Task 1

1.1 Sources of finance for unincorporated and incorporated business

Incorporated- This term is related with the legal identity as the firm registered in the law are recognized as the legal entity (Gupta and Rai, 2016). The business who will registered with the law of the country counted among registered entity which possess all rights and obligations.

Crowd funding- This is one of the important source of finance in which people are invited to take the equity shares of an entity. The external parties are attracted to invest their valuables in the existing firm by enjoying ownership in return

Debentures- The debenture holders who will support the corporation by providing the variety of debt for specific period. The Coupon rate will ensure the interest to be charged on the amount taken which is the obligation of an entity to payback the debenture-holders.

Unincorporated-These businesses are registered under the legal law who have same identity between their business and the owner.

Bank loan- The amount borrowed by the owner by approaching different financial institutions for getting small and higher amount of loan (Raikes and McBean, 2016). The small scale entity will take loan according to their current business requirements.

Owner's capital-The personal savings of the owner will be invested in uplifting their existing position in relation to the external market. The amount used by an individual will have full control over their money to be used in their business entity.

Related Sample: Managing Financial Resources and Decision Making

1.2 Assess the implication of internal and external sources of finance

 

Basis	Internal source of finance(Equity)	External source of finance(Debenture)
Financial	The financing of the business through this mode will increase the capital of an entity. The amount financed through this mode will keep in the business till the wound of business.	The debentures are offered by the venture by inviting external party to invest in the business. The capital will be increases by using the sources of finance. It raises the debt obligation of an entity by using this mode of finance.
Legal	The clariton are required to pass ordinary resolution in the board meeting followed by sending of application letter to the registrar of companies for issuing equity shares. The issuance of equity shares will require legal fee to provide legal identity to the source of finance.	The appointment of debenture trustee is essential for issuing debenture who prepare debenture register for recording all debenture holder name, amount and the interest accrued. The business entity will determine its interest rate in assistance of the legal authority.
Bankruptcy	The equity shareholder's will not affect in case of bankruptcy.	The business entity will get affected with the effect of bankruptcy in which business will need to pay the aggrieved party.
Dilution of control	The equity shareholder will have enough control in the business entity.	There is no control

 

1.3 Evaluate most appropriate sources of finance for clariton

There are different sources of finance selected by n entity owner in their business at different point of time whose efficiency is assessed by defining its pros and cons which is given below:

Equity

Advantages

• It provides ownership to the holder
• It accompanies with voting right according to the shares enjoyed by the users
• It raises the capital of the business in achieving their current goals and the objectives
• Dividend is provided to the users out of the total profit

Disadvantages

• There is no dividend for the users in case of loss
• The priority is given to preference shareholder in payment of dividend
• The profits are distributed among the equity holders

Debentures

Advantages

• It helps in enhances the long term fund of the business
• The rate of interest on shares are less than compared to the dividend paid on shares
• The interest paid on debenture is tax-deductible which reduces the burden of tax

Disadvantages

• The imposition of fixed interest will reduce the profit of an entity

Bank loan

Advantages

• Large amount of fund can be raised
• It creates relationship with bank to take loan in the future

Disadvantages

• The burden of interest imposed on the business
• Collateral security need to be deposit before taking loan

Owner's capital

Advantages

• Full possession on the money used in the business
• No burden to repay the amount

Disadvantages

• The less amount will not fulfill the demands of the business concern.

Task 2

2.1 Analyse costs of two sources of finance under various considerations

There are two sources of finance such as internal and external sources of finance which can be used by clariton in order to uplift their existing working conditions which is given as below:

Basis	Equity	Debenture
Dividends	The internal source of finance that is equity finance by inviting external entity to invest in the business. The equity holders who play an integral part in the business will demand dividend in return for the amount invested in the business. The primary obligations of an entity is to pay dividend out of the total earned revenue by the business entity. The cost involved in using this source of financing includes paying dividend as the compensation for investing money in supporting the aims an objective of an entity.
Interest		The debenture is another important source of fiance which comes under the category of external source of fiance. The external parties are invited to borrow fund to an entity in improving the existing condition of the business (France, 2016). The amount borrowed from the externalities will be re-payed their money for a specific period mutually decided by both the parties. The interest rate will be determine by the parties which need to be paid to the person who invest money in the business of clariton.
Tax	The burden of taxation will not affect the business while taking this form of financing.	The taxation pressure will be imposed on the business entity which seems to be external obligation which increases the cost of taking this source of finance.

