Mr. and Mrs. Swanson’s start-up enterprise decision areas
ord Limit: 2,000 words (with 10% plus or minus leeway)�
�
Percentage of marks awarded for module: This assignment is worth 50% of the total marks for the
module�
�Constructive critical analysis, introduction, conclusion �Relevant, accurate content, demonstrating
research, as required by the assessment task. �
�Coherent and clear discussion of the different forms of business�
�Clear comparison between financial and management accounting�
�Critical discussion of the different sources of finance 70%�
Referencing Style �Full in-text referencing using the Harvard citation style. �
�Structured reference list or bibliography using the Harvard referencing method 10%�
Content, style, relevance, originality Clear demonstration of rigorous research from recognised
authoritative sources. Audience focus; report format � 10%�
Executive summary
Mr. and Mrs. Swanson could incorporate a Sole Proprietorship, a Partnership, a Private
Limited Liability Company or a Public Limited Liability Company as a business vehicle to
implement their business idea of producing and selling biscuits and chocolates. Each of these
types of business entities has their benefits and disadvantages. For example a sole proprietorship
will give the two entrepreneurs a lot of control over the affairs of their business and will enable
them to make faster business decisions. On the flipside the liability of the enterprise extends to
their personal property. If the couple decides to incorporate either a Private Limited Liability
Company or a Public Limited Liability Company they will be required to prepare at certain time
periods financial statements in line with Company Act of the country. These include Income
Statement, Balance Sheet, Cash flow statement, statements of changes in equity and notes to the
financial statements in line with International Financial Reporting Standards (IFRS) or Generally
Running Head: Business 3
Accepted Accounting Standards (GAAP). The documents are prepared in line with financial
accounting requirements and are for external use. The couple could also prepare management
accounts to aid them or their managers in planning, organizing, directing and controlling the
operational activities of the company. Management accounts are however not mandatory
documents by law unlike financial accounting documents. The couple has various sources from
which they could get finances to implement their business idea. They could approach angel
investors for equity financing, a bank for a loan, friends, relatives etc. for equity financing or
loans. Each source has its benefits and disadvantages.
Table of Contents
Executive summary 2
Introduction 4
Starting a Business 4
Main Branches of accounting 7
Sources of Finance 9
Conclusion and Recommendation 11
References 13
Running Head: Business 4
Introduction
Mr. and Mrs. Swanson are intending to go into the business of producing and selling
biscuits and chocolates. They could undertake the business by incorporating various forms of
business entities namely; Sole Proprietorship, Partnership, Private Limited Liability Company or
Public Limited Liability Company. Each business entity type has benefits and drawbacks. It is
the duty of the couple to decide in light of these drawbacks highlighted in this document which
would be the most ideal type of business entity to undertake the business venture(BULL,
NELSON and FISHER 2009). If the couple decides to incorporate a Private Limited Liability
Company or a Public Limited Liability Company they will be required to abide by IFRS or
GAAP guidelines as the company law and thus prepare annual reports using financial accounting
practices. There are various sources of finance that the couple can use to raise funds. To
implement the business idea, the couple could approach a lending institution for a loan or a line
Running Head: Business 5
of credit. They could approach a venture capital fund, an angel investor, a friend, relative or
resort to internal sources like selling private property to raise equity funds to implement the
business idea (BULL, NELSON and FISHER 2009).
Starting a Business
In every sector of an economy of any country in the world, business entities are registered
either as sole proprietors, partnerships, private limited liability companies or public limited
liability companies. Mr. and Mrs. Swanson will have to choose whether to register their business
in any of these forms. The main differences between these three types of business configurations
relates to ownership structure, legal requirements and financing structure decisions among others
(BULL, NELSON and FISHER 2009). The term “sole proprietorship” is somewhat misleading
as the word “sole” might be interpreted to imply that only one individual is involved in the
business. The reality is that a sole trader could have more than one person involved in it. In a
sole proprietorship the main requirement is that only one individual is required to own a business
entity. The person who owns the entity would be the main source of finance and is expected to
be actively involved in its management (MASLIANKOA and MAISTRENKOA 2012). The
main drawback is that sole proprietorship entities normally operate on an informal basis in that
the private matters of the owner become part of the issues impacting on the business. For
instance if the owner is sick the business stalls until he/she recovers. If the business is folded up,
the creditors could auction the owner’s property that is unrelated to the entity to recover their
money. There is no separation between the assets of the owner and those of the entity. The main
benefit of this type of business is that decision making is done much faster than in other types of
entities. The owners will have total control over the affairs of the company. Accounting
Running Head: Business 6
information in a sole proprietorship is relatively straightforward and there is no specific piece of
legislation that governs accounting arrangements (KIRTZKHALIA 2012).
