• Home
• Module overview
• 1. Introduction to budgets
  • 1.1 Introduction to the Budget Process
  • 1.2 Budget types
    • 1.2.1 The Budget Guidelines
    • 1.2.2 The Sales Budget
    • 1.2.3 Budget for Operating Expenses
    • 1.2.4 Profit Budget
    • 1.2.5 Cash-Flow Budget
    • 1.2.6 The Financial Position Budget
    • 1.2.7 Additional Types of Budgets
    • 1.2.8 Additional Budgeting Techniques
  • 1.3 The budget process and its objectives
  • 1.4 Budgets for performance management
    • 1.4.1 Master budget

• 2. Planning the budget

  • 2.1 Planning the Budget
    • 2.1.1 Business income
    • 2.1.2 Visual representation of sales and budgets
    • 2.1.3 The break-even point
    • 2.1.4 Contribution margin

• 3. Controlling the budget

  • 3.1 Controlling budgets
    • 3.1.1 Variance analysis
    • 3.1.2 Taking action to achieve the objectives of the budget
    • 3.1.3 Resource acquisition and usage

• 4. Introduction to Financial Management

  • 4.1 Business Objectives
    • 4.1.1 Maximising profit
    • 4.1.2 Maximising wealth
  • 4.2 Ethics and conflicts in business
    • 4.2.1 The dilemma of ethics in finance, investment and accounting
  • 4.3 Financial Managers
    • 4.3.1 Financial information and objectives
    • 4.3.2 Accounting, the financial information system
  • 4.4 The finance function
    • 4.4.1 Business and financial calculations

• 5. Elements of Business and Financial Management

  • 5.1 Business Structures
    • 5.1.1 Sole proprietors
    • 5.1.2 Partnerships
    • 5.1.3 Corporations and companies
  • 5.2 Reporting financial data and information
  • 5.3 Financial reports
    • 5.3.1 Statement of financial performance (profit and loss statement)
  • 5.4 Capital Markets
    • 5.4.1 Capital Markets
  • 5.5 Regulation and financial institutions
    • 5.5.1 Interest rates, supply and demand and market efficiency
  • 5.6 An overview of taxation implications

• 6. Obtaining Funds: Sources of Long Term and Short Term Finance

  • 6.1 Finance from external sources
    • 6.1.1 Equity finance
  • 6.2 Debt
  • 6.3 Long-term debt
    • 6.3.1 Debentures and unsecured notes (bonds)
    • 6.3.2 Mortgage loans
  • 6.4 Hybrids of debt and equity
  • 6.5 Leasing
    • 6.5.1 Operating Lease
    • 6.5.2 Financial Lease
    • 6.5.3 Distinguishing between an operating lease and a financial lease
    • 6.5.4 Sale and Leaseback
    • 6.5.5 The issue of gearing
  • 6.6 Short-term debt
    • 6.6.1 Bank Overdrafts
    • 6.6.2 Fully drawn advance
  • 6.7 Retained Earnings, internal funds and depreciation

• 7. Managing Working Capital

  • 7.1 Managing current assets and current liabilities
    • 7.1.1 Appropriate level of working capital
  • 7.2 Managing inventories
    • 7.2.1 Reasons for holding inventories
    • 7.2.2 The economic order quantity (EOQ)
    • 7.2.3 Re-order point (ROP)
    • 7.3.4 Safety stock (SS)
    • 7.2.5 Quantity discounts
  • 7.3 Managing trade debtors (accounts receivable)
    • 7.3.1 Credit policies
    • 7.3.2 Collection period
    • 7.3.3 Managing cash and near-cash assets
    • 7.3.4 Managing trade creditors (accounts payable)

• 8. Job Costing

  • 8.1 Accounting information about product, service and project costs
    • 8.1.1 Full costing
    • 8.1.2 Single product/service line
    • 8.1.3 Multi product/service
    • 8.1.4 Direct and indirect costs
  • 8.2 How costs behave
    • 8.2.1 Allocating Overheads
  • 8.4 Cost drivers
    • 8.4.1 ABC and the service industry
  • 8.5 Conclusion

5.1.3 Corporations and companies

Corporations, the main type being companies, are unique legal creations that the Corporations Law gives a separate and perpetual existence . This means that they can outlive their shareholders and are not affected if the ownership of shares changes. They have all the privileges of a natural person, such as acquiring assets (investing activities), incurring debts (financing activities) and engaging in business transactions (operating activities).

While there are many different types of companies (for example investment companies, banks and insurance businesses) we focus on the most common type, one limited by shares. The term 'limited' means that the shareholders are not liable (responsible) for company debts but only for whatever they must pay for their shares. A public company must have at least 5 shareholders and there is no upper limit to membership, so ownership is usually very widespread and there can be thousands of shareholders.

The main advantages of a limited liability public company are:

• The company has a permanent existence separate from its shareholders
• The shareholders' liability is limited to the amount they invest in shares (they are not liable for company debts, so have limited financial risk)
• It can have its shares listed and traded on a stock exchange
• Shareholders can easily transfer ownership by selling their shares and thus liquidate their investment (get their money back), especially if the shares are listed on a stock exchange
• For the previous reasons, a listed company can more easily raise large amounts of money (funds) from the general public by share issues (share floats) or borrowings
• There is no mutual agency , so shareholders have no part in management and cannot enter into contracts that bind the company
• Management is by an elected board of directors and qualified (often highly paid) professional managers who are employees, which allows for lots of specialization.

Some disadvantages of incorporation are:

• A company is a separate legal entity and must pay taxes on its taxable income (not quite the same as net profit)
• Shareholders must pay tax on dividends received , unless these are franked
• Limited liability is sometimes a disadvantage to a small company by limiting its ability to borrow (because it may be a risky for lenders)
• The initial set up costs can be high
• Demanding government and stock exchange regulations mean high administration and compliance costs (including costs of producing very extensive annual reports that must be audited by professional and independent auditing firms)
• Separation of management control from ownership can be a disadvantage if management makes decisions that are not in the best interests of the shareholders (the Corporations law discourages this).

One way in which public companies expand is to buy shares in other companies and gain control of their activities or own them outright. The chief entity (parent company or holding company) controls the other entities (subsidiary, related or controlled entities) and must publish extra 'consolidated' financial reports for the group of companies as a whole (the economic entity). You will see these terms mentioned in your sets of financial reports.

The Corporations Law also allows for a class of company called the proprietary company , which must have the word 'proprietary' (or Pty) before the word 'Limited' in its name. This type of company is a structure for smaller (often family) businesses, and must have a minimum of two shareholders and no more than 50.

A proprietary company gives its shareholders limited liability, some continuity of existence and has fewer legal constraints. On the other hand its shares are more difficult to transfer and the company is not permitted to raise money from the general public through share or bond issues.

Activity

If you were considering a business activity of some type, which business structure would you use? Discuss your choice with reference to each of the three main types of structure.

Text reading

Atrill, Mclaney, Harvey & Jenner, pages 25-28.

Attempt each of the Activities.

Previous Page - Next Page