 

2.2 Explain the importance of financial planning

Financial planning is important approach used by an entity in order to manage their existing financial resources by improving their existing efficiency (Raikes and McBean, 2016). The finance is important resource for an entity in supporting the current aim of the business entity. There are various key considerations of the financial planning are explained to reflect the importance of financial planning for clariton which is given below:

Budgeting- The current facts and figures are planned in the present in order to reduce the future threats imposed on the business. The financial resources are procured by developing a variety of budgets which enhances the effectiveness of all kinds of resources. The current facts and figures are analyzed properly in order to minimise the future impacts of all kinds of factors in the future.

Inadequate finance-The business analysts are appointed by an entity who will analyses the existing financial resources and all kinds or risks associated to reduce its pressure in the future. The priorities are set by an individual by setting threshold limits to control the expenditure incurred in the business (Yuan, Qian and Pangarkar, 2016). The expenditures are monitored to transform them into cash inflows rather than increasing the outflows.

Over trading- The financial statement analysis has given a terminology in which the growth done by the business by spontaneously expanding their business operations. This will bring lot of risks as the size of business increases frequently will lead an entity towards the loss. The financial plans prepared by an entity will define the short, medium and long term goals which guides an entity to move ahead in the business gradually.

2.3 Assess the needs of information needs of users

The preparation of financial statement is essential in order to convey financial information related to the current financial conditions of an enterprise. The needs of different users of the business will get fulfilled which is mention below:

Partners- The partners will ensure the existing condition of an entity in order to ensure its future earnings in form of returns generated from this entity (Raikes and McBean, 2016). The partners invest money in the organization in exchange of returns obtained from this entity.

Venture capitalist-The investors will demand stake in return for investing money in the business of clariton in supporting their aims and objectives. The management decisions are intervened by these investors who will ensure the stable working conditions of this entity.

Finance broker- The finance broker will allow business entity to take loan from the financial institutions easily without facing any kind of complexities. The profitability of the clariton is essential for the finance broker who to ensure its higher rate of brokerage in the future.

2.4 Explain the impact finance on financial statements

Venture capitalist- Venturecapital is one of the internal sources of finance in which an entrepreneur will borrow some amount of money in order to fulfill their current needs and the expectations (Husted, Montiel and Christmann, 2016). The impact of venture capital will affect the balance sheet as it raises the capital of the business as the capital borrowed to invest in the business. The amount paid as the interest on the amount take from the investors are repaid to them. The interest paid to these investors will be recorded in the profit and loss account.

Table 1: Extract of balance sheet

Particulars	Amount
Capital	XXX
+ Venture capital	XXX

 

Table 2: Extract of profit and loss

Particulars	Amount
Profit	XXX
- Interest	(XXX)

 

Finance broker- The amount borrowed from the external parties that is the financial institution in form of bank loan through finance broker (Dekker, Ding and Groot, 2016). The loan taken by this entity will increase the capital but at the same time it increases liability for the business entity. The interest paid on the repayment of bank loan will affect the profit and loss account. The current sources of finance through this mode will involve the financial information from income statements and the balance sheet prepared by the clariton firm.

Table 3: Extract of Balance sheet

Particulars	Amount
Equity
Capital	XXX
+ Bank loan	XXX
Liabilities
Bank loan	XXX

 

Table 4: Extract of Profit and loss

Particulars	Amount
Profit	XXX
- Interest@2%	(XXX)
-Brokerage@1%	(XXX)

 

Task 3

3.1 Analyse the cash budget

Particulars	January	February	March	April	May	June
Receipts
Received in same month(W.N.1)	15000	22500	30000	15000	15000	3750
Received in one month(W.N.1)	120000	240000	360000	480000	240000	240000
Received in two month(W.N.1)	22500	22500	45000	67500	90000	45000
Total receipts	157500	285000	435000	562500	345000	288750
Payments
Payment to suppliers	807250	137250	119750	437250	227250	219750
Shortage/Surplus	-649750	147750	315250	125250	117750	69000
Opening cash balance	110000	-539750	-392000	-76750	48500	166250
Closing cash balance	-539750	-392000	-76750	48500	166250	235250

