Starting a business enterprise
Order Instructions:
Word Limit: 2,000 words (with 10% plus or minus leeway)
Percentage of marks awarded for module: This assignment is worth 50% of the total marks for the module
Constructive critical analysis, introduction, conclusion •Relevant, accurate content, demonstrating research, as required by the assessment task.
•Coherent and clear discussion of the different forms of business
•Clear comparison between financial and management accounting
•Critical discussion of the different sources of finance 70%
Referencing Style •Full in-text referencing using the Harvard citation style.
•Structured reference list or bibliography using the Harvard referencing method 10%
Content, style, relevance, originality Clear demonstration of rigorous research from recognised authoritative sources. Audience focus; report format 10%
Introduction, conclusion and recommendation •Coherent and concise introduction, conclusion and clear recommendations
10%
Assignment Task:
Mr and Mrs Swanson are thinking of starting a business enterprise. They have saved up some money from their 20 years in employment and have decided to produce and sell biscuits and chocolates. They expect this to be a lifelong investment with a plan for rapid growth and expansion.
They know that there are different forms of businesses, each with its own benefits and limitations, but are unsure of the best one to adopt. They also require the aid of an in-house accountant to help with their day-to-day management decisions, but also unsure if a management accountant would be preferable to a financial accountant.
Since this is a lifelong investment, with plans for expansion, they would also like to know the sources of finance available to them. They have come to your accounting practice for advice and guidance on these issues.
As an accountant, you are required to write a report to Mr and Mrs Swanson explaining the issues below:
• Explain the different forms of business units (sole proprietorship, partnership, limited company) available, highlighting the benefits and limitations of each (20 marks)
•Explain financial accounting and management accounting, highlighting the differences between the two strands of accounting (20 marks)
•Explain the sources of finance available to a business owner, making distinctions between internal and external sources, short-term and long-term sources, equity and debt (30 marks)
•Style, layout, format and relevance (5 marks)
•Introduction, conclusion and Recommendation (15 marks)
•Referencing – Harvard Style (10 marks)
Total marks for assignment: 100
Please inform your writer to completely adhere to instructions on how the report should be. Also, every content of report must conform to UK including Referencing because I am not study in America University.
The following shows the Marking Scheme:
Introduction 5%
Sole Proprietorship 5%
Partnerships 5%
Private Limited Company 5%
Public Limited Company 5%
Financial Accountant 10%
Management Accountant 10%
Internal vs External source of finance 10%
Short Term vs Long Term Finance 10%
Debt vs Equity 10%
conclusion and Recommendation 10%
Style, Layout,format relevance 5%
Referencing 10%
Total 100%
Percentage of marks awarded for module: This assignment is worth 50% of the total marks for the module
Assessment criteria Explanatory comments on the assessment criteria Maximum marks for each section
Constructive critical analysis, introduction, conclusion • Relevant, accurate content, demonstrating research, as required by the assessment task.
• Coherent and clear discussion of the different forms of business
• Clear comparison between financial and management accounting
• Critical discussion of the different sources of finance 70%
Referencing Style • Full in-text referencing using the Harvard citation style.
• Structured reference list or bibliography using the Harvard referencing method 10%
Content, style, relevance, originality Clear demonstration of rigorous research from recognised authoritative sources. Audience focus; report format 10%
Introduction, conclusion and recommendation • Coherent and concise introduction, conclusion and clear recommendations
10%
SAMPLE ANSWER
Starting a business enterprise
Table of Contents
Main Branches of accounting. 7
Conclusion and Recommendation. 11
Executive summary
Mr. and Mrs. Swanson could incorporate a Sole Proprietorship, a Partnership, a Private Limited Liability Company or a Public Limited Liability Company as a business vehicle to implement their business idea of producing and selling biscuits and chocolates. Each of these types of business entities has their benefits and disadvantages. For example a sole proprietorship will give the two entrepreneurs a lot of control over the affairs of their business and will enable them to make faster business decisions. On the flipside the liability of the enterprise extends to their personal property. If the couple decides to incorporate either a Private Limited Liability Company or a Public Limited Liability Company they will be required to prepare at certain time periods financial statements in line with Company Act of the country. These include Income Statement, Balance Sheet, Cash flow statement, statements of changes in equity and notes to the financial statements in line with International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Standards (GAAP). The documents are prepared in line with financial accounting requirements and are for external use. The couple could also prepare management accounts to aid them or their managers in planning, organizing, directing and controlling the operational activities of the company. Management accounts are however not mandatory documents by law unlike financial accounting documents. The couple has various sources from which they could get finances to implement their business idea. They could approach angel investors for equity financing, a bank for a loan, friends, relatives etc. for equity financing or loans. Each source has its benefits and disadvantages.
