The Financial Organization of a Firm

The Company

When looking at the economic development in industrial life in the Western World, three structural changes are conspicuous, each of them representing stages in the process of development from before the era of the Industrial Revolution, which took its early beginnings in the 18^th and 19^th centuries, and up till now. The first stage includes the basic extractive industries – the primary industries: agriculture, fisheries, forestry and mining. The second stage – the secondary industries – is represented by manufacturing, and the third and so far final stage in the development – the tertiary industries – is services; all of them reflect the changing pattern in consumer needs while people have become richer.

The Company and Its Environment

For practical reasons, we shall focus on the most illustrative and representative type of company, the production company. The environment of the production company is made up of a number of elements – actors and forces – both inside and outside the company, which affect the management and the potentials of developing and maintaining successful business relations with suppliers and customers. Now we shall take a look at the most important factors and the interaction between them.

Production

Production is generally defined as adding value to something. Processing of new materials into finished consumer goods or capital goods is production. The same goes for transporting goods from where they are plentiful to markets where they are in great demand. But it should be noted that the rendering of services, though they are intangible, is also production.

Marketing

The management process in marketing basically consists of 3 parts:

Ø planning of marketing programs

Ø implementation of programs

Ø evaluation of performance

Planning includes the setting of goals, selection of strategies and tactics. Implementation involves organizing, staffing and operation. Evaluation comprises a comparison of performance with goals in a feedback which enables management to adjust plans to future goals and adapt the implementation to a changing environment. In a competitive market, the interaction between rivals will include mutual checks on sales figures, profit margins, selling prices, improvement of products, changes in trade discounts, credit terms etc. Selling incentives aimed at end customers are closely related to the marketing tools, distribution, promotion by means of advertising and PR-work.

Organization

A business organization consists of a group of people whose activities and interactions are structured in such a way that their joint efforts are aimed at well-defined goals. The organization is normally shown in an organization chart which serves the dual purpose of lining up the activities, powers, control and responsibility of the individual members and groups, and illustrating the lines of communication and authority.

Ethics

For many years the general opinion of business people in Britain has been that they are more or less suspected of cheating or exploiting ordinary people. At school children are told that wealth is no good goal in life, and the Church is anti-business. These are some of the reasons why successful business people have been most reluctant to report on their activities and achievements.

In recent years alarming scandals in financial environment, in giant production companies, etc. have, however, caused management and CEOs (Chief Executive Officers) to approach the business ethics debate. Today many executives argue that the long-accepted business code “lose your morals or you’ll lose your market” no longer works. It is becoming increasingly recognized that ethical practices by way of honesty and mutual respect will win in the long term. Also inside the company, ethics affect the way an individual behaves. In general, the standard of business behavior in the individual country or region will, naturally, to a great extent lay down the pattern of business conduct.

The social responsibility of the company includes responsibility towards its stakeholders, i.e. customers, investors, employees, and the micro environment in general. The responsibility towards customers is first of all a question of morals as to the quality and reliability of the product/service, and in the case of foodstuffs the healthiness of raw materials and the product as a whole, and whether the pricing is fair compared to market standards. Responsibility towards investors comprises fair openness as to operation of the company and its plans for new activities, without any misrepresentation of the financial standing, profits and losses.

In its human resource management activities, a company should make use of fair and equitable practices. Human resource management includes recruiting, hiring, training, promoting and compensating staff. A company that offers equal opportunities for success and promotion, irrespective of race, sex, age, language, attitudes, knowledge, experience or other relevant factors is meeting its social responsibilities to employees.

Responsibility towards the environment may be based upon anti-pollution policies followed by cleaning-up efforts. The heaviest pollution sources are emission of chemicals, e.g. sulphur and carbon monoxide causing acid rain which is harmful to forests, lakes and streams. Air pollution in areas of heavy industry is the main cause of various human diseases. Uncontrolled toxic waste disposals consisting of chemical or radioactive by-products of manufacturing processes may pollute the resources of drinking water developed in nature over long periods. To many companies, this responsibility towards the environment is a balancing act as it may be very costly and cannot be fulfilled because of lack of funds, and many of those with great pollution problems will have to close down with the consequence of lay-offs and unemployment in the area and financial losses to investors. The essence of all these types of responsibility is that today a business is more than money. It can only develop if it is in harmony with its employees and its environment.

Closely related to ethics is company (or corporate) culture. Company culture is a fairly modern concept in management. In short, the company’s culture is a specific way of watching, interpreting and reacting to the real world. It is affected by a number of factors of which social responsibility has already been dealt with under ethics. The interaction between internal and external factors creates the cultural pattern of the company.

