Interest is the return that is paid to the creditor for the amount of fund that it make available to the Clarion for the specific time period. Interest percentage may by static or non-static in nature. Percentage of interest on bank loan and debentures usually remain nearby to 8% and 11%. Thus, it can be said that cost of equity is always greater then cost of debt and due to this reason most of business firms often issue debenture in the market or take loan from the banks instead of bringing FPO in the market.
  • Tax: Tax amount is only charged on equity then debt. This is because shareholders are considered as owner of the company and due to this reason payment made to them is not included in category of cost (Faboyede, Moses and Onochie, 2013). Thus, even any company pay dividend to the shareholders it have to pay tax to relevant department.

2.2 Importance of financial planning for Clariton ltd

Significance of financial planning is explained below by considering relevant factors.

  • Budgeting: Financial plan is the instrument by using which allocation of fund is done among different business activities in systematic way. The output of financial plan acts as input for the budget preparation. This is because under financial plan allocation of cash is already done among different items. In the budget allocated amount is further divided among varied expenditures and target amount for each of them is determined to keep same in control (Mestry, 2016). Thus, it can be said that financial plan help Clariton in preparing budget in systematic way.
  • Implication of failure to finance adequately: Cash of limited amount is available in the business and it is very important to make its best use so that maximum amount of cash remain in business to finance core activities. It is the financial plan which ensure that sufficient amount of cash will remain in business for financing business tasks. Thus, there is significance of financial planning for Clariton. 
  • Overtrading: In the financial planning managers can determined higher amount of sales that will be made on credit basis in the business. In this way curb can be maintained on the elevation of bad debt in the business. Thus, it can be said that financial planning have significance for the Clariton ltd.

2.3 Information requirement of the decision markers

There are number of prospective stakeholders that Clarion have in its business in relation to takeover of the other company. Information needs of the different decision makers is explained below.

  • Partners: These are the one of the main stakeholders of the business firm. Information of the company whose takeover Clariton intended to do is required by the partners in order to make decision. Information may be related to the other firm current business operations and profitability as well as capital structure.
  • Venture capitalist: Venture capitalist may also fund takeover deal but in order to make final decision it requires lots of information. It must be noted that profit of the VC firm is linked to the amount of profit that will be earned by Clariton after acquisition of other firm in its business (Sen, 2012). Thus, they needed information related to the profitability and capital structure of the Clariton and other relevant company.
  • Finance broker: Finance broker are the one who will arrange debt amount for the Clariton in respect to the acquisition deal. It does not need any information because it is charging minor percentage on the deal value.

2.4 Impact of finance on the financial statements

Finance affects the financial statements because value of transaction is entered in the income statement and balance sheet. Impact of finance on the financial statements is explained below.

  • Venture capitalist: Venture capital is the source of finance under which million dollar of amount is raised by the firm from the market. The value of the raised amount is mentioned in the cash section of current assets (Makar and Wang, 2013). Firm is liable to pay dividend amount to the shareholders and due to this reason its liability comes in existence. Hence, shareholder equity value enhanced by the raised amount in the statement of financial position. Dividend is expenditure and its value is included in the income statement by which profit amount decline. Thus, income statement and statement of financial position get affected by the relevant source of finance.
  • Finance broker: Finance broker is not providing equity to the Clariton and due to this reason on receipt of amount long term loan amount will be elevated by relevant value. Traction will also be observed in the value of the current assets in the statement of financial position (Ray, 2012). Fee amount will be mentioned in the statement of income and by value of same profitability of the business firm will be curtailed. It can be said that finance affects financial statements.

TASK 3

3.1 Cash budget for Clariton ltd

Table 1 Preparation of cash budget

Particulars

January

February

March

April

May

June

 

 

 

 

 

 

 

Opening cash

110000

-539750

-392000

-76750

48500

166250

Sale

15000

22500

30000

15000

15000

3750

Receivables

142500

262500

405000

547500

330000

285000

Total cash inflow

267500

-254750

43000

485750

393500

455000

Payment

807250

137250

119750

437250

227250

219750

Total outflow

807250

137250

119750

437250

227250

219750

Closing balance

-539750

-392000

-76750

48500

166250

235250

Interpretation

Cash budget is the one of the most important statement which is prepared by the firm in its business. Sales of the Clariton jumped in the quarter which comprises January, February and March month. After these months sales starts declining till end month of June. Receivables increased in value up to month of April and then it declined consistently for the months of May and June. It must be noted that payment amount also elevate up to relevant month then it fall in the month of May and again in the month of June improvement is observed in payment amount.

