Ministry of Education
Chuvash State University after I.N.Ulyanov
Faculty of Business and Management
Student: N.I. Nikitin, FBM-61-02
Advisor: M.V. Emelyanova
Chapter 1. Setting up a business………………….………………..……..….4
Chapter 2. Company performance.….……..…………………….…………..6
Chapter 3. The stock market...…….……..…..….….…..……….……….…..8
The given course paper represents a brief material. It has the recommendations of successful management of business. The experience of the entering business and the achievements of positive results are generalized in it. I have chosen the theme of my course paper as I think that each person has an opportunity of opening his own business in our country now, but not everyone can do it. And thats why I have decided to help the beginning businessmen to earn money.
The given course paper consists of three parts. In the first part it is considered preparatory steps of the setting up of business. Work of the company is analyzed in the following chapter of the course paper. And I have tried to study the stock market in the third chapter.
Setting up business
If a person wishes to launch a new business, he has to make some preparatory steps. The first step is the selection of an appropriate legal form. In various countries these forms differ. But usually they are as follows: a limited liability company, a partnership and a sole proprietor.
There is a basic difference between these forms. A limited liability company is a legal entity (legal person). In case of a bankruptcy, it has to reimburse (cover) its debts with all its assets, but the creditors cannot seize the assets owned by the companys shareholders.
Sole proprietors or partners do not form a legal entity and have unlimited liability. If their business goes bankrupt, they have to reimburse the debts not only with the firms assets but also with their personal belongings: money, houses, cars, etc.
For this reason, most businesses are set up as limited liability companies. The name of such a company ends with “Limited” in the UK or Canada and with “Inc.”, “Corp.” or “LLC” in the USA.
A limited liability company may be private or public. A private company is usually founded by a small group of people who know each other and intend to do business together. A private company cannot sell its shares to the public and if it the business is not successful the founders loose their own money only.
A public companys shares are traded on the stock market and may be purchased by millions of people all over the world. These shareholders are not aware of the companys day-to-day performance and must rely on the professionalism of the companys managers and their reports. If the management is poor or in case of the managers fraud, the shareholders may loose billions of dollars.
Many countries have special regulatory bodies to supervise public companies, such as the US Securities Exchange Commission. Yet, corporate disasters sometimes happen. One of the most recent examples is the bankruptcy of Enron Corporation, a giant supplier of energy resources in the Western part of the United States.
The second step in setting up a business is the preparation of various documents, such as: Memorandum of Association, Articles of Association and Resolution of the founders on the appointment of directors. The Memorandum contains the conditions, on which the founders agree to set up this business, and the Articles set out the principles of the companys formation and management: its name, objectives, share capital, rules of management, etc. The founders have to make the initial investment and may either hire the directors of the company or appoint themselves as the directors.
Every new business is to be registered with the official company register. The UK has such registration offices in London and in Edinburgh, while in the USA each of the 50 states has its own register.
Any business is set up to make profit. But the founders sometimes do not have enough experience or make serious mistakes, which result in losses. The financial results of the companys operations can be seen from its financial reports.
There are at least three reasons for preparing such reports. First, every government needs to collect taxes and therefore requires detailed information on the companys performance, revenues and expenses. Second, the shareholders need to know, whether the companys management is professional enough, and ask for confirmation with facts and figures. Third, the companys top executives must control the efficiency of the companys various departments and the input of each department in the companys operational results. The reports prepared by the companys accounting department are often verified by an auditor, which is an independent public accountant. The auditor has to confirm that the reports comply with legal requirements and they reflect the companys actual performance.
There are a lot of reports submitted annually, semi-annually and quarterly. The most important one is the balance sheet, which describes the companys assets and liabilities as on the last date of each year. The assets are the values, which the company owns: money, buildings, equipment, raw materials, computer hardware and software, trade marks. The liabilities specify what the company owes, such as: share capital, credits received from banks and suppliers, other debts. If the amount of assets is higher than that of the liabilities, the company has profit. If the liabilities are higher than the assets, the company has losses. In the latter case they say that the company is “in the red”.
Money transfers between the company and its partners during the year are shown on the statement of cash flows. Cash is the most liquid asset, which is as important for the companys activities as blood for a human body. If a company has huge fixed assets (land, buildings, equipment) but does not have enough money, it is a sign of financial problems.
There are many other reports, letters, notes and messages, which a company has to submit. Some of them are very colourful, with photographs and illustrations and look like advertising material. But their contents are usually a summary of the above two documents and additional comments to them.
If we deduct the companys expenses from its revenues, the result is gross profit before taxes. If we further deduct taxes from the gross profit, the result is net profit, which may be distributed among the shareholders as their dividends or may be reinvested. The shareholders adopt a resolution on this matter at their annual meeting. Often they decide to use half of the net profit for dividends and to reinvest the other half. The net profit may also be carried forward to the next year. The amounts brought forward from the previous year are known as “retained earnings” of the company.
Companies are usually reluctant (do not wish) to pay taxes and there are legal ways to avoid some of them. The companys ability to save on taxation depends on the professionalism of its accountants. The easiest way to avoid taxes is to increase expenses through purchasing new machinery, investing in new technologies, making money transfers to charity foundations.
While tax avoidance is allowed, tax evasion is a crime. The companys executive body (the board of directors) is responsible for the correctness of the information submitted to the government. The personal liability is on the chief executive officer (the board chairperson) and the chief financial officer who sign the reports. If the information contained in the documents is not correct and if the company tries to evade taxes, these persons may be fined or even jailed. Otherwise, they may escape to another country, which sometimes happens.
The stock market
A century ago, the size of enterprises was rather small, each of them usually employed several dozen workers, and most business companies were family-owned. Further industrial growth required more intensive financing and family capitals became insufficient.