Table 5: Working notes

Months	November	December	January	February	March	April	May	June	July
Sales	150000	150000	300000	450000	600000	300000	300000	75000	150000
Received in same month			15000	22500	30000	15000	15000	3750
Received in one month			120000	240000	360000	480000	240000	240000
Received in two months			22500	22500	45000	67500	90000	45000

 

Interpretation

Cash budget prepared by an entity in order to know the movement of cash inflow and outflow in the business in relation with the receipts and payments (France, 2016). The income will be recorded from different sources to compensate the effect of all kinds of expenses incurred in the business of clariton. The above budget is fully based on considering all kinds of receipts such as trade receivables and the payment made to the supplier. The basic assumptions used in the preparation of the cash budget is that the sales are not considered as the credit sales are received into different categories of the receipt. The business performance of an entity is showing negative position in initial three months which further gets increases with the passage of month. The negative closing balance of the cash budget will carry forward to the next month which reduces the total receipts generated by the business enterprise (Stacchezzini, Melloni and Lai, 2016). The reducing cash balances of the current cash budget is due to the fluctuating position of all the cash receipts generated over the months. The payment to the suppliers are higher than compared with the receipts generated by an entity over the months in the overall cash budget of an entity.

3.2 Calculate cost per unit

Operating and running cost	Total cost	Units	Per unit
Depreciation	5000	2000	2.5
Fuel	2500	2000	1.25
Supervisor wages	500	2000	0.25
Repairs and Maintenance
Repairs	800	2000	0.4
Overhead	1000	2000	0.5
Petty expenses	250	2000	0.125
Standing charges
Salary of manager	1500	2000
Insurance	1200	2000
Rent of premises	2000	2000
Motor vehicle	5500	2000
General expenses	4000	2000
Interest	1200	2000
Total standing cost	15400	2000	7.7
Total Cost per unit			12.725
Add profit@20%			2.545
Selling price			15.27

 

On the basis of above calculation of unit cost the clariton has selected various pricing methods in order to develop their pricing of products which is given as below:

• Cost plus pricing methods-The current approach is followed by several business entity in which the pricing of products are developed which will consider all kinds of cost along with profit element.
• Differentiation- The prices are differently offered to the variety of customers on the basis of current negotiation power of the buyers. The competition can be created by facilitate variety of customers by offering lower price products as compared with the competitor of this entity.

 

3.3 Assess the viability of project

Years	Project A	Cumulative cash flows
0	8.6	-8.6
1	1.6	-7
2	2.8	-4.2
3	3.4	-0.8
4	3.6	2.8
5	4	6.8
6	4.2	11

 

Calculation of payback period

= 3+0.8/3.6

=3+0.22

=3.22 years

Years	Project B	Cumulative cash flows
0	4.4	-4.4
1	0.8	-3.6
2	1.4	-2.2
3	2	-0.2
4	2.4	2.2
5	2.3	4.5
6	2.6	7.1

 

Calculation of payback period

3+0.2/2.4

=3.08 years

It is regarded as one of the important tool of capital budgeting which is used to assess the time line generated by a project in relation to the generation of returns. The higher return produces over the period in less time are taken into account. In the above analysis of two projects the best suitable project which generated returns in less time period is Project B.

Years	Project A	Pv@14%	Present value
0	8.6
1	1.6	0.8771929825	1.4035087719
2	2.8	0.7694675285	2.1545090797
3	3.4	0.6749715162	2.2949031551
4	3.6	0.5920802774	2.1314889985
5	4	0.5193686644	2.0774746574
6	4.2	0.4555865477	1.9134635003
Total			11.975348163
NPV			3.375348163

 

Years	Project B	Pv@14%	Present value
0	4.4
1	0.8	0.8771929825	0.701754386
2	1.4	0.7694675285	1.0772545399
3	2	0.6749715162	1.3499430324
4	2.4	0.5920802774	1.4209926657
5	2.3	0.5193686644	1.194547928
6	2.6	0.4555865477	1.184525024
Total			6.9290175759
NPV			2.5290175759

NPV is an acronym which stands for net present value method that is another approach of investment appraisal (Gupta and Rai, 2016). The future profitability of the project are assessed over the years on the basis of discounting rate on which projects are analyzed. The higher returns generated by a project will be considered by an enterprise. In the above projects the best suitable project which is higher than the standard limit decided for the project is Project A.

