Finance Homework: Business Structures, Finance, and Conflicts

This finance assignment delves into various aspects of business finance. Part A examines the potential losses and liabilities associated with sole proprietorships, general partnerships, and private limited companies, alongside the advantages and disadvantages of each business form. It also analyzes a company's bank overdraft situation and explores alternative financing sources. Part B focuses on factoring accounts receivable, comparing its costs and benefits to other credit control methods, and discusses the reasons for early repayment of long-term borrowings. The assignment concludes by addressing conflicts of interest between shareholders and business managers and proposes strategies for their resolution. The solution includes financial calculations, comparisons, and an in-depth analysis of key financial concepts.

FINANCE

TABLE OF CONTENTS
PART- A..........................................................................................................................................1
QUESTION- 1.................................................................................................................................1
a) Potential losses and the liabilities of the owners in the different forms of businesses............1
b) Advantages and disadvantages of the forms of the business...................................................1
QUESTION- 2 ................................................................................................................................2
ii) Three alternative sources of the finance..................................................................................2
PART- B..........................................................................................................................................3
QUESTION- 1.................................................................................................................................3
a) Factoring of the accounts receivables......................................................................................3
b) Reasons for the repayment of the long term borrowing earlier than the repayment date........4
QUESTION- 2.................................................................................................................................4
Conflicts of interest among shareholders and the business managers and how they could be
dealt..............................................................................................................................................4
REFERENCES................................................................................................................................6