Mr. and Mrs. Swanson could also undertake the business as a partnership. The only
difference between a partnership and a sole proprietorship is that there is more than one owner in
a partnership. It is important for partners in a partnership to agree among themselves the amount
of financial resources each will contribute into the business venture before they start. It is also
important for the partners to agree on the job responsibilities that each will bear and how many
hours each will work (KIRTZKHALIA 2012). Partners must also agree on how they will share
profits and losses at the end of each financial year. In many jurisdictions there are laws that
govern partnerships. A partnership deed is normally signed to govern the agreements in some
countries which are witnessed by an attorney (MASLIANKOA and MAISTRENKOA 2012).
The main advantages of a partnership are that the partners are able to raise more capital than in a
sole proprietorship and they share ideas on how to effectively manage the business thus making
better decisions. The main disadvantage of this type of partnership is that liability for the
partnership’s debts is shouldered by the partners as individuals. In the event of dissolution,
creditors can auction personal assets of each partner to recover their money. The next business
entity is a Private Limited Liability Company (BULL, NELSON and FISHER 2009). The
main advantage of these types of entities is that they have a separate legal personality from their
owners. These types protect owners from personal bankruptcy unlike in sole proprietorship or
partnership discussed in the foregoing. The owners’ liability is only up to the agreed contribution
paid at the start of the company and they are not obliged to add more funds in future if the
company runs into financial problems. The main disadvantage is that the owners will be required
to prepare financial statements in line with IFRS or GAAP depending on the standards used in
Running Head: Business 7
the country. The entity will be subject to the company laws and will have to be governed in line
with these laws. The level of control will be lower and decisions will not be made as fast as in
previous types (MASLIANKOA and MAISTRENKOA 2012).
Lastly, the couple could incorporate a Public Limited Liability Company to implement
their business ideas. This type will have a separate existence from its owners. Companies are
either limited by shares or by guarantees. The term “limited liability” means that owners are
allowed to finance their company up to a certain agreed amount of money. After the owners
have contributed the agreed amount of money they cannot contribute any more funds even if the
company lands into financial difficulties. To incorporate a Public Limited Liability Company the
owners will have to register as a Private Limited Liability Company and then trade for a number
of years before they can sell shares in the company to the public through the stock exchange. The
benefits of incorporating a Public Limited Liability Company are many. First, the liability of the
owners is up to the amount they have contributed and not more. In the event the company is to be
liquidated, the creditors cannot sell the personal assets of the owners (BULL, NELSON and
FISHER 2009). The owners of the company can also approach financial institutions or sell
shares to the public in an initial public share offer through the stock exchange to get additional
equity and debt funding since limited liability companies are subject to more public scrutiny
which improves their credit rating. The main disadvantage is that owners cede control to
management who may not have the same passion for the business. The management usually
pursues short term interest to the detriment of long term sustainability of the company which is
to the detriment of the owners. This is what is called the agency problem. The owners will have
less control over the affairs of the business and decisions will be made much slowly and will be
subject to public scrutiny (MASLIANKOA and MAISTRENKOA 2012).
Running Head: Business 8
Main Branches of accounting
The main branches of accounting that Mr. and Mrs. Swanson will have to understand and
probably use depending on the type of business entity they choose to incorporate are financial
accounting and management accounting. Management accounting is concerned with analyzing
and providing information on cost to the management of a company to aid them in planning,
organizing, directing, controlling and evaluating the operations of the company and making
better decisions. It is basically accounting information prepared for managers and employees
within an organization (BIRNBERG 2011). It is the process of identification, measurement,
accumulation, analysis, preparation, interpretation and communication of accounting information
that can be used by the management of a company to carry out their normal duties of planning,
organizing, directing, controlling and evaluating of the business activities to ensure the
organization achieves its strategic objectives (HASTE 2009). Management accounting is
concerned with providing information to managers for use in planning, controlling and making
better decisions to achieve business objectives. Management accounting is basically designed to
provide information to people inside an organization i.e. managers and employees
(BROCCARDO 2014).
