Financial Decision Making for Managers: Ownership Structures Analysis

This report delves into the intricacies of financial decision-making for managers, offering a comprehensive analysis of various ownership structures, including sole proprietorships, partnerships, LLCs, corporations, and public sector organizations. It explores the financial statements associated with each structure, highlighting their reporting requirements and organizational implications. The report further examines key financial concepts such as cost of capital, return on equity (ROE), and return on assets (ROA), providing insights into profitability and efficiency. It then proceeds to address practical aspects of business finance, including sources of funding, budget and cash flow management, and project assessment. The report culminates in actionable recommendations for managing business finances and selecting appropriate financial sources, equipping managers with the knowledge to make informed decisions in diverse business contexts.

FINANCIAL DECISION MAKING FOR
MANAGERS

TABLE OF CONTENTS
Ownership Structures.......................................................................................................................4
Task 1...............................................................................................................................................5
Analysis of ownership structures.................................................................................................5
Financial Statement....................................................................................................................10
Sole trader..................................................................................................................................13
Companies/corporations and public sector organizations..........................................................16
Proposed action plans:................................................................................................................18
Possible areas to invest $50,000.................................................................................................18
Ratios..........................................................................................................................................18
Sources of business finance........................................................................................................19
Difference between long-term and short-term financial needs..................................................20
Analyzing a Published financial statement................................................................................20
Assessing implications of different financial sources for the organization...............................22
Recommendations for financial sources for business projects...................................................23
Task 2.............................................................................................................................................28
a) Budget and Cash Flow...........................................................................................................28
b) Recommendation for managing business finance and expenditure.......................................29
Task 3.............................................................................................................................................31
a) Project assessment..................................................................................................................31
b) Recommendation based on calculations................................................................................32
Bibliography..................................................................................................................................34

OWNERSHIP STRUCTURES
Businesses are expected to grow continuously, but on the other hand, the money supply can
simultaneously remain stagnant, only the inventory size and the accounts receivables increase as
the company expands.
In the course of the daily operational activities, it is essential to focus on client needs. In order
to fulfil customers’ needs, the inventory has to be increased unreasonably high which will then
require significant procurement expenses, perhaps leading to the need for bank loans as well to
bear the maintenance cost.
There are different types of ownership structures that will be presented in the report, including
sole proprietorship, partnership and public Limited Corporation. To determine the scope of
business, the purposes and needs of the business must be analysed. These are bounded with
certain financial constraints, for example sole proprietorship requires low capital whereas a
public limited corporation needs massive investment. Their expansion prospects depend on the
size of business along with some legislation constraints, for instance public limited companies
and partnership firms have to be registered while it is not necessary for a sole proprietorship.
Current financial situation of a company must be evaluated from diverse aspects, e.g. we have
to identify the cost of possible financial sources, the current market value of the company assets.
Since cost of financial sources differ from company to company depending on its different
functioning areas and operating history, the most commonly used practice is to analyze the cost
of capital.
The cost of capital depends on the way how a company is financing itself. Most commonly a
company can be financed throughout its equity and debt from the market. We can receive the
cost of capital if we decrement the value of total assets by value of total debt.
Furthermore by examining the return of equity (ROE) we can identify the profitability of a
company, namely how much profit a company generates with the money that shareholders have
invested.
ROE = Net Income / Shareholder's Equity
On the other hand the return of asset (ROA) identifies how efficient the management of a
company uses its total assets to generate profit. We are dividing the company annual income by
its total assets.
ROA = Net Income / Total Assets

Among these, expansion prospects also require to study the different operational fields of a
company like HR expenditures and financial services.
For making large profits, there is a need for huge corporate expenditure such as investment,
maintenance, taxes and duties to be paid. Based on these factors, the business owner needs to
make a decision regarding the financial methods to be applied for operating funds under different
business structures including sole proprietorship, partnership, corporation or LLC.
TASK 1
Analysis of ownership structures and their reporting requirements
1. Sole Proprietorship – The easiest and least expensive way of starting a business is to
establish a sole proprietorship which involves only one person. All the responsibilities will
belong to one person who has unlimited liability for the sole proprietorship’s debts. It is
based on single taxation, all the income will be reported on the owner’s tax return form at
the end of the financial year. No other documentation has to be filled, the organizational
costs are minimal, no start-up fees and minimal filing fees apply. The control lies with one
person, quick decision making possible, however lacks diversity and dynamics. (GOV.UK,
2015). In sole trader there are not a large number of managers. In this type of business
there is a single person who manages all business operations. Other employees act as his
subordinates. Hence, there is a single man who is controlling entire business operations. In
case of sole proprietors the main reporting requirements is to prepare income statement
and balance sheet. They do not need to prepare a cash flow statement. Format of these
statements remain simple due to small size of business operations.

