Introduction
The decision as to the form of business structure that one chooses depends on quite a number of things. There are different legal requirements in New Zealand for running different forms of business structures. For instance, there is a minimum number of people of people required to start a private limited company. There are also tax implications in whichever form of business structure that an investor chooses. For instance, for partnerships, only partners are taxed on their share of partnership profits earned (Collier, 2003). On the other hand, limited liability companies are taxed at a corporate tax rate on their net incomes. Apart from the legal implications, there are also financial implications in deciding the form of business structure. For instance, there are elaborate procedures required to start a private limited company. Besides, funding such business structures require substantial capital that in most cases is difficult to raise from personal savings.
After deciding on the form of business entity that one wants to run, the business has to acquire the necessary resources to start and run the business (Collier, 2003). These resources are balance sheet items, and this report will explore them more. Once the business has commenced operation, it will be necessary to keep records that will be used to evaluate the performance of the business. Accounting information is important in evaluating performance, and this report will discuss important accounting statements and how they help in proper management of the business (Gibson & Gibson, 2001). The report will also explore the importance of accounting information in obtaining funding for a business entity.
Business Structure
Adrian Choo and his wife should run their business under a partnership business structure. Partnership's businesses are easy to start and also to run. There are no many legal hurdles to be fulfilled before the business can start operating. The startup costs for a partnership are lower compared to a company which is the other option they would have. There are several merits of running their business as a partnership. For instance, partnerships have limited liability and as such, it is easier to acquire funding in the form of loans from financial institutions (Collier, 2003). This is as compared to limited liability companies where lenders are too cautious to issue credits without collateral. Apart from acquiring funding, partnerships do not require the filing of tax returns every year. Partners are taxed on their share of annual profits at personal income tax rates.
The restaurant business will be suitable for partnership considering that it is easy to change a partnership into another structure in future if the circumstances change. For instance, supposing the restaurant business grows, and there is a need for expansion, the partnership can be turned into a company that can issue shares and generate more capital for expansion. According to Porter, Norton & Porter, (2008), partnership businesses are better placed to keep the business affairs private away from competitors who could use such information to earn an advantage over the business. Moreover, the couple being engineers, they could become sleeping partners in their restaurant business and employ other people to help them in active management when they land employment as engineers. It is, however, appropriate to note that the restaurant will likely perform well when the couple is working on it since they will be selling Malaysian cuisine and they are Malaysians. It is likely to help the business since the likely target of the restaurant are Malaysians in New Zealand and others who may like Malaysian food and who will be convinced if they find Malaysian Nationals working in the restaurant.
Balance Sheet Resources
There are three balance sheet items that are necessary, and they would, therefore, need to operate the business. These items are in the balance sheet equation. They are assets, capital, and liabilities. Assets will be the properties that are owned by the business that they will use to generate income and to pay for their debts ("Preparing a Balance Sheet – Small Business Resources | TD Bank", 2016). They will include kitchenware, furniture, and cash, among others. Capital is the contribution of each of the partners to the partnership. It is the amount of their investment in the business. Liabilities are also balanced sheet items, but they do not have to be present for the business to operate. However, most businesses do have them. They are what the business owes to other people or institutions. For instance, the restaurant can receive supplies on credit to be paid later. There are also bank or other financial institution's loans to the business.
The balance sheet is important for business decision making for various reasons. A balance sheet is a financial statement that states the financial position of a business as at a given time. It is, therefore, an important statement for business when it is making financial decisions. For instance, it shows the liquidity of the business, i.e. the business' ability to meet its short-term obligations ("Uses of the Balance Sheet", 2015). Further, the balance sheet is an important document in the substantiation process. This is the process where a business regularly reconciles balances in the primary accounting balances. The valuation of the business is also majorly based on its balance sheet and it as such an important document when convincing potential investors to invest in the business (Reimers, 2007).