Financial accounting on the other hand is concerned with providing information to
people outside an organization and includes stockholders, creditors, government, investors,
bankers, suppliers, customers etc. The information that management accounting provides enables
an organization to be managed effectively whereas the information provided by financial
accounting enables stakeholders to judge the past performance of an organization and make
better decisions on how to engage in future (LEAUBY and WENTZEL 2012). Financial
accounting provides information that is used by external parties such as bankers, creditors and
Running Head: Business 9
other stakeholders whereas management accounting provides information that is used by
managers and employees in an organization to better perform on their jobs. Financial accounting
provides information that covers the entire organization whereas management accounting
provides information on smaller business units or individual departments, in addition to
information on the entire company. Financial accounting focuses on the history of a company
whereas management accounting focuses on the future and present state of the company
(JESSWEIN 2011).
Financial accounting is supposed to be in a given format that ensures comparability with
similar organizations in the industry whereas management accounting has no specific format and
is in line with the information requirements of the management of a company. Management
accounting information assists the management to plan, record and control activities whereas
financial accounting assists stakeholders, bankers, suppliers among others in making investment
decisions and for credit analysis. The information provided by financial accounting is
quantitative and monetary whereas the information provided by management accounting is both
quantitative and qualitative that is both monetary and also non-monetary in nature
(MASLIANKOA and MAISTRENKOA 2012). Financial accounting reporting is done at
predetermined times in a year like annually or semi-annually whereas management accounting
reports could be produced daily, weekly or monthly depending on the needs and directives of
the management of a company. Financial accounting reports are mandatory for limited liability
companies as per the company laws in a country whereas there is no legal requirement for
companies to produce management accounting information. A company can decide not to
prepare management accounting information and it will not be breaking any law in the country
(HASTE 2009). Financial accounting is done in line with stipulated accounting standards which
Running Head: Business 10
could be International Financial Reporting Standards or Generally Accepted Accounting
Procedures whereas management accounting information is prepared according to the directions
of the management of a company. The main objective of financial accounting is to disclose the
end results in a trading period and depict the financial condition of a company at a given date
normally at the end of the financial year. Management accounting on the other hand has the
objective of providing information to management that will help them make better decisions to
achieve the objectives of the organization (HASTE 2009).
Sources of Finance
To implement the business idea, Mr. and Mrs. Swanson will have to identify several
sources of finance. This is because new businesses need start-up capital to invest in long term
assets and use as working capital to start operations. There are many sources of finance to a
business entity that it can utilize. These sources could be internal or external to the business
entity. Internal sources of finance basically refer to finance generated from inside a company
whereas external sources of finance refers to finance generated from outside sources of a
company. There are many internal sources of finance available for a company to utilize
(MASLIANKOA and MAISTRENKOA 2012). The company can negotiate for a longer credit
period with its suppliers. In this case the company will take longer to pay for goods supplied than
before. For instance if it was paying its suppliers in 15 days from the date they supply goods and
services it can negotiate to pay after 30 days. This will increase the amount of funds available to
carry out business activities.
Alternatively a company can improve its debt collection methods to ensure it collects its
debts sooner than before (BYRD, ROSS and GLACKIN 2013). For instance, if it was
collecting its debts in 30 days it can reduce the debt collection days to 15. This method increases
Running Head: Business 11
the amount of cash available for trading and enhances the bottom line which increases equity and
is a long term source of finance. A company can also sell some of its assets such as land to raise
capital or lease it to rent payers (LUTTER 2013). There are instances where a company has non-
strategic assets such as underutilized land or land it does not use at all. This asset can be sold or
leased out to generate cash for trading or to acquire strategic assets. Another internal source of
finance is by ploughing back profits into the business instead of paying dividends to
shareholders. This can be done in full or partially and of course with the permission of the
shareholders. This is a long term source of finance since the company could retain part of the
profits as retained earnings at the end of each year. These earnings increase the equity
component in the balance sheet (LUTTER 2013).
