Crucial Issues Concerning Business Management - Coursework Example

INTRODUCTION TO ACCOUNTING By name Institution Lecturer Course Date Introduction Setting up a business comes with its own anticipation and excitement. However there is more to setting up a business than picking up a location and a name for the business. For one to start a successful business, one has to have the knowledge of the form of business unit they need to start, the market in which their business will be engaged in, understand what management and finance accounting means to the business and also be able to identify the long term, short term and medium term sources available to finance the business for it to be able to achieve the set goals. This knowledge is crucial to anyone starting a business especially if they do not have a background in business management. This report will analyse and evaluate these crucial issues concerning business management and provide the required knowledge to set up a business. Forms of Business Units The form of business takes is determined by factors such as the person contributing to the capital of the business, the person contributing other resources, the person who controls and coordinates activities and the implementer of all operations in a business. All this factors determine the ownership of a business. A business can be owned by a single person or can be owned two or more individuals who determine what form a business will take. In relation to the ownership arrangement there are several forms that a business can take. They include; sole proprietorship, partnership, Limited Liability Company, corporation and joint stock companies (Dlabay & Burrow 2008). Sole Proprietorship This is a form of business unit which is owned by a single individual. There is no separation of ownership in such a business and the owner manages the business relying on his own knowledge and skills. There is no sharing of profits and losses and the liability is unlimited. The power to control completely lies with the owner (Dlabay & Burrow 2008). Sole proprietorship has its own benefits and limitations. One of the benefits of this form business is the fact that it is easy to form due to the few legal formalities required. The form of business also allows the owner to give a personal touch to the business. Also with this business decision making is easy since the owner do not have to consult any other person. The business is also flexible and allows the owner to bring in changes. Since it is controlled by a single person, it is beneficial in that it is easy to have better coordination, safeguard the secrets of the business and allows for equal distribution of wealth Dlabay & Burrow 2008). Though the benefits stated above makes the sole proprietorship seem effective, efficient and convenient, the business has its own limitations. Since it is managed by one individual, funds and managerial talent might be limited which creates great limitations to the business. Also the lack of continuity and the fact that liability is unlimited possess great limitations to such a business and may lead to its failure (Dlabay & Burrow 2008). Partnership This is a relationship between two or more individuals who pool their managerial talents and finances together to form a business where they agree to share profits in certain ratios. In a partnership form of business there is no interdependence. All involved people contribute funds, carry the risks involved and run the business. Just like a sole proprietor, the personal liability of each partner is unlimited unless a partner is registered to have limited liability (Dlabay & Burrow 2008). The benefits of partnership form of business are that it is easy to form since there are few legal requirements and that there are more fund and resources when there are more people and the decision making process comes out with better decisions. The business is flexible and the risks involved are shared among the partners unlike in the sole proprietorship. The business is formed by people with diverse talents and this brings specialisation which is good for the success of the company. Partnership also has the benefit of secrecy and the interest of each partner is well protected and if any partner is dissatisfied, they can always pull out of the partnership (Dlabay & Burrow 2008). Partnership has its own limitations. One such limitation is the unlimited liability which ties the personal properties of each one of them to the liabilities of the firm. Another limitation is the fact that such businesses face uncertainty where the death or incapacity of any member ends the partnership. The business also faces limited capital since the number of partners is limited to 20 members and shares within a partnership cannot be transferred to other partners or even to outsiders and if this is to happen, the firm has to be dissolved. The presence of many partners with different opinions and interest may sometimes lead to conflicts which is another great limitation to this form of business (Dlabay & Burrow 2008). Corporation A corporation is a form of business which operates as a legal entity and is separate from those who own it and is treated as an individual by law. Any shareholder of a corporation is liable for debts related to the corporation only, depending on his or her investment to the corporation. A corporation carries out its operation like a sole proprietorship or a partnership. However unlike in partnership a corporation is not dissolves upon the death of a director, officer or shareholder. Shares can be transferred to other shareholders or outsiders (Dlabay & Burrow 2008). A corporation has several benefits. One such benefit is the fact that a corporation has the ability to raise capital through the sale of stocks and shares to expand and grow the company. Another benefit is the fact that shareholders have limited liability. Corporation also have another benefit where the owners are not the one directly running the business, instead they have a board of directors responsible for making sure that all the operations in the business run smoothly. Through this separation of ownership and management, the corporation is able to use the diverse skills, experience and knowledge of individuals to run the business successfully (Dlabay & Burrow 2008). Running a corporation has some limitations too. Some of this limitations include the complexity and cost of setting up the business, the process of decision making which is slow and long and the fact that the business is has to pay taxes to the government and also pay shareholders dividends which are later taxed again (Dlabay & Burrow 2008). Limited Liability Company This form of a business where the operations are carried out as those of a partnership but include limited liability for the partners. The business enjoys the benefits of