Forms of Business Ownership and Income Statements

Forms of Ownership

• The text is about forms of ownership
• Key legal forms of business ownership: Sole proprietorship, partnership, corporation
• Sole proprietorship single owner
• Partnership two or more owners
• Corporation entity separate from owners
• Advantages of sole proprietorship and partnership: simplicity and low startup costs
• Disadvantages of sole proprietorship and partnership: unlimited liability and limited life
• Corporation has limited liability
• Advantages of corporation: ability to raise funds and has unlimited life
• Disadvantages of corporation: double taxation
• Hybrid forms are possible to combine the features of each

Income Statement

• The income statement shows the profitability of a firm over a period of time
• Income statement of H.J. Boswell Ltd provided for an example
• Revenue is the total amount of money received from the sale of goods or services
• Cost of goods sold is the cost of producing the goods that were sold in the period
• Gross profit is the revenue - the cost of goods sold
• Operating expenses are the expenses incurred in running the business, such as salaries, rent, utilities, marketing, and advertising
• Operating profit is the gross profit - operating expenses
• Interest expense is the cost of borrowing money
• Net profit before tax is the operating profit - interest expense
• Income tax is the amount of tax paid on the company's profits
• Net profit after tax is the net profit before tax - income tax

Balance Sheet

• The balance sheet is a snapshot of a company's assets, liabilities, and equity at a specific point in time
• The balance sheet of H.J. Boswell Ltd provided for an example
• Assets are what the company owns, such as cash, accounts receivable, inventory, and fixed assets (property, plant, and equipment)
• Liabilities are what the company owes to others, such as accounts payable, bank loans, and bonds
• Equity is the difference between assets and liabilities
• The balance sheet follows the accounting equation: Assets = Liabilities + Equity

IFRS and earnings management

• IFRS (International Financial Reporting Standards) are the rules that govern how companies prepare their financial statements.
• Earnings management is the practice of trying to influence the reported profits of a company by using accounting techniques.
• Earnings management can be used to make a company look more profitable and increase its stock price
• IFRS is intended to reduce the amount of earnings management

Chapter 3: The Big World of Small Business

• Small Businesses play a significant role in the economy, contributing to:

  • Job creation
  • Innovation
  • Economic growth

• Key Characteristics of Small Businesses

  • Owned and operated by a few people
  • Limited resources
  • High risk
  • Often located in local areas

• The number of small businesses is increasing due to:

  • Ease of starting a business
  • Technology advancements
  • Favorable government policies

Chapter 3: The Entrepreneurial Spirit

• Many individuals choose to start their own companies due to:

  • Desire for independence
  • Financial rewards
  • Opportunity to create something new
  • Passion for their idea

• Successful entrepreneurs often possess qualities including:

  • Creativity
  • Determination
  • Risk-taking
  • Hard work

• Intrapreneurship describes the process of encouraging innovative thinking within existing large companies .

Chapter 3: The Start-Up Phase: Planning and Launching a New Business

• Small-business ownership options include:

  • Sole Proprietorship
  • Partnership
  • Corporation

• A business plan is a crucial document for a new business. It outlines:

  • Mission and vision
  • Products or services
  • Target market
  • Financial projections
  • Marketing strategy

Chapter 3: The Growth Phase: Nurturing and Sustaining a Young Business

• The new business failure rate is high, indicating a challenging environment for startups.

• Factors contributing to success include:

  • Strong leadership
  • Effective marketing and sales
  • Sound financial management
  • Adapting to changing market conditions

• Business owners can seek advice and support through:

  • Networking with other entrepreneurs
  • Government agencies
  • Private consulting firms

Chapter 3: Financing Options for Small Businesses

• Private financing:

  • Debt financing: bank loans, lines of credit
  • Equity financing: venture capital, angel investors

• Public financing:

  • Initial Public Offering (IPO): selling shares to the public market

• Crowdfunding: raising capital from a large number of individuals.

