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LESSON WEEK 2 LEARNING OBJECTIVE

LESSON WEEK 2 LEARNING OBJECTIVE. After this lecture, you should be able to: Differentiate between Economic entity and Business entity Explain the type of Business entity Understand the Environmental factors in Business formation Aware of Other factors for consideration

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LESSON WEEK 2 LEARNING OBJECTIVE

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  1. LESSON WEEK 2LEARNING OBJECTIVE After this lecture, you should be able to: Differentiate between Economic entity and Business entity Explain the type of Business entity Understand the Environmental factors in Business formation Aware of Other factors for consideration Understand the process of Business management

  2. Economic entity and Business entity Accounting - provides financial information for economics entities. Economics entities – bodies exist for sole purpose of serving our community’s need. Examples of Economics entities – HICOM, BSN, mini market, governmental agencies. Sole purpose – profit or non-profit Non profit – non profit oriented entities (UPM, Governmental Agencies) Profit – business entities (HICOM, PETRONAS, BSN)

  3. BUSINESS ENTITIES Business Forms Types of Activity Business Size

  4. Business Forms • Sole Proprietorship/Sole Trader • Partnership • Company

  5. Sole trader • Owned by an individual (Reeve, Warren, Duchac, Wang, 2012) • Independence and freedom in action and regulation • Simplicity of organisation • Personal responsibility • Easy and cheep to organise • Unlimited liability (owner personally for the debts of the business) • Lack of capital • Lack of expertise • Stress

  6. Partnership • A partnership is a relationship which subsist between several persons carrying on business in common with a view to profit. • Not legally recognised as an entity separate from the partners. i.e not a legal entity • Partnership liabilities not limited to the capital contributed by the partners • All partners are collectively liable for all the debts of the business

  7. Partnership (Advantages) • Easy to form compared to limited companies. Verbal agreement is sufficient • More capital compared to a sole trader • Easier to expand the size of the business due to additional capital • Low cost of formation

  8. Partnership • Additional partners may be brought in to provide expertise, extra capital and to share the work load • Division of labour: more partners are likely to have a variety of experience and expertise • Tax advantage. Taxes paid individual partner based on personal income

  9. Partnership (Disadvantages) • Unlimited liability • Need for discussion. Lack flexibility • Disagreement among partners • Difficulties on dissolution (assets may not be readily realizable without damage to the business)

  10. Partnership (Disadvantages) • Share of profits • Shortage of capital • Inability to raise more capital without changing the control of the business

  11. Company • A corporation is a business legally separate from its owners. It is a legal entity. • Business entity formed under Companies Act 1965 • Ownership of corporation is divided into units called shares (owners of the company: shareholders) • Types of shares: common shares, preference shares

  12. Company (advantages) • Limited liability • Ease of raising capital especially in the case of public companies • Continuity. Indefinite and continuous existence • Transferability of ownership • Management expertise • Economies of scale

  13. Company (disadvantages) • Cost of setting up • Subject to more regulations than other forms of business • Delayed decision making • Divorce of ownership from control • Conflict of interest between owners, directors and other employees • Lack of personal contact

  14. Business Activity • Merchandising • Retailing • Wholesaling • Manufacturing • Service

  15. Business size • Small • Medium • Large

  16. Social Business Technology Economy Politics

  17. Understanding Environmental Factors • Economic • Financial and fiscal policies, inflation, economic recession • Social • Income distribution, age distribution, consumer taste and preferences, family values

  18. Understanding Environmental Factors • Technology • Development in computer based technology • Politics • Different ideology, political power, interest group, legislation

  19. Starting a business • Need to consider: • Type of business to be carried out • Form of business • Where to obtain capital? • Perform SWOT analysis • Strengths • Weaknesses • Opportunities • Threats

  20. SWOT analysis • A strategic planning tool used to evaluate the followings in a project or in a business venture: • Strengths (attributes of the firm that are helpful to achieving the objective) • Weaknesses (attributes of the firm that are harmful to achieving the objectives) • Opportunities (external conditions that are helpful to achieving the objective) • Threats ( external conditions that are harmful to achieving the objective)

  21. Other Factors to be considered • Location • Regulations • Resources • Financial resources • Non Financial resources • Materials • Labour/human resource

  22. Managing a business (cont.) • Planning • Monitoring performance

  23. Planning • Definition: A thinking process that precedes action and is directed towards making decisions now with the future in mind. • Set the objectives of the business • Different types of planning • Strategic planning • Tactical planning • Operational planning • Need to prepare budget • Cash budget as an important tool for cash management

  24. Monitoring performance • Control (comparison of actual performance and budgeted performance) • Determine variance • Take corrective actions

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