In order to successfully manage the financial resources within the organization it is essential for management to properly allocate the resources so that they may engage in proper operational activities. With the proper alignment and allocation of the financial resources corporation can easily accomplish their goals and objectives. Along with this, it is also assessed that engaging in taking financial decision regarding adequate supply of funds it results in overcoming or minimizing the financial risk (Fischer and Marsh, 2015). For the present report focuses on considering the case scenario of Clariton Antique Ltd. That is started as the an unincorporated business. The company has effective brand image in the field of selling antique items.
Along with this, report will identify the different sources of finance that is available for both unincorporated and incorporated business so that they can easily source the adequate fund for operating the business activities (Zerban, Omar and Al Sibani, 2015). In addition to this, it would also calculate or assess that viability of the undertaking project with the help of different investment appraisals techniques such as IRR, NPV etc.
1.1 Identify the sources of finances for
a) Unincorporated business
Unincorporated are such entities those do not have their separate legal identification. Sole traders or partnership firms come under such type of business. In such firms, owner has to take responsibility of risk and liability of the organization (Dimmock, Gerken and Grahm, 2015). Financial sources available to unincorporated business are as following:
- Bank loan: It is one of the most suitable source of finance available to the firms. As Clariton Antique Ltd is working as partnership firm, all four partners are responsible for the risk of the organization. With the help of this source, cited firm will be able to increase cash flow in the workplace. Apart from this it can be repaid by borrower easily because schedule of repayment is manageable. Long term funds requirement can be fulfilled with the help of bank loan (Abazieva and et.al, 2015).
- Third party investors: Venture capitalists is the another source of finance, in this any third party or investor can invest their money in the firm for getting high revenue. This helps in the enhancement of capital of the entity. As high risk is attached with the start up firms like Clariton Antique Ltd so investors look upon the worthiness of the company then they invest amount in it (Abraham, 2015). But cited firm will have share ownership with them that can influence decision making process of the corporation.
b) Incorporated business
These are such firms those which have legal structure, firms have to follow legal guidelines. Owner or partners are no responsible for the debt and risk of the organization. Financial sources for incorporated business are discussed below:
- Retained earning: It is the cheapest form of source of finance, in which organizations retain own profit for further development of the company (Yildiz, 2014). As per the statistical facts in UK 80% retained profit reinvested by owners for the growth of business. In this entrepreneur needs not to pay interest to any lenders thus, liability remains in control.
- Share capital: It is the shareholder's money which they invest in the organization for getting higher profit. Shareholders get shares of the company and they enjoy preference rights. It is long term financial source for the company and can help in increasing capital side of the firm. If entity earns profit then they will get dividend on it (Nan and Wen, 2014).Â
1.2 Implication for using
Both the sources of finance that is internal and external sources support the business organization in raising adequate funds that assists them to operate their business activities in the market (Aktas and et.al, 2015). There are certain implications of using both the sources that are enumerated as follows-
a) Internal sources of finance
- Implication of using sale of assets: The key internal source of finance is selling of unwanted assets with the help of this company can easily raise fund for the business. The implication for using sale of assets for raising finance results in adding expenses for the organization (Opitz and Hofmann, 2014). As, for selling the assets such as furniture, building etc company requires monetary fund for opting advertisement. On the contrary to this, while selling the building the company also face legal implication as it may not results in diluting the ownership (Vladimirov, 2015).
- Implication of using retained earnings: Another internal source of finance include gaining monetary fund through retained earnings these are also termed as the retained profit of the business that is used within the business for engaging in the business activities (Meyskens and Bird, 2015). There are no financial implication associated with this form of internal source of finance.Â
b) External sources of finance
Implication of taking bank loans: The key external source of finance that is used by corporation for raising the fund include taking loans from bank. Thus, taking bank loan results in attaining economical implication for the business as in order to meet the bank loan the company need to repay the interest on the loan taken from the bank. Along with this, another implication of taking bank loan is that it also act as the expense for the firm as they have to pay certain amount to bank (Atanassov, 2015). In the situation if company is unable to repay the loan then bank is accountable to cease their operations and activities.
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1.3 Appropriate financial source for Clairton Antique Ltd
Clariton Antique Ltd is aiming to open its second branch and cited firm wants to raise funds so that it can expand its business globally. For achieving this objective Clariton Antique Ltd needs huge amount, so bank loan will be the most suitable source of finance for the organization. Security charges and interest rate of financial institutes are affordable (Florackis, Kanas and Kostakis, 2015). Apart from this cited firm can repay the amount in easy installments. So that risk is limited thus it may give good results to the organization. Though it will increase liability but Clariton Antique Ltd can manage it and will be able to earn good profit by this way.
Retained earning is another option that can give optimistic results to the cited firm. As Clariton Antique Ltd will use its own profit amount so liability will be in control, it can help in increasing profit of the company. Business can use its own internal amount for further development, by this way owner will not have to share its ownership with third person. Individual will be able to take business decision by own (Acciaro, 2014). It cited firm opt this source then risk will be limited and liability will be in control. It will help in accomplishing the objective of cited firm of raising funds 0.5 million.
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