PART- A
QUESTION- 1
a) Potential losses and the liabilities of the owners in the different forms of businesses
i) If the Tiny Pots is the sole proprietorship business and the Ms Stark is the owner of such
business, and then she is to assume all the liabilities of the business. In the sole proprietorship
form of the business there is the unlimited liability of the owner of the company for all the debts
and obligations that are incurred by the company. So in this case the potential loss of the
investments are equal to the contribution made £60000. The amount of payment that the owner
shall be personally be obliged to make are £90000 which are the outstanding obligations.
ii) If the Tiny Pots is the general partnership and the profit sharing ratio between both the
partners is 50:50, then in that case Ms Stark shall be liable for the 50% of the total amount that is
due in the business. In the contract of partnership it can be assessed that all or any of the partners
are jointly and severally liable for the debts of the company. So the potential loss of the
investments made by Ms Starks shall be £30000 which is 50% of the overall liability (Morales
and et.al., 2021). The total amount that she shall be obliged to pay are £75000 out of which
£30000 is to self.
iii) In case of Tiny Pots being the private limited company the company and its shareholder's are
the different person and so the shareholder's are not liable to pay the debts of the company. As
per the concept of the separate legal entity it can be defined that Ms Stark will not be liable for
the debts of the company. So in this situation the potential loss of the investments shall be
£60000 but the amount that the Ms Stark is obliged to pay shall be nil as the owners are not
liable to meet the debt obligations of the company in case of the company.
b) Advantages and disadvantages of the forms of the business
i) Ability to raise finance- The sole proprietorship is at disadvantage to raise the finance from the
equity sources by offering to the public at large and also in terms of acquiring loans to finance
the operations of the business its credit history shall be verified and the loans shall be extended.
The partnership businesses are moderately favourable in case of the raising or obtaining the
finances for the smooth functioning of the business. The capital can either be contributed by the
various existing partners, through adding the new partner or then by taking the loan from the
bank. The company stays most advantageous in case of ability to raise the finances as it is free to
obtain the capital either through issue of equity shares or from the debt sources.
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ii) Ability of Ms Stark to control decision-making- The ability to control the decision- making is
the most in the sole proprietorship business and she shall be the sole authority to decide on the
future operations of the business. On the contrary in case of partnership the control of the
decision making shall be 50% as per the profit sharing ratio and the power shall be remaining
with both the partners. In the case of the private limited company it shall be in the hands of all
the investors who are having the voting rights. Further the operations are under the control of the
management so Ms Stark shall be at disadvantage in case of the company.
QUESTION- 2
i) The current bank overdraft that the company has assumed has been important for the
organization to meet the obligations of the trade payables. Since the company is feeling extreme
pressure from the trade payables of the business, so they can use the amount to repay these trade
payables without spoiling their credibility. Apart from this it can also serve in the routine
working capital requirement of the business such that the demand in the market can be fulfilled.
The bank shall not be accepting the proposal of the management for increasing the
current bank overdraft by 40% as the current ratio of the company shows the weaker liquidity
position as compared to the industry and also the cash and bank balances has been wiped off and
the company has already got the bank overdraft (Islam, Farooq and Ahmad, 2017). It is facing
the tight liquidity position where it shall not be able to pay the debts of the trade receivables. In
that case the bank shall be denying the proposal of the company.
ii) Three alternative sources of the finance
 One of such sources can be through factoring services by selling the accounts receivables
of the company. This shall provide the immediate funds to the company to satisfy the
debts and obligation.
 The other could be through the issue of the shares to the public at large. This is the long
term finance and shall not require any repayments in the near future. These funds can be
utilized to finance the growth opportunities for the business.
 The last is through the venture capital financing which will dilute the ownership, but shall
be providing funds with the assistance and requires no repayment in the short term. Such
funds can also be applied to the business.
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PART- B
QUESTION- 1
a) Factoring of the accounts receivables
i) Average trade receivables= £100000
Annual sales= £1.2 million
Two options for the recovering the trade receivables:-
I) Through the recovery agents
Incurring of the credit control costs= £37000
II) Factoring
Factoring company charges= 2.5% of sales
= £1200000 * 2.5%
= £30000
Interest on the advance of 90% of the receivables= 6.5% pa
= £100000 * 90% * 6.5%
= £5850
Total= 30000 + 5850
= 35850
Yes, it is financially beneficial for the company to enter into the factoring contract as it is
incurring the costs of £35850 as compared to the recovery costs of £37000. It is a net saving of
£1150 for the company. So it can be suggested that the company XYZ should be entering into
the factoring contract to save the amount of £1150 for the business.
ii) Advantages of factoring Immediate inflow of the cash- It can be assessed that in the factoring arrangement the
company shall be receiving the cash or the financial resources immediately, which
otherwise would be received at a later date by the through the receivables. The cash
collection cycle gets shortened and simultaneously the liquidity position of the company
gets enhanced. Evasion of the bad debts- It can be assessed that though the contract of factoring the
trade receivables of the company are sold and thereby the recovery of the dues is at the
end of the factoring agent and this is the reason that the bad debts and the losses for the
company has evaded.
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 Capitalization of the growth opportunities- The finances that are acquired by the
company through the sale of the accounts receivables can be applied to use in the
capitalization of the available growth opportunities (Anschuetz and et.al., 2019). This
shall be helping in the achievement of the company's objectives.
Disadvantages of factoring High financial charges- The method of factoring shall be involving higher amount of
financial charges and this is the reason that the company shall be experiencing the
reduction in the profitability (Advantages and Disadvantages of Factoring, 2021).
Certain amount of the accounts receivables that could have otherwise be received by the
company are now decreased as cost of the early payments that are made by the factor.
 Reliable on the credibility of the customers- The acquisition of the factoring service for
the customers shall be depending on the credit score and the credibility its past records
and the current position shall reveal. Firstly the bank shall be analysing the same and then
shall be preferring to enter any kind of contract within the company.
b) Reasons for the repayment of the long term borrowing earlier than the repayment date
The organization might choose to repay the loans earlier than the repayment date in order
to save huge costs of the interest. It is a viable choice that if the company has the possession of
idle cash in hand then its better to repay the loans than to unnecessarily bear the interest costs of
using such amount. Generally there is lock in period for such loans but post the lock in period the
company is free to make the payments if they have the excess availability of cash. This can be
beneficial for saving the interest cost of the company, reducing the debt obligations from the
balance sheet and also proving the credibility of the company.
QUESTION- 2
Conflicts of interest among shareholders and the business managers and how they could be dealt
The shareholders, who are the owners of the business and the business managers who are
responsible to undertake the day to day operations of the business are the two different parties in
the organization having the major conflicts of the interest. It can be further be assessed that the
agency problem is one of the most significant conflicts of interest among the management and
the shareholders where each party wants the others to act in the best interest of the prior. The
shareholders expects the management who are acting as their agents to perform effectively such
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that the objective of shareholder's wealth maximization can take place, but on the contrary the
management tries to boost their salaries and the bonuses.
The presence of this problem is majorly because of the various incentives and also the
benefits that are associated with the completion of the particular task in the company. The
management of the company goes behind the fulfilment of the various tasks just with the motive
to fulfil their personal objectives of earning higher but this does not coordinate with the
organizational objectives of maximizing the wealth of the shareholders (Wang, 2017). Many a
times the conflict of interest also arises because the decision- making power and the voting rights
are available with the shareholder's who are having lesser idea related to the business operations
as compared to the managers who have the prime knowledge of all the crucial factors of the
business.
One of the most significant example is that the shareholder's of the company shall be
wanting to increase the profits of the business so that the benefits can be extended to them in the
form of the dividends, despite the fact that it is at the cost of the salaries and the incentive
payments that are made to the management of the company. On the other hand the management
shall be trying to give the best performance so that the incentives and their pay scale can be
maximized. In this case the agent principle breaks and the conflicts of the interest starts.
The agency problem in the company can also be dealt effectively through establishing the
proper internal control systems that can monitor the corporate governance and simultaneously
can also lead to aligning the activities of the management and the shareholder's of the company.
Another measure is that the regulations are developed that shall be monitoring the fiduciary
relationships of the principle and agents and the specific laws are established so that the arising
agency problems can effectively be regulated.
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REFERENCES
Books and Journals
Morales, A. and et.al., 2021. Hybrid forms of business: Understanding the development of
indigenous social entrepreneurship practices. Journal of Business Research. 124.
pp.212-222.
Islam, A., Farooq, M. and Ahmad, A., 2017. Factors affecting liquidity position of islamic
banks. City University Research Journal, Special Issue: AIC, Malaysia. 2017. pp.27-36.
Anschuetz, E. and et.al., 2019, March. Variational quantum factoring. In International Workshop
on Quantum Technology and Optimization Problems (pp. 74-85). Springer, Cham.
Wang, Z. H., 2017. Turf war or collusion: An empirical investigation of conflict of interest
between large shareholders. Corporate Governance: An International Review. 25(5).
pp.358-380.
Online
Advantages and Disadvantages of Factoring. 2021. [Online] Available through:
<https://efinancemanagement.com/working-capital-financing/advantages-and-
disadvantages-of-factoring>
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