This report contains detailed information about the type of business entities available along with the merits and demerits of each type. It also explains the various sources of funds available to a business owner. The main focus is on the long term and medium term sources of finance and explained with the examples. The last part of the report explains and differentiates the terms financial and management accounting, followed by a recommendation provided to the client by a financial consultant working in a consultancy firm, named IBM. The advice was about choosing the best type of entity and best source of finance.
An organization which produces goods and services with the help of available resources, in order to meet the requirements of a consumer, is known as business organization. The business organization can be funded by a single individual or a group of individuals who owns and manage the business in the form of partnership or a company. Such arrangement of ownership is called as forms of business organization. Following are the different forms of business units:
Sole proprietorship
As the name suggest, it is the form in which business is managed and owned by one individual. In the books of accounts, owner and business are considered as a separate entity but for legal purposes both are taken as single entity. The profit or loss made in the business solely belongs to the trader and he has the full control over the activities of the organization. (Pride, Hughes & Kapoor, 2014).
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Benefits |
Limitations |
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It is very easy to form a sole proprietorship form of business. Also it can be easily wind up as and when the proprietor decides to do so. |
The resources available are limited because the proprietor has a limited capacity for arranging funds from his own sources. |
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No external interference is there, which results in quick decision making (Mancuso, 2016). |
Unlimited liability is there. Reason being, owner and the entity are treated as a single person in front of law. |
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It requires less legal formalities at time of formation and the changes can be made in the structure as and when required. |
It is not suitable for performing large scale operations because of limited resources and capital (Scott, 2012). |
Partnership
The firm owned by two or more people, who work as partners, is called a partnership firm. In such form, a partnership deed is formed which states the distribution of profits and losses, interest on capital and many more (Clough, Sears, Sears, Segner & Rounds, 2015).
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Benefits |
Limitations |
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It is also very easy to form as it only requires a simple agreement to be made. |
The firm has limited capital because of limited number of partners. |
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Partners have a right to participate in the management of the firm and decisions are taken from the consent of all the partners. This led to better decision making. |
The major drawback is that partners have unlimited liability. This means they are personally liable for any debt or obligation. |
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Risk or losses are shared among all the partners either equally or in a stated ratio (Kumar, 2008). |
Conflict may arise due to differences in the view point and interest of partners. |
Company or Corporation
It is that form of business organization which owned by group of people known as shareholders. These people invest their money in the business and they also hold some percent of shareholdings in the company. In the eyes of law, a company is treated as a separate entity and is considered as an “artificial person” who runs a business in its own name. Further, transfer of shares is easy and it is expected that the business will continue for a long time. (Boone & Kurtz, 2013).
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Benefits |
Limitations |
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A limited company can raise huge amount of funds from its number of shareholders. |
The formation of a company requires many legal formalities which make the process more complicated. |
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Shareholders have the advantage of having limited liability. They are not called up to pay more than the face value if their shares. |
It is difficult to maintain the confidentiality in the business information as many people are involved in the management of a company (Guerard and Schwartz, 2007). |
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The life of a limited company does not depend upon the life of its shareholders. It has permanent existence (Bouchoux, 2009). |
Decision making process is very time consuming because it is not always possible to arrange a meeting of directors on short notices. |
Business finance, in general, is described as the money required for conducting various activities of the business. It also includes the way through which finance has been raised. There are various sources through which a business owner can raise funds for his business operations. These are equity, debt, term loans, retained profits and many more. The different types of sources are used in different situations. Generally, sources of funds are categorized on the basis of time duration, ownership and their source of generation. Knowing the fact that, there are various financing sources available, company should choose the right source and right mix of capital (Cinnamon and Helweg-Larsen, 2010).
On the basis of time period, sources are classified as short, medium and long term. From these sources, finance is raised according to the time for which it is required in the business. They are defined as:
Medium term sources
This type of financing is generally for 3 to 5 years and is used either when there is no availability of long term capital or when the expenditures like advertisements are required to be written off within a period of 5 years. In addition to this, events related to renovation and modernisation, promotional programmes and many more which are to be occurred for a shorter period of time also required medium term finance (Bose, 2012). These sources are available in following forms:
For example, company can issue bonds or debenture for the projects having medium length, though it increases the level of leverage. Another way is that, it can take loan from commercial banks or institutions which provide financial assistance to the business owners. The loan can be for a period shorter than five years. However, it increases the debt of the company but also leads to inflow of cash in the business.
Long term sources
It basically deals with the requirement of capital for more than five years. The fund raised from these types of sources is used for capital expenditures like acquisition of fixed assets including property, plant, building and machinery. Long term sources of funds are also used to raise the working capital which is required for the day to day operation of the business. It is that source through which company raises funds for financing its activities like expansion of business and taking over of another business. The reason why they go for long term financing is that they do not have such huge cash balance in hand and also various sources are available for raising the same (Bose, 2012). Following are some long term sources opted by a business owner:
For example, a company can divide its capital into small units and these units are known as share. By issuing them to the public, company can raise capital for its business. Moreover, issue of shares is one of the main sources of long term financing. The persons who hold those units or shares are known as shareholders. Apart for this, the owners can also borrow funds from the banks for longer period of time, on which they are require to pay interest at a specific rate.
