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Intraduction

Finance is the one of the important factor that heavily influence business performance of any firm. In the current report, varied finance sources and there implications on business are discussed in detail. Along with this, budget is prepare and and interpretation about same is made. Project evaluation methods are applied on cash flows and best one is selected for the firm. In end section ratio analysis is done and comments are made on performance.

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TASK 1

1.1 Finance sources for business firms

There are two sort of business firms namely unincorporated and incorporated business. There is difference between both sort of business firms. Unincorporated business refers to the sole trader and partnership business. Whereas, incorporated business refers to the company. Sources of finance for both are given below.

Unincorporated business

  • Bank loan: Bank loan is the source of finance which comes in debt category (Raheman and et.al.,  2010). In order to meet long and short term finance need bank loan is usually taken by the business firms.
  • Retained earning: It is a portion of sales value which remain as residual amount after paying all expenses out of cash inflow amount.

Incorporated business

  • Venture capital: It is a long term source of finance in which  VC company buy shares of any other firm and in return latter entity receive cash in its business. Thus, it is attractive source of finance.
  • Equity: Similar to VC equity is also long term source of finance. Firm need to obtain prior approval from stock exchange in order to issue shares in the market (Wilmott,  2013).
  • Debenture: Debenture is similar to bank loan  and only difference between both is that in case of former one assets are not mortgaged but in latter case specific asset is mortgaged. Interest is paid to creditor on debt amount.

1.2 Implications of finance sources

Source of finance

Legal

Finance

Dilution of control

Bankruptcy

Venture capital

It is mandatory to ink a agreement with other firm in which investment will be made (Tirole, 2010).

Higher finance cost relative to other source of finance.

Control remain unstable in case of VC.

Amount is paid to the creditors and then capital is paid back to shareholders.

Equity

Inevitable to furnish statement of income and financial position to the stock market regulator.

Same as above except venture capital.

Same of VC.

Same of VC.

Debenture

Necessary to make available relevant documents to the market regulator.

Lower finance cost relative to equity and VC (Embrechts,  Klüppelberg and Mikosch,  2013).

Control remain unchanged.

Same of VC.

Bank loan

Mortgage of asset is required to take loan from bank.

Same of debenture.

Same of debenture.

Same of VC.

Retained earning

There are no legal implications for retained earning.

There is no finance cost of retained earning

Same of debenture.

Same of VC.

1.3 Appropriate source of finance

Debt is the appropriate source of finance for the Clariton in comparison to other source of finance. This is because small percentage of interest is charged on the bank loan amount by the business firms. Moreover, Directors of Clariton will be able to make business decisions independently and without any person interference. Thus, on this ground debt seems appropriate source of finance for the business firm (Brigham and Ehrhardt, 2013). Venture capital and equity both are not assumed for the relevant firm because there cost is so high and decision making power of the Directors also get reduced. Hence, in order to prevent this situation debt is considered appropriate one for the business firm. Retained earning is the best option that firm currently having because there is no cost of retained earning. Hence, bank loan and retained earning is considered best source o


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