(Talking Business)


(Talking Business)

Ministry of Education

Chuvash State University after I.N.Ulyanov

Faculty of Business and Management

Course Paper:

Talking Business

Student: N.I. Nikitin, FBM-

61-02

Advisor: M.V. Emelyanova

Cheboksary 2003

PLAN:

Introduction..........3

Chapter 1. Setting up a business......4

Chapter 2. Company performance.......6

Chapter 3. The stock market................8

Conclusion..........10

Bibliography.......11

Introduction

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 that's 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.

Chapter 1.

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.

Chapter 2.

Company performance

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.

Chapter 3.

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. This gave birth to share

capital, which can combine financial resources of many people into a pool

for starting a big project.

The most visible representatives of share capital are public

limited companies, such as British Petroleum, Royal Dutch Shell or General

Motors. They raise money on the stock market by issuing securities, mostly

shares and bonds.

Ordinary shares (common stock in USA) form the largest part of the

whole securities market. A shareholder owning ordinary shares can vote at

the annual shareholders meeting, which reviews the companys reports,

takes decisions on the companys plans and the distribution of the

companys profit. The meeting may decide to distribute the dividends to the

shareholders or to reinvest the profit. If the company has no profit or has

losses, the owner of ordinary shares will receive no dividends.

Each ordinary share has its face value and its market price. The

face value is indicated on the share certificate but one cannot sell or buy

the share at the face value. The market price is established at the stock

exchange, where the shares are quoted and traded. The market price may be

several times higher or lower than the face value because it depends on the

general market situation and on the performance of the company.

When the countrys economy grows, the stock market usually has an

upward trend, the market prices of shares go up and the stock exchange

traders say that the market is bullish. If the market has a downward

trend, the market prices of shares go down and the market becomes

bearish.

Many companies issue preference shares (preferred stock in USA).

These shares give the shareholder a guaranteed, stable income fixed as a

percentage of their face value. But preference shares do not let their

owner to vote at the shareholders meetings.

Some companies issue bonds. These securities provide their owner

with stable income, the same as preference shares do. But unlike ordinary

or preference shares, bonds are redeemable. It means that the company

issuing bonds has an obligation to redeem them or buy them back at the face

value after a certain period of time, usually after several years.

There was a stock market boom during the latest decade of the

twentieth century. Many people became active in shopping for financial

products and invested much of their wealth in securities. They expected

that the markets would grow rapidly in the coming years and hoped to earn

money through buying securities at lower prices and selling them at higher

prices.

But these expectations were ruined by a sudden economic crisis. Now

the Western economies have been in recession for about two years and the

market price of most securities is much lower than their face value. It is

a very sad situation for the shareholders, because they cannot return their

shares to the issuing companies and get their money back. They can only

sell these shares at their market price, if somebody will buy them.

Conclusion

In the conclusion I want to tell, that the knowledge of the basic

economic principles creates conditions of safe existence for the person.

The public phenomena, which are studied with the economic theory, influence

various layers of the population. The size of the received income plays an

important role in the position of the person in the society.

Certainly, I cannot say that if you study the basic economic

principles, you will understand all essence of economic events.

I hope that my work will help the beginning businessmen in the

future.

Bibliography:

1. B.Kolhass. Financial management of the enterprise. Moscow:

"Finance", 1997.

Osipov J.M. Bases of enterprise activity. Moscow, 1992.

2. Bulatov A.S. The economic theory (2 edition). Moscow, 1997

3. http://www.ref.ru



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