Starting Up A Business - Essay Example

STARTING UP A BUSINESS Introduction A hobby is a great source of a business idea. Therefore, it would be simpler for one to turn such a hobby into a business venture. This paper will elaborate on such a business idea and how it will be operated. I have always had an interest in selling sunglasses and have made a decision to turn this into a business venture. This is due to a gap in the current market such that it is hard to get a store that sells a variety of sunglasses for all ages, designs and even custom-made designs. Hence, it would be good to specialise in this product line. I purpose to offer these products at a pocket friendly cost that will attract customers. In addition, my plan is to start up the business with three members of staff that is, an administrator that will also act as a cashier, a bookkeeper and two salespersons one of whom will act as a deliveryman for delivery services. In this way, I believe it will minimise the cost of operation. I also intend to rent a store in town at a low rate and stock it with a variety of sunglasses. My business will be based as a sole proprietorship since I intend to start it up it on my own. I have chosen this form of business as it offers some benefits such as flexibility in operation, fast decision making, there is no distribution of profits, the owner has maximum control of the business, it is easy to wind up if need be and few legal formalities are involved. The business venture will also require a chart of account. According to Shim, Siegel & Levine (1998) this is a listing of names of accounts that a business has identified to be used in recording transactions in the general ledger. The chart of account must show the various assets, liabilities and equity of the business. It also covers the revenues and expenses of the business. I have designed the following chart of account for my business. Assets: Account number 001-020 001 Furniture and fittings 002 Motor cycle 003 Cash balance 004 Inventory balance 005 Debtors Equity: Account number 021-030 021 Owners capital 022 Retained earnings Liabilities :Account number 031-050 031 Bank loan 032 Creditors Revenues: Account number 051-100 051 Sales of product no. 100 052 Sales of product no. 200 053 Sales of product no. 300 Expenses: Account number 101-150 101 Office rent expense 102 Salaries and commissions 103 Fuel and maintenance costs 104 Petty cash expenses The above chart of accounts shows the various account numbers and the entries they represent in the general ledger. I have given room for future entries that may arise. I have chosen the accounts according to what I plan to start with such as the motor cycle account is created since I intend to purchase one for making deliveries to customers. Accounting standards According to Oppermann (2001), In order for every business to prosper, proper accounting policies and standards must be used to prepare financial statements. This will help portray the actual position of the company’s financial performance. In this business, I will require that the bookkeeper use the Generally Accepted Accounting Standards to prepare the financial statements. This is because the financial statements will assist me in analysing the financial performance of the business over time. In addition, the financial statements will act as proof of a going concern for my business that is needed when sourcing for funds. There is not much difference between the GAAPs and the IFRS. However, having chosen to use the GAAPs will require certain adjustments to be made that may affect the results of the business such as 1. The business will be required to disclose the accounting policies and concepts they use in the notes to the financial statements. 2. They recommend separation of current and non-current assets and liabilities. 3. Items that are not of regular nature are allowed in the financial statements. 4. Bank overdraft is treated as a financing activity. Choosing to use GAAPs over IFRS is better for a sole proprietorship business since there is not much of reporting done as keeping financial records. Pro forma Balance sheet and Income statement Below is a sample of the pro forma balance sheet and income statement See Beyond the Sun Balance Sheet As at 31st December 20xx Assets $ $ Non-current Assets Motorcycle 1875 Furniture and fittings 1500 3375 Current Assets Inventory 700 Debtors 100 Cash balance 135 935 4310 Equity Owner’s Capital 2155 Liabilities Bank Loan 2155 4310 Note: It is assumed that 50 percent of the Assets will be financed through bank loan while the other 50 percent will be through the capital I will contribute to the business. For the use of this document, I have selected the name of the business to be ‘See beyond the sun’ See Beyond the Sun Income Statement For the year ended 31st December 20xx $ $ Sales 6,250 Less: Cost of goods sold Opening stock 100 Purchases 1,200 Closing stock (700) (600) Gross profit 5650 Expenses Office rent 100 Salaries and commissions200 Fuel and maintenance 90 390 Net profit 5260 Internal Controls According to Hightower (2009), internal controls are important in order to safeguard the business property. Due to the value of the assets in the business, I intend to put internal controls that will safeguard the business assets and customer databases. I intend to do this through two ways which are: Restricted Access This is restricting access to the company’s assets and information of the business. It can be done by installing doors that only open through passwords, marking the unauthorized areas in the office and ensuring that all computers are encrypted with passwords. This will ensure that any other person except the authorized staff cannot use those computers or enter into the back office room where sensitive information is kept. The installation of surveillance cameras would also help restrict access to sensitive areas by unauthorized persons. Segregation of duties This is whereby every employee in the business is assigned duties that are unique to him and can only be done by him. Therefore, everyone becomes accountable for his or her duties. For example, the salesperson responsible for delivering products to customers is the only one responsible for the motorcycle and therefore will ensure that it is protected. The administrator is the only one responsible for keeping records of customers and the business in general. Such information should only be accessed by him only. In this way, the business will safeguard its assets and important information. I will implement the two internal controls through the following ways. Firstly, I will purchase computerised locking system for all the unauthorized areas to ensure that only authorized persons get access to them. I will also ensure that all staff have user accounts on their computers and such computers have strong passwords, which will be changed randomly to enhance security. Surveillance cameras will also be installed in several parts of the store and back office to assist in tracking the activities around the place. Finally, I shall design a job description for every staff to enable carry out the segregation of duties. This will ensure that every employee is conscious of their errands and will be held responsible. According to Morris (2001), any business strategy is faced by various challenges, which must be overcome. The implementation of these internal controls may be challenging due to several reasons. For example, in this case, the challenge of cost may arise which I intend to overcome by proper planning on how to get the funds. Impact of the Regulatory Environment In the current business world, many regulations have been put to ensure that good business practices are maintained. According to Sarbanes Oxley (SOX) (2004), such regulations include the Sarbanes-Oxley Act that was enacted to enhance corporate transparency that would reduce cases of fraud and corruption. Therefore conforming to these regulations will help the business to be more accountable for its actions and financial statements being more reliable. The business will gain public confidence if such regulations are complied with. However, the cost of conforming to these regulations may be a challenge to the business since it will be very costly. This is because its benefits are will not be felt immediately and may take a long time. For example, conforming to the Sarbanes-Oxley Act will enhance transparency in the business and hence the public will have confidence in it. This may not be felt immediately and therefore the business will enjoy the benefits after some time, say three to five years. These regulations also have an effect on decision-making. This is because, for every decision made, it has to match the standards of the regulatory framework hindering the flexibility in decision-making. Conclusion This paper has concluded that starting up a business venture may be a challenging task considering the formalities involved, finding a source of capital and conforming to the regulations in the business environment. Starting up a business involves many activities but also operating the business is another task that if not well coordinated, may lead to low performance of the business. However, such can be surmounted with proper planning and wise decision-making. It is also significant to the importance of conforming to the accounting standards when preparing financial statements for the business as discussed in this paper. References Hightower, R. (2009). Internal controls policies and procedures. Hoboken, N.J.: Wiley. Morris, M. J. (2011). Starting a successful business (7th Ed.). London: Kogan Page. Oppermann, H. R. (2001). Accounting standards (9th Ed.). Lansdowne [South Africa: Juta. Sarbanes Oxley (SOX): an overview and update. (2004). Indianapolis: Indiana Continuing Legal Education Forum. Shim, J. K., Siegel, J. G., & Levine, M. H. (1998). The dictionary of international business terms. Chicago: Glenlake Publ. Co.; Read More