What are the questions does she in her new position seek to answer? (Sara)
As the new financial manager, Sara will be involved in managing all the company’s assets and liabilities, and monitoring operational financing such as expenditures, revenues, account payable and receivable. Focusing on maximizing the BBQ stores profitability and value through planning and evaluating the stores short and long-term goals to achieve its goals and objectives.
One of the challenges Sara may face is the long systematic approach that her father has taken in running the business his own way. Sara’s financial strategies will evolve the company to withstand the current economy; Inflexible organization may find it a challenge to succeed in the fast changing business environment.
Small and medium sized companies are the backbones of an economy, Sara’s extensive range of financial and management knowledge from graduating from an EMBA will serve as a competitive advantage in the process of her decision-making. Sara, as the new financial manager of the company must address the key financial management decisions process related to investment, financing dividends and asset management.
Investments: As the financial manager, it is her responsibility to define the optimal size of the BBQ Company. In respect, Sara must adequately study the market place she is in and set out clear objectives that the company should acquire to meet. Also, study the technology, demand and equipment, with consideration of financial methods and human resources available to her. As the financial manager, Sara must analyze whether the resources available will equipped her to adapt the optimal size she desires for the company. If they do not, it is required to assess the assets that the company requires or needs to get rid of in order to achieve management efficiency.
Financing: Defining a financial strategy is essential for any business over the long term; it should be discussed and shared with everyone in the company, so that everyone is on the same page financially. Here as the financial manager she has two main roles in accordance to finance that is, managing the company’s money and the actual process of acquiring needed funds. There are two main types of financing: equity and debt: Equity is money that does not necessary need to be paid back, but relinquishes ownership to the shareholder; it is another word for ownership. An investor would give his money and in return would receive claims on future earnings. As for Debt, it must be paid back. Lenders of the money want to be paid back at a rate of interest in exchange for the use of their money.
As the financial manager, Sara must maintain a constant inflow of capital to allow continuity of operations without the support of additional liquidity. She should make a decision on the best financing options for the operations for the business; this could be a combination of short and long term financing to meet her financial strategy objectives.
Asset management: Sara must insure that the current assets at the BBQ store are managed in the most efficient manner possible. It is essential for her to priorities her current assets before her fixed, as current assets will become effective in the near future such as inventories and accounts receivable. As for fixed assets, they lack liquidity since they are needed for permanent operations of the business. Managing the assets lifecycle from an operations and financial perspective will help the business to insure the best return on assets, it will reduced the unnecessary interruptions, maintaining assets will also reduce service in the long run.
Dividend Policy: If Sara decides to bring in funds into the company through shareholders then it is her duty to determine how much of the earnings will be paid out to shareholders and how much of it will be needed to reinvest in the BBQ supplies shop to improve operations. She must also keep in mind that if her dividend distribution is too high that BBQ supplies may encounter difficulties of expanding or improving existing managements operations. It is important to know that for the company to grow over the long term, short-term investment in necessary for the growth.
What are the alternative forms of business organizations BBQ Supplies could take?
Sara has one of several ways to organize the business that will affect the owner and business’s tax treatment and legal liabilities.
Sole proprietorship refers to a business that is primarily owned or run by one individual (Astrachan & Shanker, 2003). Astrachan and Shanker argue that this business structure is mostly for family businesses, in their perspective and argument there are no paid employees in such a business.
Some features of sole proprietorship is that there usually little legal documents as the structure is in such a way where you don’t need to determine profit sharing. In this case all the losses, profits and liabilities are only the responsible of the owner. In countries that requires tax, the sole proprietor will pay self-employment tax. In this type of business, personal assets are at risk should the business fail.
For Sara, while it may seem this business is effective usually sole proprietorship is for individual owners or family business, Adam wants her to be a partner. Secondly, the employees in her business need salaries, in the perspective of Asrachan and Shanker (2003) employees of such businesses don’t usually receive income as they are the owners of the business.
LLC – Limited Liability Company
LLC refers to a Limited Liability Company. This type of business structure is seen to protect the owner’s assets from financial liability and offers security against personal liability. There are exceptions to this case should the owner of LLC take illegal action or fraud. In countries like United States each state have different laws to regulate the work and rules of LLCs. The tax system of LLCs in other countries usually require fee payments, they are often taxed as corporations.
For example, if an LLC is forced into bankruptcy, then the members will not be usually be required to pay the LLC’s debts with their own money. If the assets of the LLC are not enough to the debts and liabilities, the creditors generally cannot look to the owners for payment. Their debt was with the LLC, not the people that owned the LLC.
Corporations are owned by shareholders, this can mean one shareholder owns the entire business or hundreds of shareholders owning a business, depending on how much they have invested their shares are determined. This means the paperwork, accounting, taxes and legality of corporations are more complex. The structure of the corporations often need to be defined, including board of directors.