Due to carry forward of high amount of negative balance in first three months closing balance amount is negative and thereafter gradually improvement is observed in value of closing balance from the month of April to June. Firm needs to make prudent use of cash surplus in its business and under this 30% portion must be kept aside for venture capital finance, 20% for making investment in financial securities and 50% for making investment in core business activities. By doing so best use of cash can be done in the business. my assignment help  

3.2 Calculating unit cost of production to take purchase decision

Cost is considered as the basis for taking pricing decision. It is because before producing a particular product direct and indirect cost associated with the same is taken into account to recover it by putting appropriate margin.

Particulars

Amount (£)

Purchase

15000

Salaries of staff

5000

Utility expenses

3000

Others

2000

Units sold

500

Total cost per unit

50

Mark up 20%

10

Price

60

Profit percentage on sales = 10 / 60*100 = 16.67%

According to the given information it can be said that price of product will be kept as £60 per piece whereby cost worth 50£ will be recovered easily along with profit worth 10 per piece. Owing to this,  16.67% can also be kept on profitability of the Clariton Antique limited and recovers its cost of production effectively. This tends to meet expectations of all related buyers as well as business itself. This would be effective to create competitive edge of the business and ensure its global presence effective with greater success (Adrian and Shin, 2014).

3.3 Evaluating the viability of project using investment appraisal techniques

The investment appraisal techniques are used to assess the effectiveness of single proposal in term of rate of return and time required to recover initial cost. For this purpose, techniques like payback period, net present value and accounting rate of return are used (Bain and Nowak, 2015). These area applied as follows-

  • Payback period method -The following table is showing information related to payback period of both investment 1 and 2. It reflects that investment 2 should be selected as it is taking relatively less time. However, as per the standard criteria both projects can be accepted.

Table 2: Payback

Particulars

Investment 1 (£m)

Cumulative Cash inflow

Investment2  (£m)

Cumulative cash inflow

Initial Years/investment

8.6

 

4.4

 

1

1.6

1.6

0.8

0.800

2

2.8

4.4

1.4

2.200

3

3.4

7.8

2

4.200

4

3.6

11.4

2.4

6.600

5

4

15.4

2.3

8.900

6

4.2

19.6

2.6

11.500

Payback period

3 + (8.6 – 7.8) / 3.6=3.2 years

 

3 + (4.4 – 4.2) / 2.4

= 3.01 Years

 

 

Standard criteria

Payback-3.5 years

ARR-35%

NPV £2m

Results of investment 1

3 + (8.6 – 7.8) / 3.6=3.2 years

Results of investment 2

3 + (4.4 – 4.2) / 2.4

= 3.01 Years

 

  • Net present value (NPV), Accounting rate of return - The below mentioned table contains information related to net present value and accounting rate of return of both investments. It has been found that net present value of both projects is 3 whereas standard criteria was 2 million pound only (Benes and et.al., 2015). Hence, both can be accepted as they are generating higher return. Apart from this, accounting rate of return is to be selected on the basis of 35% but in the given table investment 1, 2 has return worth 56.98% and 43.56% respectively. Hence both can be accepted but 1 is more beneficial as it generates relatively higher rate of return.

Table 3: ARR and NPV

Particulars

Cash inflow (£ m) Investment 1

PV factor @14%

Present value

Investment 1 (£ m)

PV @14%

Present value

Initial investment

8.6

 

 

4.4

 

 

1

1.6

0.877

1

0.8

0.877

1

2

2.8

0.769

2

1.4

0.769

1

3

3.4

0.675

2

2

0.675

1

4

3.6

0.592

2

2.4

0.592

1

5

4

0.519

2

2.3

0.519

1

6

4.2

0.456

2

2.6

0.456

1

Total present value

 

 

12

 

 

7

NPV (Total present value-initial investment)

 

 

3

 

 

3

Accounting rate of return

 

 

56.98%

 

 

43.56%

TASK 4

4.1 Discussing the key components of financial statements

The key financial statements of Clariton consists of balance sheet, income statement and fund flow statement. All these statements are important for corporation to disseminate all important information related to profitability and liquidity etc. These are explained as follows-

  • Balance sheet -It is the statement of financial position under which assets and liabilities are covered. This reflects business to impart detail information regarding liquidity, investment and efficiency are covered (Bodie, Kane and Marcus, 2014). This aids to meet expectations of all related stakeholders of the business.
  • Income statement -It is also one of the most important financial statements which covers information related to expenses and income of the business. This tends to bring forth information related to gross profit and net profit through which investors can be come to know about internal position of the firm (Chang and et.al., 2014).
  • Statement of changes in gains and equityThis financial statement of Clariton covers detail regarding changes in the gains and equity. It would be effective for corporation to present the effective detail regarding the overall statement of gains and equity. It shows that how effective corporation can contribute towards growth and success of business by keeping the investors informed.
  • Cash flow statementThis covers return from different activities such as operating, investing and financial (Dontoh, Ronen and Sarath, 2013). This makes it possible to keep record related to assets and liabilities along with all financial activities taking place in Clariton Antique limited.
  • Notes to financial statementIt is also the important aspect associated with financial statement as management keep the notes below the financial statement for the sake of stakeholders such as customers, shareholders, investors and others.

