Establishing XYZ Limited In The Australian Retail Sector

Introduction to the business selected

The business company established will be named as ‘XYZ Limited’ which is formed by three members. The company will operate within retail sector of Australia and will provide mainly clothing retail products within the country. The company will be established in Queensland as a private limited company. The main operations will include of merchandising only at the initial stage within the retail sector. The merchandising products will be sourced from different suppliers to be sold in the retail outlet of the company. It will be primarily established as a medium-sized company within the retail industry of Australia. The company aims to grow itself as a large manufacturer of clothing products in all the domains including men, women ad kids in the future period of time.

The company is being established as a private limited company mainly to separate ownership from the company. It will be a legal entity having wide legal capacity which is entirely separated from its members. This legal form of business for the company is selected as private limited ownership has a limited liability structure. The most significant advantage of this type of business in comparison to proprietorship and partnership is that liability of shareholders is limited for meeting the debt position of the company. The liability of business will only be limited by members and thus there is less financial risk for the business owners to be sued for negligence. The most advantage of this type of business is there is less risk of personal liability as the company itself is responsible for its debts and legal obligations (Brough, 2010).

The business has been established as the private company that will deal in retail sector. The company is medium size company that does not require heavy investment as in case of large size company. The initial financing cost required to finance the business is estimated between $ 1.5 million to 1.75 million dollars depending upon the place of business acquired in renowned place of Australia. As business is managed by three members, it is mandatory for all three to contribute $ 350,000 each to the operation of the company (Brigham and Ehrhardt, 2011). Total financing amount raised will be $ 1.75 million to meet the requirement and it will finance either through members capital contribution or through debt finance. So two major finance options used XYZ Company Limited is as under:

(Source: https://www.lend.com.au/business-loan-interest-rates)

The role of accounting is very important for developing and disclosing significant accounting results to the general users in order to seek the attention of its various stakeholders. The development and presentation of accounting data in the form of financial reports is very useful for the business company to support its continuing growth and development by realizing continuous flow of capital and seeking customer attention. The users of financial information include all the stakeholders such as employees, customers, government, investors, lenders, creditors and suppliers who are directly or indirectly impacted by its operations. The accounting processes and systems within the company consist of keeping a track of all its financial transactions (Hopper, 2012). This includes developing effective accounting method for keeping a track of all of its purchases, sales, assets and liabilities. The systems or process enables a company to develop financial reports for keeping a track of all of its accounting activities. The development of financial or management accounts is dependent on the type of accounting systems and processes adopted by the company. The present business will develop both type of accounts that are, financial and management to keep a track of its accounting performance. Financial accounting process will be used for developing the financial reports for the external users of the company such as customers, government and investors. On the other hand, business managers will adopt the use of management accounting systems processes to develop and present the financial information internally such as to the employees and other levels of management. This will facilitate the business managers in making accurate decisions regarding the future growth and development of the company (Bragg, 2016).

Legal form of business

Financial statement analysis helps the management in taking many useful decisions such as identification of units that are generating highest revenue, percentage of fixed expenses, profitability position of company, financial health of the company and cash generated from the various activities. Analysis of financial statements will also helps to find the trend in the business like net profit ratio in last few years, increase in cash flow in past few years etc.

 Example of unearned revenue and prepaid expenses that will be arise in the business 

In retail sector business there are very cases where unearned revenue can arise as mainly all goods are purchased by the customers on cash basis or credit basis. In very few cases customers provide advance and required goods or services afterwards. So the example of unearned revenue is advance received from the customers (Mirza, 2011).

 Prepaid expenses refer to the expenses that are not due but already paid by the company. The example of prepaid expenses is lease rent paid for 6 months in advance.

The XYZ Limited has been raising finance through use of loan from bank and there is certain information that is required by bank to grant the business loan. Bank is mainly concerned for profitability performance, cash flow position and capital structure of the company to take decision regarding the financing the business loan. In this relation financial statements that are required by Bank are income statement, balance sheet and cash flow statement. Accounts that will be reviewed are capital account, sales revenue account and bank account. Ratios that need to be calculated by bank for taking the decision regarding the bank loan are debt to equity ratio, net profit ratio, operating cash flow to sales ratio (Ward, 2012).

There are number of factors that need to be considered by the management of the business before making the decision regarding the distribution of profits or retain them. The distribution of profit is completely dependent upon the reinvestment policies of company. As company is in between initial stage or growth phase that requires huge capital to expand the business (King, 2011). As there is very high requirement to open the stores at different locations in Australia company need capital and it can easily financed by the retained earnings or current earnings of the company. In present time there are only three members, among which profits has been distributed so it is decided that profit will not distributed but is reinvested back in business for expansion purpose (Hightower, 2008).

(Krantz, 2016)

Conclusion 

There are several of businesses and each business has different requirement of fixed assets and capital requirement. Retail business has been established in form of private company and it is financed through using owner’s equity and debt capital. Debt capital has been financed from the unsecured loan from bank. Role of accounting is very important in managing the business activities and it is essential to prepare the financial statements to know the performance of the company. 

References

Bragg, S. 2016. Accounting Best Practices. John Wiley & Sons.

Brigham, E. and Ehrhardt, M. 2011. Financial Management: Theory & Practice. Cengage Learning.

Brough, G. 2010. Private Limited Companies: Formation and Management. Sweet & Maxwell.

Hightower, R. 2008. Accounting and Finance Policies and Procedures. John Wiley & Sons.

Hopper, T. 2012. Handbook of Accounting and Development. Edward Elgar Publishing.

King, A. 2011. Internal Control of Fixed Assets: A Controller and Auditor’s Guide. John Wiley & Sons.

Krantz, M. 2016. Fundamental Analysis for Dummies. John Wiley & Sons.

Mirza, A. 2011. Wiley IFRS: Practical Implementation Guide and Workbook. John Wiley & Sons.

Paramasivan, C. 2009. Financial Management. New Age International.

Tend. 2018. Compare Business Loan Interest Rates. [Online]. Available at: https://www.lend.com.au/business-loan-interest-rates [Accessed on: 7 October, 2018].

Ward, K., 2012. Strategic management accounting. Routledge.

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