ARR
Year	Project A	Project B
0	8.6	4.4
1	1.6	0.8
2	2.8	1.4
3	3.4	2
4	3.6	2.4
5	4	2.3
6	4.2	2.6
Total	19.6	11.5
Average	3.67	1.67
ARR	37.98%	43.56%

 

Interpretation

Accounting rate of return used to evaluate the financial condition of an entity on the basis of capital budgeting techniques (France, 2016). The current approach will assess the project on in relation to the net income generated by an individual while considering the business proposal. The current approach will not consider the effect of time value of money as it will determine the rate at which an entity will produce higher amount of profit.

Task 4

4.1 Discuss the components of financial statements

Income statements-The sales and the revenue are assessed by preparing this kind of statement in which trading and profit and loss account are merged together (Gupta and Rai, 2016). The generation of profit is the primary aim behind presentment of this kind of statement. The sales can be enhanced by using this approach in which expenses are minimized.

Statement of cash flow- The cash flow of an entity will be determined by monitoring the existing cash inflow and cash outflows in the business. The cash outflows are reduced by controlling on the expenditures in order to increase or enhance the cash flow from variety of sources.

Statement of changes in equity- The equity is regarded as one of the important factor of the business which increases the capital of an entity in order to fight against the competitor. The opening and closing equity shares are considered by including the amount of dividend.

Statement of financial position- The financial position of an entity will be estimated by assessing the essential factors such as assets and liabilities. This statement is reflector of internal performance of the business in relation with the estimation of value all kinds of resources and their financing.

Notes to financial statement- The notes to accounts are prepared in order to refer these notes in the future for the beneficial of an entity. The business owner may refer to these notes at which the changes takes places in the value of different components are recorded with the complete details. It also fulfills the legal requirement according to which the changes are presented over the years are included as part of these financial statements.

4.2 Comparison of financial statements with the business structure

• Sole trader-The sole owners are under no obligation to prepare a financial statements in a particular year as they are free from this implication as they are registered under the laws. The sole owner follows the system of single entry system in which the business transactions will have only single effect in the business accounts (Oh, Chang and Cheng, 2016). The profit and loss accounts for these owners will be same for all other business but its presentation may get different. The balance sheet will determine the external position of the business entity. The cash flow will reflect the available cash balance held by an entity over the period in order to meet their obligations.
• Partnership- The profit and loss statement is different for the partnership business as the total profit will be divided among all the partners in different ratios. This business prepares profit and loss appropriation account for distributing profits. The balance sheet will include the amount of capital brought and withdrawn by the partners from the business. The balance of closing capital will be divided in the capital ratio of the partners which is based on the investing ratio on the amount of capital brought by them.

 

4.3 Interpret the financial statements

Particulars	Formula	2015	2016
Profitability ratios
Revenue		1220	1255
GP		175	178
NP		33	23
Operating profit		46	57
GP ratio	Gross profit/Net sales*100	14.34%	14.18%
NP ratio	Net profit/Net sales*100	2.70%	1.83%
Operating profit ratio	Operating profit/Net sales*100	3.77%	4.54%
Liquidity ratios
Current assets		71	105
Current liabilities		161	167
Inventory		46	47
Quick asset	Current assets-inventory	25	58
Current ratio	Current assets/Current liabilities	0.4409937888	0.628742515
Quick ratio	Quick asset/Current liabilities	0.1552795031	0.3473053892
Efficiency ratio
COGS		1045	1077
Inventory		46	47
Receivables		13	12
Net sales		1220	1255
Receivables turnover	Credit sales/trade receivables	93.8461538462	104.5833333333
Inventory turnover	COGS/Inventory	22.7173913043	22.914893617
Solvency Ratios
Debt		161	167
Equity		276	301
Debt to equity ratio	Debt/Equity	0.5833333333	0.5548172757

 

Interpretation

Profitability ratios are calculated in an entity as the profit generation is the primary aim of an enterprise which need to be improved (Shanks, 2016). The clariton company will divide its profitability ratios into different segments which are given as below:

Gross profit ratio-The incomplete profit or raw amount of profit generated by an entity in a particular year. The cost of sales are deducted from the sales figure which will produces the gross profit of the business by assessing the income statement. The GP of 2016 is decreasing gradually due to higher cost of revenue incurred in the firm.