both a corporation and a partnership. This is because the owners in this business have limited liability to what they have invested in their company and taxes on profits are done once. This form of business is suitable for small business but not large ones (Dlabay & Burrow 2008). The benefits of a limited liability company are the fact that the owners have limited liability and that the taxes on profits are only done once. The company enjoys all the benefits that are there in a partnership as well as a corporation. The limitations are that only small business will operate well under this form of business and the fact that it faces the same limitations as a partnership or a corporation apart from double taxation (Dlabay & Burrow 2008). Finance Accounting and Management Accounting When setting up a business it is crucial that one is able to understand what finance and management accounting is. Both are important in processing and identifying relevant information required during decision making and helps communicate through reports the information. According to the Institute of Management Accountants, Management Accounting is defined as the profession that involves the process of partnering during the process of making management decisions, devising a plan and a system for performance management and providing financial reporting expertise as well as providing control that would help management form and implement an organisational strategy (Needles, Powers & Crosson 2011). Financial Accounting on the other hand is helpful in providing the financial health of a company to its shareholders. This is usually the major source of information required for making decisions related to the allocation of resources. This information is usually provided to external shareholders of a business (Needles, Powers & Crosson 2011). One difference between the two systems is the fact that management accounting is specifically for internal use in decision making while financial accounting is done for external users. Management accounting is purposely for running a business and helps make financial decisions. The managerial reports generally break down projections and numbers which are related to product, employees, customers and departments and their effects to the business. Financial reports on the other hand are prepared and sent to external users like financial professionals, lenders and granters and shareholders. The reports provide information on concrete numbers, past achievements and mistakes that the business might have made (Needles, Powers & Crosson 2011). Another difference is on the objectives. Financial accounting’s objective is to provide final results of a business as well as the financial state at a given date while the objective of management accounting is to assist management with information that is helpful in the planning, setting goals and evaluating those goals. In addition, Management accounting reports are not required by the law and have no legal requirements binding them but financial accounting reports are legally required and have to maintain a certain standards. Another difference is that management accounting focuses on the present and predicts the future while financial accounting focuses on the past reports required annually (Needles, Powers & Crosson 2011). Management accounting concentrates on information relating to money and the company’s goals while financial accounting concentrates on monetary information. There is a specific format for writing a financial accounting report. However, there is no specific format for managerial accounting. The format depends on the company. Lastly, reporting for managerial accounting usually occur either daily, monthly or weekly when need be while financial accounting reporting has a defined time of reporting which may be annually, yearly, quarterly and semi-annually (Needles, Powers & Crosson 2011). Source of Finance Starting a business requires enough capital that will keep the business in operation until it gets to its breaking even point. It is important to know the sources for finance available in the short term, medium term and long term for the business funding. When operating a business, one has to think of ways to fund it in the shot and medium term and also long term. There are several sources for small and medium term financing. Sources like trade credit where the business acquires good and services on credit, bank overdrafts, leases and rentals, bills of exchange, credit and sale acceptance, invoicing and factoring discounting from debtors and short term bank borrowing are some short and term sources of funds. To be able to manage this short and medium term funds the management should be able to guard them for the acquisition of assets in the long term (Glynn & Murphy 2008). For long term financing one can get funds through the capital market. This way the business provides debentures and shares of different kinds and through this the business is able to raise funds in the future. Another way of acquiring long term funds is through leasing the business, foreign sources such as World Bank, special financial institutions and profits from reinvestments or retained profits (Glynn & Murphy 2008) Conclusion Venturing into business can be exciting but can also be scary at the same time. However with the right knowledge and skills one can be able to start a successful business. One thing to understand is the form of business in which one wants to start whether partnership, sole proprietorship, a corporation or a limited company. Also one has to understand management and financial accounting and how both are different while used in the business. Funds are crucial in a business, knowing where to find fund is also very important and this report has provided most of the source for short, medium and long term. With this information one is able to set up successful business. Recommendation Start a Partnership business since you are two, it will make decisions making easier. Also you will not be required to comply with many legal requirement. Decide how to carry out operations within the business, always consult each other and be open to each other Understand both financial and management accounting. Start making reports for both as early as possible to keep track of your business. The reports will help in decision making in the future and also show the progress of the company. If the funds and resources you have are not enough, consider getting funds from the bank by taking short term loans that will help fund the business Bibliography Dlabay, L. & Burrow, J 2008, Business Finance. Ohio: Thomson South-Western. Glynn, JJ & Murphy, M 2008, Accounting for Mangers. London: South-Western Cengage Learning. Needles, B., Powers, M. & Crosson S 2011, Financial and Managerial Accounting. USA: South-Western Cengage Learning. Read More