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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 of finance.

TASK 2

2.1 Cost of source of finance

  • Dividend: In case of venture capital and equity dividend is paid to the investors for the investment they make in the specific company. Thus, dividend is considered as cost of finance of both venture capital and equity. In case of VC company have to pay seating fee to the former entity. Due to this reason cost of equity and venture capital is considered high.
  • Interest: Banks and other creditors charged a interest on the debt amount that is payable by the business firm. Bank loan may be taken at stable or non stable interest rate. In case of non stable interest rate finance cost get changed regularly (Lo, Wong and Firth,  2010).
  • Tax: Tax is payable by the business firm in case it declared dividend to the shareholders. Relaxation in tax payment is give only when funds were raised by the business firm through bank loan or debenture.

2.2 Importance of financial planning for firms

Importance of financial planning is explained below

  • Budgeting: Budget is prepared by taken in to account entire financial plan. In the financial plan allocation of cash is already done and same is followed to allot cash amount to different expenditures in the budget. Thus, it can be said that financial planning have significance for the firms.
  • Implication of failure to finance adequately: Most of the business firms have limited amount of cash in their business and they failed to make best use of same. It is the financial plan that help firms in making best use of cash in the business (Sarumathi and Mohan, 2011). Thus, financial plan ensured that business firm will not financed inadequately.
  • Over trading: Due to over trading of goods some times receivables increased at rapid pace in the business. They get converted in to bad debts with passage of time period. Financial plan ensure that less amount of debtors will be bad debt. This happened because in financial plan amount of sales that will be done on credit basis is determined earlier.

2.3 Information needs of decision makers

Information needs of varied decision makers is given below

  • Partners: Partners require an income statement and balance sheet of the other firm in order to make acquisition related decisions. They are already aware about their business performance and due to this reason does not need their firm financial statements. Apart from this, partners also need business related information of company which they wants to acquire in order to make business decisions.
  • Venture capitalist:Venture capitalist needed financial statements of Clariton and other business firm. This is because return of VC firm depends on the performance and business conditions given and faced by the Clariton and other business firm. Thus, it can be said that venture capital needed lots of information related to both firms.
  • Finance broker:Finance broker require an information related to the amount that of debt that is already taken by the firm from the market (Krätke, 2010). On this basis they can access current burden of finance cost on the firm and can identify whether they will receive fee amount on time from Clariton.

2.4 Impact of finance on the financial statements

Finance have great impact on the firm financial statements. This is because if any company issues shares in the market then in that case shareholder equity will increase. At same time cash amount in the asset side of balance sheet will increase. In any case if dividend is paid to the shareholders then in that situation profit amount will declined by some percentage. On other hand, if business operations are funded through bank loan then in that condition also bank loan amount will be increased and in same time asset side of balance sheet will elevate (Chandra,  2011). Interest that is paid annually will be recorded in statement of income and by this value profit will slightly reduced in the business. It can be said that different sources of finance heavily affects financial statements of the business firm.

TASK 3

3.1 Financial statements

  • Statement of income:This statement indicate the revenue gained and expenditure made by the firm in its business during a year (Fracassi, 2016). Cost control strategy is prepared on the basis of input provided by income statement.
  • Statement of financial position: This statement indicate the assets and liability value at end of year. Varied areas where attention needed is identified by using this statement.
  • Statement of cash flows: This statement is prepared to find out sources from which cash inflow happen and places where same invested resultant amount of cash and equivalent inn business (Fayol, 2016). This statement help one in preparing strong cash management strategy.
  • Statement of equity:: It reveal the overall change that happened in the value of equity during a year. This statement is prepared by every company in its business.
  • Notes on financial statements: It indicate the values that are taken in to consideration to calculate final value of specific element of income statement and balance sheet.

3.2 Format of financial statements

There is huge difference in the financial statements of the sole traders, partners and company. As per rules every company have to follow IFRS and GAAP in order to prepare its financial statements. Whereas, in case of sole trader and partnership same rules does not applied. In partnership assets, liability, profit and loss are shared among partners but in case of company same thing does not happened (Ireland, Paul and Dujardin,  2011). Thus, it can be said there is a difference in the financial statements of the company, sole trader and company. In case of company each and every item is put in the specific category all things are presented in detail but in case of sole trader and partners same does not happened. These are the basic difference between the format of financial statement of business firms.

3.3 Ratio analysis

 

2016

2015

Gross profit

178

175

Sales

1255

1220

Gross profit ratio

14%

14%

     

Net profit

33

23

Sales

1255

1220

Net profit ratio

3%

2%

     
 

2015

2014

Current ratio

101

71

Current liability

317

309

Current ratio

0.318612

0.229773

     

COGS

1077

1045

Inventory

47

46

Inventory turnover ratio

22.91

22.72

Interpretation

  • Gross profit ratio: Gross profit ratio is same across the years which reflects that same level of control is maintained on direct expenses by the business firm. Further, improvement in performance is required.
  • Net profit ratio: Net profit ratio increased from 2% to 3% which is good but not sufficient. It can be said that firm does not have control on its indirect expenses.
  • Current ratio: This ratio is used to access firm liquidity position (Current ratio,2016). Ratio value improved from 0.22 to 0.31 which is below 1. This reflect that Clariton does not have required value current assets to meet current liability.
  • Inventory turnover ratio: Inventory turnover ratio decline by negligible points. It can be said that Clariton manage stability in its performance and it turned inventory in to sales 27 times in a year. It can be assumed good business performance.

Conclusion

It is concluded that best finance source must be selected by the firm because by doing so control can be managed on cost. Each source of finance must be evaluated deeply and thereafter specific one must be chosen by the managers. It is also concluded that financial plan must be prepared regularly because by doping so cash is managed properly in the business. Ratio analysis method must be used to evaluate firm business performance  and by doing so weak areas can be converted in to strength.

References

  • Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
  • Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
  • Chimucheka, T. and Rungani, E.C., 2011. The impact of inaccessibility to bank finance and lack of financial management knowledge to small, medium and micro enterprises in Buffalo City Municipality, South Africa. African Journal of Business Management. 5(14). p.5509.
  • Embrechts, P., Klüppelberg, C. and Mikosch, T., 2013. Modelling extremal events: for insurance and finance. Springer Science & Business Media.
  • Fayol, H., 2016. General and industrial management. Ravenio Books.
  • Fracassi, C., 2016. Corporate finance policies and social networks. Management Science.
  • Ireland, M., Paul, E. and Dujardin, B., 2011. Can performance-based financing be used to reform health systems in developing countries?. Bulletin of the World Health Organization. 89(9). pp.695-698.
  • Krätke, S., 2010. ‘Creative cities’ and the rise of the dealer class: A critique of Richard Florida's approach to urban theory. International Journal of Urban and Regional Research. 34(4). pp.835-853.

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