Operating profit- The gross profit becomes base for generating this profit as all the operating expenses are excluded from the gross profit (Archibald and Archibald, 2016). The burden of operating expenses are less than the owner has controlled all kinds of expenses which will resulted in the increasing amount of profit.

Net profit-The complete profit which is considered in the corporate world in assessing the financial performance of the business. The Net profit is decreasing over the years which showcases the inability of the firm due to external pressure of taxation.

Liquidity ratio determines the current status of an organization in order to meet short term obligations with the available cash held within an enterprise. The liquidity ratios are classified into two major segments which is given as below:

Current ratio-This ratio creates perfect alignment between the assets and liabilities which are regarded as major component of the business (Shanks, 2016). The current assets are assessed in order to meet the current liabilities held within the business entity. The current ratio is increasing over the years which is good sign of current liquidity position of an entity.

Quick ratio- the current assets are taken into consider after excluding the inventory as the inventory will not convert easily into cash. The Quick ratio is increasing which reflected the strong business position of an entity to curtail the liquidity trap faces by an entity in near future.

Efficiency ratios will determine the ability of an enterprise in relation to the existing financial performance in order top meet its obligations with the existing assets held by the firm. The efficiency of an entity can be measured through various kinds of ratios which is given below:

Receivables turnover-The current factor will form part of an entity as one of the asset which are utilized in the business of clariton (Brooke, 2016). The assets are contributed in the firm in order to generate good amount of sales and the revenue. The Higher turnover indicates that the current financial condition of this entity is efficient as the generation of cash is higher than compared with the credit held within the firm.

Inventory turnover- This ratio identifies the use of inventories in generating higher amount of sales and the revenue in the business. This measures the wide number of times the inventory are used or kept idle in the firm. The current level of inventory held in the business will indicates the higher turnover which is not beneficial for the business entity. The current level is alert situation for this entity as this will lead towards the occurrence of loss in the business.

Solvency ratios are that ratios calculated by an enterprise in order to determine the current ability of an enterprise in generating higher revenue from variety of sources. The capability of the firm are judged in relation to the equity and debt component of capital structure.

Debt to equity- The efficient capital structure of the business entity will include proportionate amount of debt and equity factor of the business of clariton (Pearlson, Saunders and Galletta, 2016). In the current situation the ratios is decreasing which is showcasing the deficiency of the corporation whose current firm is dominated by the imposition of debt obligations on the current business entity.

Conclusion

It can be articulated from the above assignment the financial conditions of the clariton firm are explained properly with the help of different tools and techniques. The decision will be simplified for expanding the business using variety of sources such as venture capital, finance broker and the partnerships. The best suitable approach among these sources is venture capitalist. The projects are also assessed by applying various techniques of capital budgeting such as payback, NPV and ARR method.

References

• Archibald, R. D. and Archibald, S., 2016. Leading and Managing Innovation: What Every Executive Team Must Know about Project, Program, and Portfolio Management
• Bartlett, S., Hart, R., Satterthwaite, D., de la Barra, X. and Missair, A., 2016.Cities for children: children's rights, poverty and urban management. Routledge.
• Brooke, M. Z., 2016. Handbook of international financial management. Springer.
• Dekker, H. C., Ding, R. and Groot, T., 2016. Collaborative Performance Management in Interfirm Relationships. Journal of Management Accounting Research.
• France, R., 2016. Finance for Purchasing Managers: Understanding the Financial Impact of Buying Decisions. CRC Press.
• Gupta, A. and Rai, S., 2016. Challenges Before Finance Professional in Ethical Decision Making. Global Journal For Research Analysis.