4.2 Comparing formats of financial statements of Clariton with partnership business

The financial statements of limited company and partnership business are kept different because of their varied requirement. Generally limited corporation ensure to follow the standards of IFRS (International Financial Reporting Standards) and accordingly income statement, balance sheet and fund flow statements are prepare for catering need of different stakeholders. On the other hand, partnership business work on the basis of partnership act under which at first capital account is prepared and then all related statements are prepared by the management or respective department (Farshadfar and Monem, 2013).

For instance, partner's capital account is not prepared in case of limited companies as company and ownership is separate. Apart from this, stakeholders of both business might also be different which has unique requirement. For example,  Clariton Antique limited must publish its financial statements on right time and it must be publicly published along with discussion of all related information. In addition to this, balance sheet of limited company is considered as the most important aspect whereas another one has basic need to prepared partner's capital account (Bain and Nowak, 2015).

4.3 Interpreting the financial statements of selected company using ratios

The financial performance of corporation can be assessed with the help of effective techniques such as ratio analysis. It has been done as follows-

 Particulars

Formula

2016

2015

Gross profit

 

178

175

Net sales

 

1255

1220

Net profit

 

33

23

 Gross profit ratio

Gross profit / net sales * 100

 

14.18%

14.34%

Net profit ratio

Net profit / net sales * 100

 

3.00%

2.00%

Current assets

 

105

71

Current liabilities

 

317

309

Current ratio

Current assets / current liabilities

 

0.33

0.23

Debt

 

317

309

Equity

 

301

276

Debt-equity ratio

 Debt / equity

 

1.05

1.12

 

  • Profitability ratio - It is the most important ratio which affect performance of the business to a great extent. Here, business need to shed light on gross profit and net profit. The performance of Clariton Antique Ltd. Here, the current financial year of corporation reflects that net profit of business was 3% which 2% in the last year. Furthermore, gross profit of 2015 was 14.34% which decreased to 14.18%.
  • Liquidity ratioThe liquidity position of business shows that whether it is able to meet short term obligation or not. Here, it has been found that during current financial year current ratio was .33 which was .23 in the last year. This is showing that firm accessed to costly source of finance but at the same time current assets are also increasing. In this manner, firm is capable to meet its short term obligation and ensure consistent flow of production in the marketplace (Adrian and Shin, 2014).
  • Efficiency ratioDebt equity ratio of 2016 shows 1.05 which is very high. It might be possible that business face issue in meeting its long term obligation. Accordingly stakeholders might not be happy to work in such kind of environment. Owing to this, firm should focus to maintain stability by promoting more assets and reducing liabilities.

Conclusion

The aforementioned report concludes that management of financial resources is done in a manner that cost of production is reduced whereby corporation can create competitive edge in the marketplace. At this juncture, investment appraisal techniques can be applied for optimum utilization of limited resources and meeting expectation of related parties effectively. It can also be said that, budget is the strong tool applied for anticipation of profit and losses for future business activities so that accordingly appropriate strategies can be employed. In addition to this, costing technique make it possible to put adequate margin on products and services through which sales can be promoted in the marketplace.

References

  • Adrian, T. and Shin, H.S., 2014. Financial intermediary balance sheet management. In A Flow-of-Funds Perspective on the Financial Crisis.
  • Bain, P.L. and Nowak, K., 2015. Sole Proprietorships. NY Practice Guide: Business and Commercial.
  • Beard, B. and Leahy, P., 2013. SME debt advisory: Managing bank risk in interesting times. InFinance: The Magazine for Finsia Members.
  • Benes, J. and et.al., 2015. Modeling sterilized interventions and balance sheet effects of monetary policy in a New-Keynesian framework. Open Economies Review.
  • Bernstein, A., 2015. Show me the money: finding alternative sources of finance. Nursing And Residential Care.
  • Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
  • Chang, X. and et.al., 2014. Cash-flow sensitivities and the allocation of internal cash flow. Review of Financial Studies.
  • Christensen, D., 2013. Managing change. Strategic Finance.
  • Dhankar, R.S. and Maheshwari, S., 2016. Behavioural finance: A new paradigm to explain momentum effect.
  • Dontoh, A., Ronen, J. and Sarath, B., 2013. Financial statements insurance. Abacust.
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