Tax paying countries separate corporations into C and S corporations. C are separate tax paying and file own income tax, the money remains in the corporations and is paid as salaries to employees. S corporations on the other hand are different, profits and losses are direct resposbility of the company’s shareholders. In corporations any of the shareholders can sell their part of the investment in the business.
General Partnerships, Limited Partnerships (LP) and Limited Liability Partnerships (LLP)
In a partnership the business is owned by two or more people, this is most relevant for people who are not the only owners of the business. In partnerships all the owners or partners are responsible for debts and losses. The decision of any one partner in the business can affect other partners and the entire business as well.
In a limited partnerships there is one main partner who is a decision maker and he or she can be held accountable for decisions they make. Other partners in the business are partners not in running the business or decision making but in investment only. Limited partnership forms vary from business to business, in some the decision making is parallel to how much investment the partners make.
Limited Liability Partnerships protects all assets, debts, liabilities of all partners. For Taxes usually each partner is taxed accordingly to their income and profits. Usually in LLP the various partners have same aims for the financial management of the organization.
What are the advantages and disadvantages for each form she should consider?
· Simplest and least expensive form of business to establish and to dissolve.
· The owner is making all the decisions and controlling the whole operations.
· All profit flows directly to the owner.
· It is subject to fewer regulations.
· It has tax advantage: any income is declared as the owner’s personal income tax return, therefore there are no corporate income taxes.
· The owner is responsible for all the obligations of the business.
· It is difficult to raise capital: it can only use the owner’s personal saving and consumer loans.
· It is relatively easy to form but considerable amount of time should be invested in developing the partnership agreement.
· It is easier to raise capital compared to a sole proprietorship as there are more than one investor.
· Any income is declared as the partners’ personal income tax returns, therefore there are no corporate income taxes.
· Employees may be motivated and attracted to the business by the inventive to become a partner
· Partners are jointly responsible for all the obligations of the business.
· Partners must make decision together therefore disputes or conflicts may occur. It may eventually lead to dissolving the partnership.
· It can raise additional funds through the sale of stock.
· Shareholders can easily transfer the ownership by selling their stock.
· Individual owner’ liability is limited to the value of stock they are holding in the corporation.
· It is restricted by more regulations, more closely monitored by governmental agencies and are more costly to incorporate than other forms of the organizations.
· Profit of the business is taxed by the corporate tax rate. Dividends paid to shareholders are not deductible from corporate income, so this part of income is taxed twice as the shareholders must declare dividends as their personal income and pay personal income taxes too.
Is stock price maximization good or bad for society?
Price maximization requires companies to be as efficient as possible while producing quality goods and staying price competitive. I think it’s good for society, as it requires companies to do what’s best for their consumers in an effort to maintain or increase market share.
Aside from such illegal actions as attempting to form monopolies, violating safety codes, and failing to meet pollution requirements, the same actions that maximize stock prices also benefit society.
Here are some of the reasons:
To a large extent, the owners of stock are society
Most members of society now have an important stake in the stock market, either directly or indirectly.
Therefore, when a manager takes actions to maximize the stock price, this improves the quality of life for millions of ordinary citizens.
Stock price maximization requires efficient, low-cost businesses that produce high-quality goods and services at the lowest possible cost.
This means that companies must develop products and services that consumers want and need, which leads to new technology and new products.
Also, companies that maximize their stock price must generate growth in sales by creating value for customers in the form of efficient and courteous service, adequate stocks of merchandise, and well-located business establishments.
People sometimes argue that firms, in their efforts to raise profits and stock prices, increase product prices and gouge the public.
In a reasonably competitive economy, which we have, prices are constrained by competition and consumer resistance.
If a firm raises its prices beyond reasonable levels, it will simply lose its market share.
Of course, firms want to earn more, and they constantly try to cut costs, develop new products, and so on, and thereby earn above-normal profits.
Note, though, that if they are indeed successful and do earn above-normal profits, those very profits will attract competition, which will eventually drive prices down, so again, the main long-term beneficiary is the consumer.
There are cases in which a stock increases when a company announces a plan to lay off employees, but viewed over time this is the exception rather than the rule.
In general, companies that successfully increase stock prices also grow and add more employees, thus benefiting society.
Note too that many governments across the world, including Kenya, are privatizing some of their state-owned activities by selling these operations to investors.
Perhaps not surprisingly, the sales and cash flows of recently privatized companies generally improve.
Moreover, studies show that these newly privatized companies tend to grow and thus require more employees when they are managed with the goal of stock price maximization.
Employees find that it is both fun and financially rewarding to work for successful companies.
So, successful companies get the cream of the employee crop, and skilled, motivated employees are one of the keys to corporate success.
Astrachan, J. & Shanker, M. (2003). Family businesses contribution to the US economy: A closer look, Family Business Review 16(3) 211-219