You Are an Entrepreneur
You Are an Entrepreneur
The formation of a new business is the easiest task in any business. However, to expand that business and making it profitable is the main concern for the business owners with limited resources. In the current financial circumstances all over the world, it is becoming difficult for the small or medium size business to raise finance via share issue or debt. The main reason behind this difficulty is that the investors are losing the faith in the sustainability and the going concern issues of smaller and new businesses. Therefore, in these circumstances, it is very important to start, develop and run new businesses in such a way that it can incorporate any expected or unexpected change in the market.
Transforming hobbies or interests into a business is a key element of developing an interest and dedication towards the business. One of the most interested areas of self employment for the students of business studies is to provide financial services to the different businesses. In other words, the business of accountancy firm or financial advisory services is the most favorite entrepreneur business.
The main reason for selecting the business of services is that the business of services usually does not require massive investments and a large work force. A simple team of a few individuals can run this business effectively and efficiently. The best way to invest in the business is to generate internal finance instead of arranging loans and bank overdrafts. Therefore, the initial investment, such as rental expenses, registration of a firm, hiring of a lawyer and the furniture for the workplace are the only expenses for the business of financial consultancy.
The form of business must be sole proprietorship because this form of business will provide the control to the owner of the business for the activities of the entire business. Therefore, the owner can direct the business in the most favorable way as compared to the other forms of business. The communication between the staff members and the owner is very important at the start of the business. Another main advantage of the sole proprietorship form of a business is that it reduces the tax liabilities of the business. The tax rates of the self employment are lower than the tax rates of the corporation or limited liability partnerships. In the case of sole proprietorship, the owner of the business can hire the proper and the required person for the job. Therefore, it is highly probable that the owner of the business will hire according to the needs and requirements of the business.
The financial statements of the business are an important element of a business which can be used to raise funds from banks, lenders or the potential investors. Therefore, for a small business looking for the investors, it is very important for the owner of the business to take the assets and the liabilities section of the statement of financial position. The assets of the business must be disclosed in detail to attract the investors and lenders. Therefore, according to the current scenario, the financial statements of the new business must be made according to the expectations of the lenders because it is highly probable that in the future, the business will require extra funds to enhance their business. Moreover, the owner of the business must show the expenses of the business in an effective and smart ways. To achieve this goal, it is very important for the owner to adopt the trend of reducing and minimizing the expenses of the business from the beginning of the business. This tactic of the business will show a small amount of expenses as compared to the earnings and other attributes of the financial statements and it will increase the chances of obtaining debt and overdraft facility from the banks.
The accounting standards play an important role in the representation of the financial position of the business. In the case of a new business, it is very important for the business to adopt accounting standards which represents the true and fair view of the financial statements. Moreover, according to the given scenario, it is more favorable for the business to adopt International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as compared to the General Accepted Accounting Principles (GAAP). The reason behind this approach is that GAAP standards always have a room or a space to make or find loop holes. For example, there is only one simple standard for the financial instruments in IAS and IFRS as compared to the number of different standards of GAAP for the different financial instruments of the business. Therefore, with the prospect of lending and raising finance in the future, the IAS and IFRS will enhance the trust of the lender as compared to the GAAP standards. Another main aspect of selecting IAS and IFRS as compared to the GAAP standards is that number of countries using IAS and IFRS are increasing every year.
Statement of financial position Performa
Assets
Current Assets
Cash 1,000
Cash Equivalent 500
Receivables 400
Investments 600
Bank 2,500
Long Term Assets
Property, Plant and Equipment 3,000
Total Assets 8,000
Liabilities
Current Liabilities
Payables 1,100
Tax 900
Long Term Liabilities
Debt 1,000
Equity
Total Owner’s Equity 5,000
Total Liabilities and Owner Equity 8,000
Statement of comprehensive income Performa
Sales 100,000
Cost of Sales 40,000
Gross Profit 60,000
Admin Expenses 10,000
Salaries 25,000
Travelling expenses 9,000
Utility Bills 2,000
Rental Expense 4,900
Profit before Interest and Tax 9,100
Interest Expense (10%) 100
Profit before tax 9,000
Tax Expense (10%) 900
Profit after Interest and Tax 8,100
Discussion on Financial Statement Performa:
The above financial statement represents the expected financial statements for the new business. As far as the new business will be required the investments from the lenders and the banks, therefore the above pro forma for the financial statements is the best representation of the business. The above sample statement of financial position shows that the business is run by the single owner and he is liable for the losses of the investors. The personal guarantee of the debt is more valuable than the guarantee of the assets and the resources available in the business. Therefore, this representation of the business financial statement will attract the banks and the investors to lend the funds for the business.
The statement of comprehensive income pro forma shows the profitability of the business effectively. Moreover, the business is showing the highest rate of interest as compared to the rates of the banks. This presentation will attract banks in bank overdrafts because the business is already paying the high interest rates and in the case of lower interest rates the business will invest their funds in the business effectively and efficiently.