As mentioned earlier, some of the resources in a balance sheet include capital, which is an owners’ investment into the business. It is important since it is the basis upon which the business starts to operate. Capital also indicates the owners’ commitment to the business making it easy for investors to invest their money into the business and lenders to issue loans to the business as well (Reimers, 2007). Another item in the balance sheet is Assets which are normally divided into short term and long term assets. They include tangible and intangible resources that help in the day to day running of the business. For instance, kitchenware and furniture are long-term assets in the restaurant business. Cash at hand and in the bank are short-term or current assets that can be used to offset a business' current liabilities. Liabilities are also items in the balance sheet, and they include loans and creditors ("Uses of the Balance Sheet", 2015). Liabilities are important in providing extra resources required for running a business.
Business Performance
Once the business is set up, it will be important to find out how the business is performing. The investor normally wants to know whether he is heading the right or wrong direction. Identifying problems early are encouraged since it becomes easier to mitigate and avoid significant losses that can drive the business out of operation. For Adrian and his wife, the partnership business may not be too big during the startup period and as such, they may not have all the departments that big businesses normally have. However, it will be important to keep records of all their daily transactions. Such records help in evaluating the performance of the business over time and identifying areas that need to be given special attention.
It is, therefore, important to keep the daily journal entries which can be used to prepare the ledgers periodically by a part-time or outsourced accountant. These records will then be used to prepare important financial statements like the balance sheet, income statement, statement of cash flows and the trading statement (Libby, Libby & Short, 2011). These statements will then be used to evaluate performance. If the performance of the business is not as expected, accounting ratios can be calculated using the figures in the mentioned financial statements to identify specific areas that are contributing to the poor performance. Strategies can then be formulated to deal with the areas of weakness.
For a restaurant business, expenses are numerous at startup. For instance, Adrian and his wife will incur rental expenses for the premises that they will use as their restaurant. It may not be possible to buy out a building at once on startup. Therefore, renting a building will help them set up the business (Libby, Libby & Short, 2011). They will also incur power bills, water bills, and general expenses for foodstuffs necessary to prepare meals. The business may also buy or rent furniture for the restaurant depending on the most suitable arrangement considering the costs involved. Other possible expenses include kitchenware and wages/salaries for employees that will be hired to help with the work.
Role of Accounting Information
Accounting information is very important in obtaining funding for a startup business. When preparing the business plan with which to ask for funding, it is a requirement to show the expected financial performance of the business using several financial statements and accounting ratios (Porter, Norton & Porter, 2008). This information helps the potential investor or lender to determine the potential profitability of the business and decide whether it is worth investing in the business. Such information can be used to determine the payback period for investors and help them decide whether the period is acceptable to them. For lenders, the information is important in helping them determine the profitability of the business and its ability to repay any loan extended to it together with the interest (Norton & Porter, 2012). These among many others are the role that accounting information plays in ensuring that businesses can access funding for startup and also for growth and expansion.
Conclusion
References
Collier, P. (2003). Accounting for managers. West Sussex, England: J. Wiley.
Gibson, C., & Gibson, C. (2001). Financial reporting and analysis. Cincinnati, Ohio: South-Western College Pub.
Libby, R., Libby, P., & Short, D. (2011). Financial accounting. New York: McGraw-Hill/Irwin.
Norton, C., & Porter, G. (2012). Introduction to using financial accounting information. Mason, Ohio: South-Western.
Porter, G., Norton, C., & Porter, G. (2008). Using financial accounting information. Mason, OH: Thomson/South-Western.
Preparing a Balance Sheet – Small Business Resources | TD Bank. (2016). Tdbank.com. Retrieved 27 March 2016, from https://www.tdbank.com/small_business/workshops/BalanceSheet/textbalance.htm
Reimers, J. (2007). Financial accounting. Upper Saddle River, N.J.: Prentice Hall.
Uses of the Balance Sheet. (2015). Boundless. Retrieved from https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/overview-of-financial-statements-3/the-balance-sheet-25/uses-of-the-balance-sheet-159-6010/