Chapter 3: The Franchise Alternative

• Franchises offer a proven business model with:

  • Brand recognition
  • Established systems and procedures
  • Support and guidance

• Disadvantages of Franchising:

  • High initial investment
  • Limited independence
  • Possible restrictions on decision-making

• Evaluating a franchising opportunity:

  • Analyze the franchisor's reputation
  • Review the franchise agreement
  • Conduct thorough due diligence

Chapter 4: Interest Rates and the Time Value of Money

• Time Value of Money: The concept that money available today is worth more than the same amount of money in the future.

• Compound interest: Earning interest on interest.

  • Higher interest rates accelerate compounding.

• Discounting: Estimating the present value of future cash flows

• Rule of 72: A quick way to calculate how long it takes for an investment to double in value.

  • Divide 72 by the interest rate to get the approximate doubling time.

Chapter 5: Debt Financing

• Debt financing is a critical part of a business' financial strategy.

  • Businesses can use debt to finance their operations, acquisitions, and growth.

• The cost of debt: The interest rate a business pays for borrowing.

• The time value of money: crucial for understanding the cost of debt.

  • By discounting future interest payments to their present value, businesses can make more informed decisions.

• Types of debt financing:

  • Short-term debt: Used for short-term needs, such as working capital.
  • Long-term debt: Used for long-term needs, such as capital expenditures.

Chapter 5: The Capital Structure Decision

• Capital structure: The mix of debt and equity used to finance a company.

  • A strong capital structure balances the need for growth with maintaining financial stability.

• Factors businesses consider in their capital structure decisions:

  • Risk tolerance
  • Cost of capital
  • Industry norms
  • Tax implications

Chapter 5: The Debt and Equity Cost of Capital

• Businesses must determine the cost of capital to effectively evaluate projects.
  • The cost of debt requires considering interest rates, credit risk, and debt financing costs.
  • The cost of equity, typically higher than debt, reflects the investor's required return.

Chapter 5: Gearing and the Long-Term Financing Decision

• Gearing (leverage) is the proportion of debt in a company's capital structure.

  • Higher gearing can magnify earnings growth, but also increase financial risk.

• Businesses evaluate the risk and return trade-offs associated with gearing.

  • The goal is to strike a balance that optimizes profitability and financial stability.

Chapter 5: Raising Long-term Equity Finance

• Australian Securities Exchange (ASX): A platform for businesses to raise capital through public offerings of shares.

  • Share issues: Selling shares directly to investors.

• Private placing: Direct sale of shares to a select group of investors, potentially more efficient than a public offering.

Chapter 6: Working Capital Management and Short-Term Financing

• Working capital refers to a company's short-term assets and liabilities.

• The cash cycle: The time it takes for a company to convert its investments in inventory and other resources into cash.

  • Optimizing the cash cycle is a key goal of working capital management.

• Industry variations: Different industries have unique working capital requirements.

• Trade credit is a common short-term financing option.

  • Benefits:
    • Flexible financing
    • Improved relationships with suppliers
  • Disadvantages:
    • Cost of borrowing
    • Potential for late payments

Chapter 6: Receivables Management

• Credit policy: Determines the terms under which a company extends credit to customers.

  • Factors to consider: credit limits, payment terms, collection efforts.

• Monitoring accounts receivable: Tracking customer payments to manage cash flow and prevent delinquent accounts.

Chapter 6: Payables Management

• Accounts payable days outstanding (DPO): Average number of days it takes a company to pay its suppliers.

• Stretching accounts payable: Delaying payments to suppliers to improve the cash flow cycle.

Chapter 6: Inventory Management

• Inventory management: Balancing the need to have sufficient inventory to meet customer demand with the costs of holding inventory.

• Holding costs: Include warehousing, storage, insurance, and obsolescence.

Chapter 6: Cash Management

• Cash management: Ensuring a company has adequate cash on hand to meet its obligations.

• Holding cash: Balancing the need to have cash available with the opportunity cost of holding cash, which could be invested elsewhere.

• Alternative investments: Placing excess cash in short-term investments to earn a return.