Different financing options
A retail outlet named Big Basket will be established. The products provided at the store will be groceries (it will comprise fruit, meat, packaged food and vegetables), health and beauty products, household products, stationery item, baby items. The main focus will be given to household products and health and beauty products. The household product will comprise Non-stick cookware, Mothballs, Air Fresheners, Oven Cleaner, and other goods which are usually used in a living room, kitchen, bathroom and bedroom. Further health and beauty products will comprise Cleanser, Moisturizer, Mask, Scrubs, Astringents etc. along with oral care products. The big basket will operate as a retailer who usually sells amount to general public and purchases from manufacturer or wholesaler. Big Basket will be registered as a Limited Liability Company.
Legal structure shapes the journey of business and choosing an appropriate structure to require time as well as consideration. Even though many choices of business entities are available, but each one has its own pros and cons. The reason behind incorporating Big Basket as a Limited Liability Company is that it a hybrid structure which permits owners, partner as well as shareholders to limit their personal liabilities. However, at the same time specified legal form is able to take advantage of tax and the flexibility of a partnership. The main advantage which is available to an organization registered as LLC (Limited Liability Company) is that member of the company is protected from personal liability relating to the debts and outstanding of the business to the extent same can be proven that they have operated transactions or taken decision in an illegal, unethical or irresponsible manner. Further, a limited liability company provides more protection as well as separation to business in comparison to sole proprietorship and moreover it is also referred to as a combination of corporation and partnership. As personal assets and assets of the company are separated in most of the scenarios and profit and losses are not taxed at the corporate level. The owner can split corporate profit among owners and corporation and overall it is required to pay a lower overall tax rate. Even benefit relating to the separate taxable entity is also available.
Financing can be referred to as the elements required for initiating as well as for enhancing it up to profitability (Barr and McClellan, 2018). A variety of sources are available which are assessed by businesses. However the choice depends on the quantum of the amount required and when you require it. Debt and equity are believed as two significant sources of finance. Equity Financing
Role of accounting
Venture Capital: According to Bay (2018), venture capital can be specified as financing which arises from organizations or individual persons who usually invest in young, privately held business. Further, they provide capital in exchange of ownership share of the business. Usually, they provide funds to only those organizations in which owners or founders have applied sufficient funds.
Angel Investors: Angel Investors are individuals and business which help and support small business to grow as well as survive. As per the study of Steingold (2017), their objective is not only to earn economic benefits but more than that. However, angel investors are also interested in the security of their investment and return thus they might also demand in the same manner as a venture capitalist.
Owners, Friends and Relatives: If the support of friends and relatives is available in new business than it provides a strong base for funds. Moreover, funds can be attained in the form of equity financing in which the person who is providing funds receives an ownership interest in the business.
Bank and other Commercial Leaders: Bank and commercial lenders are commonly used for financing purpose in any business. It is not easy to attain at the initial level of business. However, once the company had initiated its business, it can attain support from the bank in the form of commercial loan for its operation in the form of overdraft limit or loan. However, it provides funds on the basis of the cash flow statement, net worth detail etc.
Commercial Financing Companies: As per the study by Bekaert and Hodrick (2017), commercial Finance companies might be taken into consideration at the time when the organisation is not able of raising funds from other sources. Further, these types of companies used to depend highly on the quality of security in order to repay the loan than the track record or profit projectors of the business. In addition to this, it must be kept in mind that the companies which are not having substantial personal assets, commercial finance is not suitable for them to secure funds. Along with this, the costs of finance company funds are higher in comparison to other commercial lenders. Thus, in order to raise funds from this alternative, it is important for the company to be financially strong and have its own personal assets otherwise can’t utilise this alternative.
For initiating venture, the capital option will be availed as along with funds assistance of experienced person will also be attained. The reason behind opting this option is that venture capitalist emphasize on developing an investment portfolio for the business having enhanced growth potential which eventually results in higher returns. For daily operation, the commercial loan will be applied, and the limit for the same will be decided in accordance with the requirement of funds for working capital.
Accounting refers to a process which is utilized by companies for a variety of reasons. The procedure of accounting comprises recording of all business transactions which take place in an organization and also summarizing the information (Hatfield, 2014). Subsequently, it categories people then utilize information. Further, an organization can do accounting either manually or by using software of the same. Moreover, good accounting is important in the same manner as good sales are significant for the organization. Accounting plays a key role as it provides financial information related to the organization to stakeholders as well as to the directors for example profit for sales, the cost of benefits as well as the amount that company owe from the suppliers. It is important for the company to get the information regarding a financial position from the accountant since without this executives will not be able to make appropriate decisions. Financial accounting comprises all business transactions and summarizes the value of same son financial reports at the end of every month and year. Further, stakeholders of the company evaluate the financial position of the company. Stakeholders involve banks, stockholders, shareholders as well as personnel of the organization. The same information is utilized by stakeholders to make decisions related to the leading and investment.