The most important external factors are general values and conceptions in society, e.g. attitudes to work, authority, democracy, etc. Other factors are changes in the economic development and the technological development.

Public opinion affects companies as is often seen in environmental matters. Trade unions as well as political parties and governments exercise great influence on free management as to wage policy, imposition of restrictions on the use of certain raw materials and the distribution of e.g. vegetable poisons. Export/import barriers or the lifting of them may severely threaten domestic industries so far immune from external competition. Company history, whether the company is old or young, big or small, its management style, be it active and visible or retired and more or less anonymous is also part of company culture. The cultural pattern of the company is a synthesis of the impact of all these elements.

The Financial Organization of a Firm

Many young people have the dream of succeeding in life – of working their way up in society to the top. To many of them the most attractive way has been, and still is, through business life. Many of Britain’s largest companies were started many years ago by such young initiative – entrepreneurs as they are called. To set up a business is costly and risky, but the dream of becoming one’s own master – the liberal view on life – is still alive, which is seen by the fact that most retail stores are privately owned.

Sole Traders

The sole trader or one-man-business represents the simplest organization of a firm. 80% of all businesses in the UK are sole traders, but they account for a small proportion of the GDP. A retailer, for instance a hair dresser, a bookseller or a fishmonger must provide the necessary capital – the starting or initial capital – either from his savings or from a bank loan to rent or buy premises and to equip and stock his shop with goods. For current expenses he needs some extra capital – the working capital. In addition, the manufacturer must arrange for machinery, raw materials and staff, and the wholesaler for warehousing facilities.

The sole trader runs his business on his own. He makes all decisions, chooses his own sales strategy, takes the profits for himself and bears possible losses. He is liable to the extent of his entire private property. Thus if he fails his creditors can sue him and take possession of his property. Often this type of firm is very effective. As his future life depends on its success, the sole trader will make every effort to prosper. As he makes decisions alone, the risk of misunderstanding is small, and he has personal contact with his customers and knows their buying habits and needs. His personal supervision of the staff ensures that waste is reduced to a minimum. Another reason why many very small businesses can survive is the rule that if their turnover is less than £ 35,000 they do not need VAT registration and consequently do not charge their customers. However, it must be said that the technical development in especially transport, which has reduced distances, has also made it very difficult for local manufacturers and retailers to compete against large-scale operations. Other drawbacks may be that the owner and the business are one and the same. Any legal damages or debts incurred are the owner’s responsibility. He may be reluctant to delegate responsibility to others and the success of the business depends on him alone.

If the business is a success, expansion is difficult because of sole trader’s limited capital. He must either plough back profits into the firm, ask his banker for a loan or start looking for a partner with liquid funds, but this will reduce his independence if the new partner is no a limited one.

Partnerships

The Partnership Act of 1890 defines a partnership as “the relation which exists between persons carrying on a business in common with a view to profit”. The number of partners is restricted to twenty. Still, partnerships of accountants, lawyers and members of recognized stock exchanges are exceptions and may have several hundred partners. A partnership is easily formed as there are no formalities. It is simply an arrangement to run a business together and to share profits and losses. In most cases, a contract is drawn up to cater for any future disagreements. It is termed the Partnership Deed or Articles of Partnership. It generally states the following:

• the names of the partners and the name of the firm (if they are not identical)
• the amount of capital each partner contributes
• the proportion in which the partners are to share profits and losses
• division of labor
• the duration of the partnership

If there is no written contract, the Act provides that partners share profits and losses equally. Why take a partner? The chief advantages are:

• new capital for expansion is available at once
• the work load is reduced which means more spare time
• new specialist knowledge is brought into the firm
• a new man often teams up with an older partner – the former has his health and strength, the latter the capital and experience
• it is still a private firm

This type of business organization is widely used among professionals, e.g. lawyers, doctors, architects and accountants, but it is also suitable for small-scale enterprises within retailing, manufacturing, local wholesaling, farming, etc.

An important feature of a partnership is the unlimited liability. Each partner is personally liable for all debts and obligations of the firm. In a partnership of three partners – two of which turn out to be insolvent – partner number three is liable for all debts if the assets of the partnership prove insufficient. A creditor may sue any one partner, but once he has brought an action, he must stick to the person sued.

In a general partnership there are two types of partners – general or active and dormant or sleeping. The former type is in charge of day-to-day operation of the firm, the latter has only contributed capital, but both of them have unlimited liability.

Limited Partnerships must have at least one general partner, who is liable for all debts and obligations as in a general partnership, and one or more limited partners, each of which is only liable to the extent of the capital contributed when entering the partnership. Limited partners have no influence on the operation of the firm. A limited partnership must be registered with the Registrar of Companies.

Date: 2015-12-24; view: 1023