Introduction
Mr. and Mrs. Swanson are intending to go into the business of producing and selling biscuits and chocolates. They could undertake the business by incorporating various forms of business entities namely; Sole Proprietorship, Partnership, Private Limited Liability Company or Public Limited Liability Company. Each business entity type has benefits and drawbacks. It is the duty of the couple to decide in light of these drawbacks highlighted in this document which would be the most ideal type of business entity to undertake the business venture(BULL, NELSON and FISHER 2009). If the couple decides to incorporate a Private Limited Liability Company or a Public Limited Liability Company they will be required to abide by IFRS or GAAP guidelines as the company law and thus prepare annual reports using financial accounting practices. There are various sources of finance that the couple can use to raise funds. To implement the business idea, the couple could approach a lending institution for a loan or a line of credit. They could approach a venture capital fund, an angel investor, a friend, relative or resort to internal sources like selling private property to raise equity funds to implement the business idea (BULL, NELSON and FISHER 2009).
Starting a Business
In every sector of an economy of any country in the world, business entities are registered either as sole proprietors, partnerships, private limited liability companies or public limited liability companies. Mr. and Mrs. Swanson will have to choose whether to register their business in any of these forms. The main differences between these three types of business configurations relates to ownership structure, legal requirements and financing structure decisions among others (BULL, NELSON and FISHER 2009). The term “sole proprietorship” is somewhat misleading as the word “sole” might be interpreted to imply that only one individual is involved in the business. The reality is that a sole trader could have more than one person involved in it. In a sole proprietorship the main requirement is that only one individual is required to own a business entity. The person who owns the entity would be the main source of finance and is expected to be actively involved in its management (MASLIANKOA and MAISTRENKOA 2012). The main drawback is that sole proprietorship entities normally operate on an informal basis in that the private matters of the owner become part of the issues impacting on the business. For instance if the owner is sick the business stalls until he/she recovers. If the business is folded up, the creditors could auction the owner’s property that is unrelated to the entity to recover their money. There is no separation between the assets of the owner and those of the entity. The main benefit of this type of business is that decision making is done much faster than in other types of entities. The owners will have total control over the affairs of the company. Accounting information in a sole proprietorship is relatively straightforward and there is no specific piece of legislation that governs accounting arrangements (KIRTZKHALIA 2012).
Mr. and Mrs. Swanson could also undertake the business as a partnership. The only difference between a partnership and a sole proprietorship is that there is more than one owner in a partnership. It is important for partners in a partnership to agree among themselves the amount of financial resources each will contribute into the business venture before they start. It is also important for the partners to agree on the job responsibilities that each will bear and how many hours each will work (KIRTZKHALIA 2012). Partners must also agree on how they will share profits and losses at the end of each financial year. In many jurisdictions there are laws that govern partnerships. A partnership deed is normally signed to govern the agreements in some countries which are witnessed by an attorney (MASLIANKOA and MAISTRENKOA 2012). The main advantages of a partnership are that the partners are able to raise more capital than in a sole proprietorship and they share ideas on how to effectively manage the business thus making better decisions. The main disadvantage of this type of partnership is that liability for the partnership’s debts is shouldered by the partners as individuals. In the event of dissolution, creditors can auction personal assets of each partner to recover their money. The next business entity is a Private Limited Liability Company (BULL, NELSON and FISHER 2009). The main advantage of these types of entities is that they have a separate legal personality from their owners. These types protect owners from personal bankruptcy unlike in sole proprietorship or partnership discussed in the foregoing. The owners’ liability is only up to the agreed contribution paid at the start of the company and they are not obliged to add more funds in future if the company runs into financial problems. The main disadvantage is that the owners will be required to prepare financial statements in line with IFRS or GAAP depending on the standards used in the country. The entity will be subject to the company laws and will have to be governed in line with these laws. The level of control will be lower and decisions will not be made as fast as in previous types (MASLIANKOA and MAISTRENKOA 2012).