Illustration 1: Organization structure for sole trader
(Source: Bohušová and Svoboda, 2014)
In case of sole trader organization structure there is a sole trader who is also an owner of the
business firm. Under him manager work and all employees of the organization are managed by
the manager. This is a simple organization structure of the sole trader.
2. Partnership – General partnership is the type of ownership structure where all the general
partners are participating in a single business and bear unlimited responsibilities for the
company. Limited partners can be involved, their liability is limited to their investment.
Partnerships follow flow-through taxation and the control is between all partners. The
continuity of a partnership dissolves when a change occurs in the company. Partnerships
have higher financial risk that depends on the financial capital that is being employed by
the partners themselves. Raising capital is mostly borrowing, which is easier with more
partners. In partnership there are many types of partners like sleeping and active partners.
These partners play a different role in an organization and collectively manage an
organization. In this way this mode of business is different from sole trader.
Illustration 2: Organization structure for partnership
(Source: Charles, Glover. and Sharp, 2010)
In case of partnership organisation structure there is a single lead partner who acts as leader of
all partners. All the employees of an organization works under these partners. Hence,
organisation structure of partnership is different from the sole trader. In case of partnership
reporting requirement is to prepare a partnership account and income statement in which profit

and loss is shared by the partners. Balance sheet is also required by the partners and format
remain simple like sole trader.
3. Limited Liability Company (LLC) – LLCs are owned by the members, who have limited
liability and strict obligations towards the company. Opposite to the General Partnership,
the company can be either managed by the members or the control can be delegated to
managers. The owners of an LLC can change without break in the continuity of the
company. LLCs have the right to choose between corporate taxation and flow-through
taxation. The ownership is based on the share of investment. These shareholders makes
an investment in the company and in return get an ownership in the owner. Due to
ownership they have right to vote in the company annual general meeting regarding
approval of various projects. This thing is not seen in case of above mode of business.
Hence, LLC is different from sole trader and partnership.
Illustration 3: Organization structure for company
(Source: Johnson, C.L., Kioko and Hildreth, 2012)

In case of company there is a huge organisation structure in which there is a director and
other top officers. Below these top managers different department managers comes and other
employees of an organisation work under these managers. So, it can be said that organisation
structure of the company is lengthy and different from sole trader and partnership. In case of
company income statement, balance sheet and cash flow statement is prepared. These statements
are prepared in the specific format as prescribed by the international body.
4. Corporation – Corporations are owned by the shareholders or stockholders, proportionally
to the amount of shares they have. The control is between the Officers, Board of Directors and
shareholders. Changes in the owners will not stop the continuity. Usually double taxation applies
at corporations, corporate tax on the company and shareholders tax on dividends. “C
corporations” pay taxes to the government. Between the two “S corporation” and the “C
Corporation” the difference is about how they are taxed. They don’t pay tax, mainly focusing the
income and loss, this is what they apply, and they will report in their tax returns. The way of
raising capital for a corporation is borrowing or issuing bonds and stocks. Organisation structure
of corporation is same as we see in case of company. In case of corporation reporting
requirements are similar to same of Limited Liability Company.
5. Public Sector Organization – These are the types of entities that are owned and controlled
by Government, and provide public services as national defence, police, fire fighting or other
services. There is some overlapping with the private sector, providing services as healthcare or
waste management or security services etc. The main focus of these organizations is on
employee welfare and due to this reason they take several steps for well-being of their mentioned
stakeholder. Profit maximization is not their objective. There are board of directors who manage
government organization. Hence, it can be said that management system in public sector
organization is similar to Limited Liability Company. Reporting requirements for public sector
organization and corporation are same.

Illustration 4: Organization structure for public limited company
(Source: Marques, 2010)
In case of public limited company there is a board of director and other top officers like board
of executive directors and managing director etc. below these top managers middle level
managers work under their guidance. Other employees of an organisation work under these
middle level managers. Thus, organization structure is slightly different in case of public sector
companies relative to corporation.
6. Charities: These are non-profitable organizations who generates money from the public for
their welfare. Their purpose is to providing services to the public and operate for the welfare of
society. Trustee are the owners of charitable organization and Board of directors have managing
authority and responsible for governing overall functioning. Thereafter, staff members are
responsible for doing all the operating functions. Thus, the organizational structure can be made
by developing team works in which one or more staff members have the responsibility to
complete specific allotted tasks. In other words, it follows hierarchical structure in the
organization. A simple statement of journal and ledger is prepared in case of charities. Apart
from this there are no reporting requirements.

