How Small Business Finance Is Different to Corporate Finance - Assignment Example

Part one Explain how small business finance is different to corporate finance Small business finance refers to the funds with which a current or aspiring business owner starts a new small business, purchases an existing business of puts into an existing small business to support present or future business activity. On the other hand, corporation finance refers to both the investment decision and the financing decision that a firm makes. Define the term ‘financial management’ Financial management is the process of strategising an organisation’s financial direction as well as performance of its day-to-day financial activities. Evaluate different definitions of small business There is no single definition of a small business. However, most definitions arise from qualitative measures like ownership and control as well as quantitative measures like number of employees or the value of assets that the business owns, though the definitions vary from one industry to another to reflect their differences. Other authors argue that small businesses are those where there is no public negotiability of share ownership, and where the owner(s) of the business must personally guarantee any current or intended financing. The Australian Bureau of Statistics (ABS) defines a small business as a business that is independently owned, with close control over decisions and operations managed by the owners. Further according to the ABS, the small business entity is not publicly traded and business financing is personally guaranteed by the owners, and the business will have less than 20 employees. Identify the qualitative characteristics that typify small business There is informal and close contact between the management and staff of the business The business is mostly influenced by the personality of the entrepreneur There is a low degree of formalisation in the organisation Most small businesses have flat organisational hierarchies Identify the economic and social/psychological motivations of small business owners Economic motivations: Need to improve financial opportunities Need to gain financial independence Social/psychological motivations: Personal challenge to become own boss Unemployment Job loss Lack of work opportunities Appreciate the importance of small business owner characteristics in financial management decisions The characteristics of small business owners include need for achievement, willingness to take risks, need for autonomy, confidence, versatility, resilience and perseverance. These characteristics are important with respect to making financial decisions because small business owners must be able to strategise their organisation’s financial direction and ensure that its day-to-day operations are sustained while attaining profitability. For instance, they must be wiling to take risks during resource allocation, they must be able to make key decisions, and be versatile or adaptable in weighing various investment options. Importantly, small business owners must be able to handle the outcomes of their business performance, which could be profits or losses. The business owner must be resilient and able to persevere during harsh economic conditions where even seemingly good financial decisions could result in losses. That is, small business owners must be willing to take risks through their investment decisions, but the decisions need to be prudent as to result in profit, which is the aim of starting the business. List the key characteristics of small businesses A small business is managed by its owner or owners in a personalised way It has a relatively small share of the market in economic terms The business is independent in such a way that it does not form part of a larger enterprise and its ownership is comparatively free from external control in its principal decisions Part two Explain the concept of having an exit plan An exit plan forms the last portion of a business plan. It is important to have an exit plan since it shows the business’s long-term plans, which can help the owner and potential investors in decision making. In the exit plan, the business owner way wish to sell all or a portion of the business, to pass the business to a family member, to take the firm public and so on. An exit plan will determine how the business operates in the long run. Identify the main mechanisms for exiting a small business Forming a lifestyle company Selling the business to a friendly buyer Engaging in acquisitions and mergers Having an initial public offering (IPO) Identify the available exit mechanisms available to each of the legal business structures Sole proprietorship: Keeping the business in the family, selling the business to employees, putting the business up for sale, selling to another business, having an IPO. Partnership: Acquisition, merging, selling to a friendly buyer. Limited liability company: Mergers, acquisitions, selling the company, joint venture. Corporation: Corporate divestiture, one-step equity spin-off, two-step equity spin-off, split-off. Explain the process of going public Going public refers to a private firm’s initial public offering, by which the private company offers the first sale of its stock to the public. By doing so, the company becomes a publicly traded and owned entity. When a company intends to go public, it first has to select one or more investment banks as underwriters for the IPO. The underwriter monitors and evaluates the existing market conditions for an IPO. The underwriter also manages the whole IPO implementation and marketing process. In addition to financial advisors, the firm requires legal advice because the listing requirements impose strict legal compliance and reporting obligations of the respective stock exchange. After compiling the IPO prospectus, which has extensive financial information, the documentation is filed with and audited by the respective stock exchange. Identify the benefits and disadvantages of going public Benefits: Going public increases a business’s net worth since the business has access to larger capital Going public makes the business to be ranked among the big firms that have gone public, hence the business commands greater respectability The cost of capital for a listed business tends to be lower When a firm goes public, those who have invested in it can cash out and establish a diversified portfolio Disadvantages The process is complicated, expensive and time-consuming There is no guarantee that the business will be more successful by going public Loss of control for the entrepreneurial founder of the business: The business owner may be required by the venture capitalist to step down as the CEO of the business if his or her skills are not adequate for taking the company public. A business that goes public is required to disclose a lot of information Identify the motivations for floating the company The main purpose for floating the public market is the firm’s high demand for capital. Floating a company enables prospective investors to take an insight into the company’s stock’s volatility. Generally, investors usually prefer to invest in stocks that have large floats since companies with larger floats are regarded to be less volatile. The larger the company’s float, the more prospective investors it is likely to attract. Read More