The financial services business has clients all over the country and most of the time the financial experts travel from one city to another. The disclosure of traveling expense shows the increasing clients of the business. In these circumstances, if the business request for a bank loan for one year to make a new branch in another part of the country to reduce the travelling expenses, then it is highly probable that the bank will accept the loan request of the business. However, it is very important for the business to show profitability and the professionalism towards the business and increase their clients.
The salaries of the employees are the major portion of the administration expenses. The main signal to the lenders or the bank is that the business is serious in hiring the quality individuals for the business. The efficient financial experts can increase the clients of the business and improve the reputation of the business in the market. Therefore, the dedication towards the activities and operations of the business will be represented by the major portion of the salary expense in the statement of comprehensive income. Moreover, it will also impact positively on the ‘going concern’ of the business by analyzing the employee satisfaction in the business.
The statement of financial position of the business is another important element in raising the funds from the investors. The lower amount of current liabilities will automatically attract the investors to the business. The low level of liabilities shows that the business is in a good position and the gearing of the business is low. The financial gearing of the business is an important tool used by the investors before investing in any business. Therefore, if the liabilities of the business are in control and the gearing of the business is lower than the market gearing, then it is highly probable that the business will generate funds via loans and debts to enhance their dealing and overall business.
In the services of financial consultancy and the auditing, it is very important to make and implement proper controls within the organization to maximize the customer’s trust. It is in a view that the conflicts of the business and the individuals clash during the practical business. Therefore, in these circumstances, it is very important to make proper controls from the beginning of the business.
The first control of the business must be to secure their assets. The control test must be to identify, check and inspect the availability of the assets of the business in the office premises. In the business of the financial services, the office furniture, sales and purchases of office equipments such computers and stationery are important assets. The machinery in the office, such as printers, photocopy machine and the heating and cooling system of the office are important assets. It is very important for the management to keep accounts for the purchases and the use of these assets.
Another control test is to make sure the safety of the client’s records and their confidential information. For example, if the team A in the business is working for one company and the team B in the business is working for the competitor of the first company, then it is highly probable that the team members will try to obtain the confidential data of the company in the decision making. Therefore, the computers on the company must have a proper identification or password protection. Furthermore, the management of the business must inform to the team members that they must not leave their computer without locks. It is in a view that the employees leave their computers and documents open on their tables in the lunch break. Therefore, to minimize the risk, it is the responsibility of the management to implement the password control for the computers.
In the hiring of the employees, it is very important to hire the correct individual if needed. Therefore, in the current scenario, the control to implement is to insure that owner of the business approve the hiring. It is highly probable that the growing businesses need new employees and the hiring managers hire the individuals according to them.
Another important control test is to communicate with the client directly to inspect the performance of the employees. The third party review is the best review for the managers of the business. Therefore, to enhance the performance and the reputation of the business, the owner of the business must communicate and ask for the evaluation of their firm. This tactic will assist in the identification of the errors and it will improve the actual working of the business.
The annual independence test in the audit firms is one of the most important and a vital control test to insure that the auditing procedures are performed according to the International Auditing Standards. To maximize the independence of the auditors, the audit firm can appoint two or three independent senior auditors to review the audit reports of the auditing teams. The management of the auditing firm must rotate the auditors on the regular basis to avoid familiarity risk. Moreover, to maximize the integrity of the audit team, the management of the audit firm must ensure that there is no influence of the client during the auditing. The fee must be collected in advance to mitigate the threats and the audit team must not accept any gifts and other offers from the clients. The excessive gifts or fee from the clients force the auditors to ignore material mistakes from the clinets.
The regulatory framework, ethics of the governance of the business plays an important role in the compatibility and the flexibility of the business. In the current financial circumstances, the businesses are adopting the flexible governance rules as compared to the Sarbanes- Oxley Act. The Sarbanes- Oxley Act is the rule based approach and it is very difficult for the companies to adopt the changes from the actual business world. Therefore, in these circumstances, the principle based approach is the best approach for the small business to adopt at the beginning of the business. This approach will help the business in getting business from the countries like the United Kingdom, Mexico, South America and all other countries in Europe who are practicing the principle based approach of the governance of the corporation. (Romano, 2005)
The main advantage of the new business by adopting the principle based approach is that it will assist them in the incorporating different type of businesses. For example, the businesses in the United States of America are considering the changes in the governance all over the world seriously and the next meeting regarding the governance of the corporations is expected in the year 2015. Therefore, by taking the future changes into the accounts, it is more favorable to use the principle based approach as compared to the Sarbanes - Oxley Act for new business.
Another important element in the favor of the principle based approach is that the International Auditing Standards are incorporating the principle based governance approaches. Therefore, it is important for the financial consulting business to adopt the approaches which are more compatible for the auditing practices in the key business related companies such United kingdom, Japan, China, Canada and the United States of America. (Romano, 2005)
Another main factor of Sarbanes Oxley Act is that it makes things difficult for the management in the decision making of the business. The rule based approach restricts the enhancement of the business because the governance act is rigid and difficult to incorporate in the dynamic business world. (Romano, 2005)
References
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