Activity 1
The cash based and an accrual based accounting systems are the two methods of accounting, which businesses use to record their accounting transactions. The main distinction between these two methods of accounting is essentially the time at which expenses and revenues are recognized and recorded (McCorkle, Klose, & Klinefelter, 2008). Thus, a cash based accounting system is essentially an accounting technique under which the business record expenses when it pays out cash and records the income when it receives cash. Consequently, a cash based accounting system recognizes expenditures and income at the time when the businesses pay out or receive physical cash. On the other hand, an accrual based accounting system is an accounting technique in which the businesses record the expenditures when they incur them and income when they earn it. Consequently, under an accrual based accounting system, the transactions are recorded in the books when they take place, even though no cash changes hands.
I would use a cash based accounting system for my small business. In particular, I would use this method since is simpler to maintain, unlike an accrual based accounting system. In essence, this accounting method does not necessitate the tracking of payables and receivables. Besides, I would easily track the amount of cash that my business will have at any given time using this method. I feel that the cash flow for my small business will change throughout the year. It will be high during the peak months and low during the low-peak months. The demand will be high during the peak months and low during the off-peak months. I will make use of the knowledge I have gained to manage it accordingly. One can navigate a disparity in cash flow through forecasting both the outflow and inflow of cash. One should then formulate a plan to handle the unexpected outcomes. For instance, one will need to cover a shortage in the cash flow.
Activity 2
Equity financing is a technique of financing business that involves selling the company’s securities such as bonds and shares to the investors (Yan, 2006). The enterprise sells its ownership interest to the members of the public so as to finance its activities. Consequently, the business owner shares the liabilities and risks with the investors. The business owner does not have to repay the loan when financing the business using this method of business financing. On the other hand, debt financing involves borrowing finances for the business through loans and bonds. In this case, the business does not sell its ownership interest to the shareholders (van der Weele & Joel, 2005). This type of business financing involves both unsecured and secured loans. The business owner borrows finances from a lender and agrees to repay the principal amount and the interest. The failure of the business owner to repay the loan and the interest results in the repossession of his/her business assets and properties.
Personally, I plan to finance my business through borrowing cash from the family members. Apart from using personal savings, I will finance my business by borrowing from the family members. Ideally, this will be a better method of financing my business because unlike the bank loan, the lender and I will negotiate a more flexible repayment method. Besides, I will pay a lower interest rate unlike when taking a loan from the bank. Furthermore, the lender will not be entitled to the profits that I will make like it is the case with equity financing. Additionally, the family members might give me time first to build my business, unlike the banks. Moreover, the family member will not need collateral. They will be more lenient compared to the banks. What is more, the family members might offer me a helping hand to facilitate the success of the business.
References
McCorkle, D., Klose, S., & Klinefelter, D. A. (2008). Financial Management: Cash vs. Accrual Accounting. Texas FARMER Collection.
van der Weele, J., & Joel, V. D. (2005). Financing development: debt versus equity. DNB Working Papers.
Yan, A. (2006). Leasing and debt financing: substitutes or complements? Journal of Financial and Quantitative Analysis, 41(03), 709-731.