Lastly, the couple could incorporate a Public Limited Liability Company to implement their business ideas. This type will have a separate existence from its owners. Companies are either limited by shares or by guarantees. The term “limited liability” means that owners are allowed to finance their company up to a certain agreed amount of money. After the owners have contributed the agreed amount of money they cannot contribute any more funds even if the company lands into financial difficulties. To incorporate a Public Limited Liability Company the owners will have to register as a Private Limited Liability Company and then trade for a number of years before they can sell shares in the company to the public through the stock exchange. The benefits of incorporating a Public Limited Liability Company are many. First, the liability of the owners is up to the amount they have contributed and not more. In the event the company is to be liquidated, the creditors cannot sell the personal assets of the owners (BULL, NELSON and FISHER 2009). The owners of the company can also approach financial institutions or sell shares to the public in an initial public share offer through the stock exchange to get additional equity and debt funding since limited liability companies are subject to more public scrutiny which improves their credit rating. The main disadvantage is that owners cede control to management who may not have the same passion for the business. The management usually pursues short term interest to the detriment of long term sustainability of the company which is to the detriment of the owners. This is what is called the agency problem. The owners will have less control over the affairs of the business and decisions will be made much slowly and will be subject to public scrutiny (MASLIANKOA and MAISTRENKOA 2012).
Main Branches of accounting
The main branches of accounting that Mr. and Mrs. Swanson will have to understand and probably use depending on the type of business entity they choose to incorporate are financial accounting and management accounting. Management accounting is concerned with analyzing and providing information on cost to the management of a company to aid them in planning, organizing, directing, controlling and evaluating the operations of the company and making better decisions. It is basically accounting information prepared for managers and employees within an organization (BIRNBERG 2011). It is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of accounting information that can be used by the management of a company to carry out their normal duties of planning, organizing, directing, controlling and evaluating of the business activities to ensure the organization achieves its strategic objectives (HASTE 2009). Management accounting is concerned with providing information to managers for use in planning, controlling and making better decisions to achieve business objectives. Management accounting is basically designed to provide information to people inside an organization i.e. managers and employees (BROCCARDO 2014).
Financial accounting on the other hand is concerned with providing information to people outside an organization and includes stockholders, creditors, government, investors, bankers, suppliers, customers etc. The information that management accounting provides enables an organization to be managed effectively whereas the information provided by financial accounting enables stakeholders to judge the past performance of an organization and make better decisions on how to engage in future (LEAUBY and WENTZEL 2012). Financial accounting provides information that is used by external parties such as bankers, creditors and other stakeholders whereas management accounting provides information that is used by managers and employees in an organization to better perform on their jobs. Financial accounting provides information that covers the entire organization whereas management accounting provides information on smaller business units or individual departments, in addition to information on the entire company. Financial accounting focuses on the history of a company whereas management accounting focuses on the future and present state of the company (JESSWEIN 2011).
Financial accounting is supposed to be in a given format that ensures comparability with similar organizations in the industry whereas management accounting has no specific format and is in line with the information requirements of the management of a company. Management accounting information assists the management to plan, record and control activities whereas financial accounting assists stakeholders, bankers, suppliers among others in making investment decisions and for credit analysis. The information provided by financial accounting is quantitative and monetary whereas the information provided by management accounting is both quantitative and qualitative that is both monetary and also non-monetary in nature (MASLIANKOA and MAISTRENKOA 2012). Financial accounting reporting is done at predetermined times in a year like annually or semi-annually whereas management accounting reports could be produced daily, weekly or monthly depending on the needs and directives of the management of a company. Financial accounting reports are mandatory for limited liability companies as per the company laws in a country whereas there is no legal requirement for companies to produce management accounting information. A company can decide not to prepare management accounting information and it will not be breaking any law in the country (HASTE 2009). Financial accounting is done in line with stipulated accounting standards which could be International Financial Reporting Standards or Generally Accepted Accounting Procedures whereas management accounting information is prepared according to the directions of the management of a company. The main objective of financial accounting is to disclose the end results in a trading period and depict the financial condition of a company at a given date normally at the end of the financial year. Management accounting on the other hand has the objective of providing information to management that will help them make better decisions to achieve the objectives of the organization (HASTE 2009).