Apart from the above, there are also various sources of funds through which a company can arrange or mange finance for its business activities or operations.
Management Accounting is a system which deals with the decision making process of the business. It provides that accounting information, which is useful for the managers in taking important decisions. (Arora, 2012). According to R.N. Anthony, management accounting consist the accounting information which is useful for the management.
It is also defined as the process of identifying, measuring, analysing, preparing and communicating the financial data to the management for the purpose of planning. It also explains the effective control and use of resources within the organization.
Objectives:
On a whole, management accounting helps in organising and coordinating different functions of the business enterprise. It also facilitates the comparison of actual performance with the standard one.
Financial accounting, in simpler terms is the preparation of company’s accounts that convey the financial information to the outsiders for their use. The main objective of this accounting is to provide the information about the performance and position of the enterprise’s management to its owners or shareholders. In other words, it is a branch of accounting that keeps record of business transactions and reports them in the financial statements such as profit and loss account and balance sheet, prepared at the end of the fiscal year (Narayanaswamy, 2017).
Objectives:
Unlike management accounting, it is very important for the companies to practice financial accounting as it deals with the core financial data of a company and reflects the true picture of it to the outside users.
Differences
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Basis |
Management Accounting |
Financial Accounting |
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Purpose |
It supply data for internal use only. |
It provides data for both internal and external use only. |
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Performance analysis |
Evaluates each and every department of an enterprise. |
Evaluates the performance of whole enterprise. |
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Nature |
It is objective by nature. |
It is subjective by nature. |
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Standards |
No need to follow accounting standards. |
Reports are prepared as per the set standards. |
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Accuracy |
Information is based on approximates. |
It ensures full accuracy of data. |
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Legal responsibility |
It is optional for the companies. |
It is compulsory for the companies. |
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Time period |
It is concerned with budgets and forecast, thus has a future orientation. |
It deals with the published financial results, hence has a historical orientation. |
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Reporting |
It reports the problems in the management and their solutions. |
It reports about the profitability and efficiency of the firm. |
(Banerjee, 2012).
From the above report and as a financial consultant, I will recommended to the clients that they should go ahead and invest their lump sum money in establishing a company. Though it is a very complicated process but once incorporated, it can provide various types of benefits. Also, as company it will be easier to raise capital through different long term and medium term sources of finance. As stated in the report, that limited companies or corporations run the business for long run, so it will derive future benefits for the owners and shareholders. Moreover, unlike partnership and sole trader, the client will be having limited liability in this type of business unit.
Conclusion
The above report concludes that the client must choose a company as a form of organization for starting their business. It is the most suitable form as compared to the other two. It has several benefits as well as disadvantages also. Also it is advised to the clients to make a proper mix of capital structure and should finance more of their business activities through equity financing rather than debt.
References
Arora, M.N., (2012). A textbook of cost and management accounting. 10th ed. New Delhi: Vikas Publishing House.
Banerjee, B., (2012). Financial policy and management accounting. 7th ed. pp.7-8. New Delhi: PHI Learning Pvt. Ltd.
Boone, L. E., & Kurtz, D. L. (2013). Essentials of Contemporary Business, Binder Ready Version. (1st ed.). USA: John Wiley & Sons.
Bose, D.C., (2012). Principles of management and administration. 2nd ed. New Delhi: PHI Learning Pvt. Ltd.
Bouchoux, D.E., (2009). Business organizations for paralegals. 3rd ed. New York: Aspen Publishers.
Cinnamon, B. and Helweg-Larsen, B., (2010). How to understand business finance. 2nd ed. United Kingdom: Kogan Page Publishers.
Clough, R. H., Sears, G. A., Sears, S. K., Segner, R. O., & Rounds, J. L. (2015). Construction contracting: A practical guide to company management. (8th ed.). New Jersey: John Wiley & Sons.
Coombs, H., Jenkins, E. and Hobbs, D., (2005). Management accounting: principles and applications. London: Sage.
Guerard Jr, J.B. and Schwartz, E., (2007). Quantitative corporate finance. New York: Springer Science & Business Media.
Kumar, S.A., (2008). Entrepreneurship development. New Delhi: New Age International.
Mancuso, A., (2016). Llc Or Corporation?: Choose the Right Form for Your Business. 7th ed. USA: Nolo.
Narayanaswamy, R., (2017). Financial accounting: a managerial perspective. 5th ed. New Delhi: PHI Learning Pvt. Ltd.
Nilsson, F. and Stockenstrand, A.K., (2016). Financial Accounting and Management Control. Springer International Publishing: Imprint: Switzerland: Springer
Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2014). Foundations of business. (4th ed.). USA: Cengage Learning.
Scott, P., (2012). Accounting for Business: An Integrated Print and Online Solution. United Kingdom: Oxford University Press.
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