7. Limited by guarantee: Limited by guarantee companies are nonprofit organizations. For
instance, sports clubs and workers cooperatives. These organizations does not usually have any
share capital in the business. Owners of these organizations are the members who provide their
guarantee, known as guarantors. Guarantee is a nominal amount which will be contributed by the
guarantors at the time of company liquidation. Reporting requirements of corporation and
company limited by guarantee is same.
8. Cooperatives: This are the registered entities in which minimum number of shareholders
are five who hold equal voting rights. Its members are responsible to participate in the
management and run the organization. In case of cooperatives simple format of income statement
is used and thus it can be said that there are simple reporting requirements in case of
cooperatives.
9. International business structure: In the international businesses, chairman is the top
authority. After that, Certified executive officer and general manager comes who manage
business overall functioning. After the general manager, various departmental managers such as
operation manager, marketing manager, financial manager, accounting manager and IT manager
comes who are responsible for managing their departmental activities. Lower level consists of
various staff members who are guided by their supervisors.
Financial statement of different organizations:
Sole trader prepare profitability statement and balance sheet after ending the financial
year. Although, it has not any legal obligations to prepare necessary financial statement.
However, partnership prepares profit and loss account, P & L appropriation account, partner's
capital account and balance sheet. It prepare all the necessary statements according to the
partnership act. However, company is a legal body and legally obliged to prepare profitability
statement, balance sheet, cash flow statement, statement of changes in equity and retained
earnings. Furthermore, it is legally obliged to
(Beth Laurence, J.D Learn About Business Ownership Structures 2015)
Sole Proprietorship
Advantages
• All the profits belong to one person only
that is owner of the businesses.
Disadvantages
• Owner bears responsibility for all debts
• Unlimited liability

• Inexpensive in terms of financial cost.
• Owner has all the authority of power
• Easy to establish
Partnership
Advantages
• Lower expense of establishment
• General partner has a right to monitor all
the activities of the company.
• Shared ideas of partners
• Secured investments are there by consent
of all the partners.
Disadvantages
• Less preferred business type as it may
leads to conflicts as well in the business.
• Issue of personal disputes as perception
of partners may differ.
• Partners depend on each other’s
decisions.
Corporation
Advantages
• It carries a higher level status.
• Limited liability
• Opportunity to extend the invested cash
• There are certain benefits such as tax
allowances that require a certain rate of
profits to apply
Disadvantages
• It has costly setup fees as it includes huge
investment for initiating business along
with high legal fees.
• The cost is between $500-2,500 (Business
and enterprise – Topics – GOV.UK,
2015.)
Financial Statement
Nynfus Corporation was founded in Liverpool, UK, over 10 years ago and since its inception
it has been at the forefront of laboratory diagnostics. It develops, manufactures and markets
diagnostic instruments. Its biggest markets are the USA and Germany.
5 years ago a private equity fund bought almost all the shares of the company. A few
managers and directors own several shares.

Throughout the world, the Nynfus brand name has been established to manufacture high
quality and reliable instruments resulting in their products being sold and marketed in more than
100 countries. Today, there are more than 30,000 of their instruments in laboratory use and their
customer base continues to grow stronger year after year.
At Nynfus, they do not only pride themselves in the quality of their products but also in the
quality of their support through their comprehensive product training programs and their
excellent technical support and customer service teams.
Their dedicated sales and marketing team can provide the customers with sales support
material and with the advice on how to market the products best in all of the countries. The
company also provides the electronic files of brochure artwork allowing their partners to produce
their market-specific materials.
All issues related to placement of orders, product availability and deliveries should be
addressed to the customer service group, who take great pride in providing excellent service to
fulfill their partners' needs.
Following are the financial statements used by Nynfus for business analysis. Income statement- It is a statement that provides information about the income and
expenses of the firms. This statement shows the profit earned and loss incurred by the
firm. It also indicates proportion of expenses in the firm sales. Hence, firm comes to
know about the expenses whose proportion is increased in sales.
 Balance sheet- It is a financial statement that indicate the financial position of the firm.
There are assets and liability of the firm which indicates that firm financial position is
strong or weak. Hence, this statement is widely used by the firms.

Nynfus Corporation
31.12.2012 31.12.2011
in USD YTD Actual YTD Actual
Cash 12,441 9,984
Accounts receivable 1 2,224,236 1,570,623
Inventories 1,990,920 955,153
Raw material 2 1,486,910 642,965
WIP 3 365,850 210,521
Finished goods 4 138,160 101,667
Prepaid expenses 223,111 29,781
Other current assets 15,224 23,395
Current Assets 4,465,932 2,588,936
PP&E 5 559,402 388,269
Net fixed assets 559,402 388,269
Goodwill 1,464,156 1,792,493
Other intangibles 50,998 52,700
Financial Investments 1,913,636 1,913,636
Other Non current assets 13,207 13,207
Total assets 8,467,330 6,749,242
Accounts payable 6 1,664,722 1,312,328
Provisions 10,686 37,285
Accrued Expenses 376,655 279,346
Accrued Taxes 7 -22,541 -58,374
Other interest 0 0
Other Current Liabilities 617,830 62,745
Current liabilities 2,647,352 1,633,330
Revolving Credit 8 1,890,168 1,890,168
Senior Term Debt 0 7,881
Capital leases 24,349 41,772
Other short term Loan 864,868 883,964
Total debt 2,779,384 2,823,785
Share Capital 153,000 153,000
Capital Reserves 1,244 1,244
Retained Earnings 2,137,883 2,126,339
Actual P/L 748,467 11,544
Total S/H equity 3,040,594 2,292,127
Total liabilities & equity 8,467,331 6,749,242
Chart 1: Own chart: Nynfus Corporation Financial Statement 2011-2012