Sources of Finance
To implement the business idea, Mr. and Mrs. Swanson will have to identify several sources of finance. This is because new businesses need start-up capital to invest in long term assets and use as working capital to start operations. There are many sources of finance to a business entity that it can utilize. These sources could be internal or external to the business entity. Internal sources of finance basically refer to finance generated from inside a company whereas external sources of finance refers to finance generated from outside sources of a company. There are many internal sources of finance available for a company to utilize (MASLIANKOA and MAISTRENKOA 2012). The company can negotiate for a longer credit period with its suppliers. In this case the company will take longer to pay for goods supplied than before. For instance if it was paying its suppliers in 15 days from the date they supply goods and services it can negotiate to pay after 30 days. This will increase the amount of funds available to carry out business activities.
Alternatively a company can improve its debt collection methods to ensure it collects its debts sooner than before (BYRD, ROSS and GLACKIN 2013). For instance, if it was collecting its debts in 30 days it can reduce the debt collection days to 15. This method increases the amount of cash available for trading and enhances the bottom line which increases equity and is a long term source of finance. A company can also sell some of its assets such as land to raise capital or lease it to rent payers (LUTTER 2013). There are instances where a company has non-strategic assets such as underutilized land or land it does not use at all. This asset can be sold or leased out to generate cash for trading or to acquire strategic assets. Another internal source of finance is by ploughing back profits into the business instead of paying dividends to shareholders. This can be done in full or partially and of course with the permission of the shareholders. This is a long term source of finance since the company could retain part of the profits as retained earnings at the end of each year. These earnings increase the equity component in the balance sheet (LUTTER 2013).
External sources of finance include approaching banks for debt finance in form of loans, overdrafts, trade finance, or lines of credit. Loans from banks are normally short term sources of finance but if the company can arrange for lines of credit instead of an overdraft then it can enjoy long term sources of finance to finance its operations. This is debt financing and the company will be required to pay regular interest to the bank. If a company is a limited liability company it could raise share capital from capital markets through an initial public share offer. This is equity funding and is a long term source of finance. The company will be required to pay dividends at the end of a given year (CHANDRA and FEALEY 2009). In subsequent years the company can offer rights issues which basically is a way of raising more equity finance from the existing shareholders by offering them more shares. Other external sources of finance include bank overdrafts, raising money from friends or family members. These methods on whether the funds are short term or long term, debt or equity mainly depend on the arrangement with providers of these funds. A company can also approach angel investors who tend to provide long term finance in form of an equity stake in the company. There are also venture capital funds that the company can approach to get equity financing mainly in exchange for a stake in the company (BYRD, ROSS and GLACKIN 2013).
Conclusion and Recommendation
From the foregoing, Mr. and Mrs. Swanson will have to incorporate a business entity to implement their business idea. The decision on the type of business entity that they will incorporate will be influenced by among other factors the amount of control they will want to have over the business affairs, the amount of liability they will need to shoulder, the level of scrutiny on the affairs of the business they will be willing to allow and the amount of capital they want to raise among other determinants (KIRTZKHALIA 2012). The couple will have to understand the main branches of accounting and its impact on their operations. Private Limited Liability entities and Public Limited Liability Companies must use financial accounting to prepare annual reports for eternal stakeholders. This is a requirement by the authorities. Failure to do that could lead to legal action being taken on the company with dire consequences. There are many sources of finance that the company could resort to raise funds. Start-up finances are mainly in forms of either debt or equity. Each form has a bearing on the future cash flows of the company. It is the duty of the two to decide which form to resort to
References
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