External sources of finance include approaching banks for debt finance in form of loans,
overdrafts, trade finance, or lines of credit. Loans from banks are normally short term sources of
finance but if the company can arrange for lines of credit instead of an overdraft then it can enjoy
long term sources of finance to finance its operations. This is debt financing and the company
will be required to pay regular interest to the bank. If a company is a limited liability company it
could raise share capital from capital markets through an initial public share offer. This is equity
funding and is a long term source of finance. The company will be required to pay dividends at
the end of a given year (CHANDRA and FEALEY 2009). In subsequent years the company can
offer rights issues which basically is a way of raising more equity finance from the existing
shareholders by offering them more shares. Other external sources of finance include bank
overdrafts, raising money from friends or family members. These methods on whether the funds
are short term or long term, debt or equity mainly depend on the arrangement with providers of
these funds. A company can also approach angel investors who tend to provide long term finance
Running Head: Business 12
in form of an equity stake in the company. There are also venture capital funds that the company
can approach to get equity financing mainly in exchange for a stake in the company (BYRD,
ROSS and GLACKIN 2013).
Conclusion and Recommendation
From the foregoing, Mr. and Mrs. Swanson will have to incorporate a business entity to
implement their business idea. The decision on the type of business entity that they will
incorporate will be influenced by among other factors the amount of control they will want to
have over the business affairs, the amount of liability they will need to shoulder, the level of
scrutiny on the affairs of the business they will be willing to allow and the amount of capital they
want to raise among other determinants (KIRTZKHALIA 2012). The couple will have to
understand the main branches of accounting and its impact on their operations. Private Limited
Liability entities and Public Limited Liability Companies must use financial accounting to
prepare annual reports for eternal stakeholders. This is a requirement by the authorities. Failure
to do that could lead to legal action being taken on the company with dire consequences. There
are many sources of finance that the company could resort to raise funds. Start-up finances are
mainly in forms of either debt or equity. Each form has a bearing on the future cash flows of the
company. It is the duty of the two to decide which form to resort to
Running Head: Business 13
References
BIRNBERG, J.G.,(2011). Robert N. Anthony: A Pioneering Thinker in Management
Accounting. Accounting Horizons, 25(3), pp. 593-602.
BROCCARDO, L.,( 2014). Management Accounting System in Italian Smes: Some Evidences
and Implications1. Advances in Management and Applied Economics, 4(4), pp. 1-16.
BULL, N., NELSON, S. and FISHER, R., (2009). CHARACTERISTICS OF BUSINESS
OWNERSHIP: OVERVIEW FOR PASS-THROUGH ENTITIES AND EVIDENCE ON S
CORPORATE OWNERSHIP FROM LINKED DATA*. Washington: National Tax
Association.
BYRD, K., ROSS, L.W. and GLACKIN, C.E.W., (2013). A Preliminary Causal Analysis of
Running Head: Business 14
Small Business Access to Credit during Economic Expansion and Contraction. Journal of
Applied Finance and Banking, 3(5), pp. 77-84.
CHANDRA, A. and FEALEY, T., (2009). BUSINESS INCUBATION IN THE UNITED
STATES, CHINA AND BRAZIL: A COMPARISON OF ROLE OF GOVERNMENT,
INCUBATOR FUNDING AND FINANCIAL SERVICES. International Journal of
Entrepreneurship, 13, pp. 67-86.
HASTE, D., (2009). MANAGEMENT ACCOUNTING -FINANCIAL STRATEGY. Financial
Management, , pp. 54-55.
JESSWEIN, K.,( 2011). PENGUIN MANUFACTURING: UNSEEN LINKS BETWEEN
MANAGERIAL ACCOUNTING, GAAP, AND CREDIT ANALYSIS. Arden: Jordan
Whitney Enterprises, Inc.
LEAUBY, B.A. and WENTZEL, K., (2012). Linking Management Accounting and Finance:
Assessing Student Perceptions. Management Accounting Quarterly, 13(2), pp. 14-20.
LUTTER, D.J., (2013). Understanding Funding Sources. Bank News, 113(7), pp. 12-14.
MASLIANKOA, P.P. and MAISTRENKOA, A.S., (2012). A system of entities for enterprise
business models. Cybernetics and Systems Analysis, 48(1), pp. 99-107.
N.KIRTZKHALIA, (2012), May 08. Number of registered in Georgia business entities increases
by 11.2 percent in April. McClatchy – Tribune Business News.