When the company is vending products, they feel that they are performing very well, but the real picture of the company is reflected in its financial reports. Further, if the cost of sale is high, then it will decrease the profits (Karadag, 2015). At the same time, if all the sales are on credit, it implies that the company is not having sufficient cash in hand to reimburse its suppliers or power bill. In addition to this, accounting gives the information related to the finances so the company can know when it has money to burn and when to be careful in the expenses. It also plays a significant role for the tax purpose. As per the study by Oprean and Podoaba, (2016), with the help of accounting the financial information could be recorded accurately which will lead to an easy estimation of taxes. The financial details are transmitted from the software of accounting to correct tax forms. Apart from this, it is very helpful in paying taxes, comprising sales taxes, payroll taxes as well as quarterly calculated taxes.
The accounting chart of the company comprises five main parts that are asset, liabilities, owner’s equity, income and expenses. Further, the section of assets comprises cash, inventories and equipment. Thus, any changes in these will be accounted in the part of assets. In addition to this, the liabilities part will consist of auto loans, mortgage the and sales tax payable and another current as well as non-current liabilities. Subsequently, there is owner’s equity which included funds invested by the investors as well as the retained earnings. Moreover, according to Storey (2016), retained earnings refer to the revenue earned by the company, less any dividends or other payments to investors. After the owner’s equity, there is the income section which includes sales of goods and services which will provide information relating to the value of stakeholders of the organization. Apart from this, the revenue generated from sales of goods and services are recorded in the income section. Lastly, expenses account which comprises all the expenditures incurred by the company such as expenses on an advertisement, office supplies and payroll.
Special Journals are developed in order to account most frequently transaction in a simple manner (Petty, Titman, Keown, Martin, Martin, and Burrow, 2015). The four types of the special journal are sales journal, cash receipts journal, purchase journal and cash payment journal. Big Basket Company will require a special journal in order to ascertain information relating to total sales of the company as well as to assess the trend of sales. Moreover, the cash payment journal will provide information relating to cash expenses as well as the total outflow and inflow of cash in each month. With this information, the company will be able to know the quantum of cash required to make available by hand or Bank so that operations can be conducted in a smooth manner.
A subsidiary ledger is referred to as a group of accounts having similar nature, and further, their balances are added and present in a specific general ledger account. The general ledger account which provides a summary of subsidiary ledger account is also known as control account. For example, the subsidiary ledger of accounts receivable which contains all the information relating to each of credit sale transaction held by company, i.e. amount of credit sales, amount received relating to credit sales from the customer, return of merchandise, sales return etc. Big Basket Company will require same it will be able to attain periodically summarized information for recognizing same in general ledger.
It is stated by Sekaran and Bougie (2016), that, the adjustment of accounts and closure of books should be made at the end of each month. However, the minimum time period in which accounts of on organization required to be closed in annually as the LLC required to file an income tax return. In order to file the return, Big Basket LLC will be required to prepare an annual financial statement which requires that closing balance of all the accounts. The company will adjust and close its books of accounts at the end of each month and will send statements to the customers; payments will be made to suppliers as well as another task such as bank reconciliation will be done. The practice of closing books of accounts at month end will provide ease in making a final adjustment at the end of the year (Singer, 2018).
With accordance to Simona-Florina and Corina, (2015), sustainable capital management is referred as a key focus area of Board of management as a company requires managing internal capital needs as well as returning profit to the shareholders. In the case of Big Basket LLP, capital management strategy will change as per time in accordance with time response to the business life cycle and macro environmental factors. The elements which will be considered to decide whether to distribute profit or to transfer in retain earning are the whether the LLP can pay a dividend, and the current needs have company. An LLP can distribute profit as a dividend only if it satisfies key principles of section 254T of Corporations Act. Further, in case it requires additional amount as internal financing than same might take the decision to not to distribute profit even in case of sufficient profit during the year.
References
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher education. John Wiley & Sons.
Bay, C. (2018). Makeover accounting: Investigating the meaning-making practices of financial accounts. Accounting, Organizations and Society, 64, 44-54.
Bekaert, G., & Hodrick, R. (2017). International financial management. Cambridge University Press.
Hatfield, H. R. (2014). Accounting: Its Principles and Some of its Problems. In The Development of Accounting Theory (RLE Accounting) (pp. 21-29). Routledge.
Karadag, H. (2015). Financial management challenges in small and medium-sized enterprises: A strategic management approach. EMAJ: Emerging Markets Journal, 5(1), 26-40.
Oprean, D. B., & Podoaba, L. (2016). Importance, Role And Qualitative Characteristics Of Accounting Information In The Decision Making Process. Calitatea, 17(S2), 48.
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Pearson Higher Education AU.
Sekaran, U., & Bougie, R. (2016). Research methods for business: A skill building approach. John Wiley & Sons.
Simona-Florina, S. ?., & Corina, M. D. (2015). The Importance of Managerial Accounting for Enterprise Management. Ovidius University Annals, Series Economic Sciences, 15(1).
Singer, L. (2018). Settling disputes: Conflict resolution in business, families, and the legal system. Routledge.
Steingold, F. S. (2017). Legal guide for starting & running a small business. Nolo.
Storey, D. J. (2016). Understanding the small business sector. Routledge.
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