Sizing-up a Business
Respond to the following:
1. Explain how the cash flow cycle works.
2. Describe how financial management is related to accounting.
3. How do sole proprietorships, general partnerships, limited liability companies, S corporations, and C corporations differ?
4. Suppose three optometrists wished to form a business that was expected to last until the oldest one was about to retire. The three had known each other since college and were close friends who trusted one another. What type of firm might be appropriate? Why?
Sizing-up a Business
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Sizing-up a Business
- Explain how the cash flow cycle works.
The cash flow cycle illustrates the movement of cash through business, as products are manufactured and sold and paid for. First, the cash is paid out for the materials, equipment, salaries, overhead, etc. , where it is used for the manufacturing of the products. This is followed by the products getting stored in a warehouse until it gets sold to the customers. After a product is sold, then the customer receives an invoice and hence creating an account receivable. The accounts receivables are then collected from the customers, which brings back cash into business again. Depending on the business, the length of time between the first and last steps can be quite lengthy (Edwards, 2019). A major common reason for business failure is the cash flow lag.
- Describe how financial management is related to accounting.
Accounting and financial management have a relationship in which they play a crucial role in any given organization. Accounting is a very vital input for the financial management function of a business. Proper financial management is significant in that it helps with the effective utilization of economic resources for a given firm (Edwards, 2019). Whereas accounting reports and summarizes financial transactions for both external and internal users, financial management involves planning, directing, monitoring, and controlling of the monetary resources for a firm to help it attain the set goals and objectives.
Accounting and financial management are related to the extent that accounting is a vital input that determines the financial decision making. However, they differ in terms of the treatment of funds and on the issue of decision making. Financial management entails planning as a way of attaining the various financial objectives, whereas accounting involves preparing and examining past financial records.
- How do sole proprietorships, general partnerships, limited liability companies, S corporations, and C corporations differ?
Sole proprietorships entail an unincorporated business with one owner, who pays personal income or tax on profits earned by the company. On the other hand, general partnerships involve businesses made up of two or more partners, where each share the liabilities debts and assets. Partners assume unlimited inability, which potentially subjects their assets to seizure in the event the partnership becomes insolvent (Grimsey & Lewis, 2017). A limited liability company (LLC) is a business structure where the company owners are not personally liable for the liabilities and debts of the company (Jelsma & Nollkamper, 2018). An S corporation differs in that it is a type of corporation which meets specific Internal Revenue Code requirements and is not taxed separately. Finally, a C corporation is dissimilar from an S corporation in that it is taxed separately from its owners.
- Suppose three optometrists wished to form a business that was expected to last until the oldest one was about to retire. The three had known each other since college and were close friends who trusted one another. What type of firm might be appropriate? Why?
The most appropriate business for the three would be to have a partnership firm. This is since each would have equal ownership and management rights, making it easy to collaborate on the business. It would therefore not affect their relationship and any coordination amongst themselves, where they would make critical decisions as partners, and resolve issues amongst themselves equally based on their equal shares of the business (Grimsey & Lewis, 2017). In the event of planning to dissolve the business, they will also have to agree. On the other hand, when the oldest person in the firm retires, then it would be easy to dissolve the business or decide on other better measures depending on their wishes.
References
Edwards, K. (2019). Accounting Systems and the Financial Operations Performance in Lean Manufacturing Companies: A Correlation Study (Doctoral dissertation, Capella University).
Grimsey, D., & Lewis, M. K. (2017). The promise of public–private partnerships: Evaluating Public–Private Partnerships and Other Procurement Options. In Global Developments in Public Infrastructure Procurement. Edward Elgar Publishing.
Jelsma, P. L., & Nollkamper, P. E. (2018). The limited liability company. LexisNexis.
