Understanding Business Concepts

Unit Number & Title: U35 – Business and Entrepreneurship

Assignment 1 Sit 1: Understanding Business Concepts

Table of Contents

Task A:

Answer 1

Answer 1.1

Answer 2

Answer 2.1

Answer 3

Answer 3.1

Answer 3.2

Answer 4

Task B:

Answer 1.

Answer 2

Answer 3

References

List of Figures

Figure 1 – SWOT Diagram

Task A:

Answer 1

Opportunity cost is the next highest valued alternative to one’s decision. It is the loss of potential gain from the second best alternative, once a business decision is taken.

Answer 1.1

• A Motor vehicle company has taken a decision to start a new production line for its vehicles with the aim of green technology. It has two options, option one is to start producing a fully electric vehicle while option two is to start producing a hybrid vehicle. If the company decides to start producing a fully electric vehicle then the opportunity cost will be the cost of producing a hybrid vehicle.
• A utility company supplying electricity is going to build a new power plant. It has two options, first option building a power plant using nuclear power while the second option building a power plant using natural gas. If the utility company decides to build the new power plant using natural gas, then its opportunity cost will be the cost of building a power plant using nuclear power.

(Henderson, n.d.)

Answer 2

Double entry system delineate that every transaction will be registered at least into two separate accounts in a company’s accounting system. A simple example is shown in table below:

(Averkamp, n.d.)

Answer 2.1

There is more than one advantage for using a double entry system. Some of these are:

• There is an arithmetic check on the company’s bookkeeping records as for every debit amount there is always a corresponding credit amount. This means that the total debit entries must be matched with the same amount of credit entries.
• Better understanding of a company’s financial situation. It shows the true profit or loss of the company more clearly at any given time.
• Financial statements will be prepared much easier when double entry system is in place. Examples of these statements are: balance sheet, income statement and cash flow.
• This system also helps in detecting and reducing accounting errors.

(Advantages and disadvantages of double entry book-keeping, n.d.)

Answer 3

The balance sheet is one of the most important financial statements within a company. The balance sheet is a snapshot at a single point in time, (usually at the end of month or year), which gives investors an accurate and reliable picture of a company’s financial position, what it actually owns and owes. The following formula is followed in a balance sheet:

Assets = Liabilities + Capital (Shareholders’ Equity)

(Balance Sheet, n.d.)

Answer 3.1

The main purpose of the balance sheet is that it figures up the company’s economic resources, obligations and shareholders’ equities at any point in time. It displays how the resources contributed by the shareholders and money lenders are used in the business. The term balance sheet is derived from the fact that at any given time, assets must be equal to liabilities plus capital hence the two sides of the balance sheet must balance out each other.

On the other hand the balance has some drawbacks too. One of which is that the true value of the assets are not reflected on the balance sheet. Historical costs of the assets will not reflect the true market value since these assets may have increased or depreciated in value. Another drawback is that certain assets value are estimated thus does not reflect the true economic situation of the business.

(Balance Sheet, n.d.)

Answer 3.2

Two important financial statements complimenting the balance sheet are the Cash Flow statement and the Profit & Loss statement.

Cash flow is comprised of three components which displays the cash generated and used by the company for any given period of time. These components are operations, investing and financing activities.

• Operation activities measure the income and expenditure caused by the core business operations of a company. It reflects how much profit is generated from the company’s products and services.
• Investing activities reflect the investment in purchasing of new assets such as property, land and equipment.
• Financing activities reflect changes in debts, loans and dividends paid. These include issue of shares and/or bonds, re-purchase of shares and/or bonds, interest paid to bond-holders.

(What is a Cash Flow Statement, n.d.)

The Profit & Loss statement displays a company’s income, costs and expenditure for a particular period of time. Normally this statement is issues quarterly or yearly depending on the company’s size and director’s preference. The purpose of this statement is to show investors whether the company has made or lost money during the specific period indicated in the statement. The Profit & Loss statement gives a good account of the company’s capabilities to increase profits and reduce costs.

(Profit & Loss Statement, n.d.)

Answer 4

The following is an abstract from the regulations of the Malta Financial Services Authority:

“A private company is a company that must, by its memorandum or articles:

1. restrict the right to transfer its shares;
2. prohibit any invitation to the public to subscribe for any shares or debentures of the company;
3. The minimum authorised share capital is €1,164.69.
4. The maximum number of shareholders is fifty
5. Must have at least one director

A public company is a company which does not qualify as a private company. A public company may offer shares or debentures to the public but it may not issue any form of application for its shares or debentures unless the company is registered and the issue is accompanied by a prospectus. The minimum authorised share capital of a public company is EUR 46,587.47.There is no maximum number of shareholders in the case of a public company. Must have at least 2 directors

In the case of a public company not less than 25%, and in the case of a private company not less than 20%, of the nominal value of each share taken up shall be paid up on the signing of the memorandum. Every Company must have a company secretary and hold an Annual General Meeting.”

(A Guide to the Registration of Companies, n.d.)

Task B:

Answer 1.

The acronyms of PEST and SWOT analysis are as follows:

PEST analysis – Political, Economic, Social and Technological analysis.

SWOT analysis – Strengths, Weaknesses, Opportunities and Threats analysis.

Answer 2

1. PEST is a business measuring tool to understand the business environment growth or decline before setting up a new business or expanding an established business. It is an investigation for reviewing the external environment factors for political, economic, social and technological influences.

Political Environment – These are all those factors related to and executed by a government. A change in government can bring a change in laws, regulations, policies and taxes which can have an impact on the business environment. Since Malta is part of the European Union, EU regulations and new member states can have an impact on the business environment.

Economic Environment – This is mainly the financial system fluctuations that occur from time to time with general booms and slumps in the economy activity. A change in unemployment, interest rates and customer purchasing power can cause these fluctuations.

Social Environment – This is the influence on the business environment which its effects depend on religious, cultural and social trends. These effects can be either positive or negative. Education, lifestyles, career trends and demographics have influence on the social environment. If a decision from a business company have a huge impact which goes against the societal norms, it may face negative publicity and protests.

Technological Environment – This gathers all the technical aspects of the business environment such as automation, technology awareness, progress, research and development. Technical environment aspects can have an impact on the cost and quality of the business production.

(External Environment Theory – PEST Analysis, n.d.)

2. SWOT analysis is a matrix analysis of the internal strengths and weaknesses of a company against identification of external opportunities and threats. It helps a company to uncover and exploit opportunities while understanding the weaknesses to eliminate threats. Workshop sessions and brainstorming sessions are two useful ways of completing the SWOT analysis while involving personnel from your own company. A sample table of the SWOT Matrix is shown in figure 1 below.

Figure 1 – SWOT Diagram

Strengths are the resources and capabilities of a business or a project within a company which are used to gain a competitive advantage over other competitors. Examples of strengths are:

• Reputation,
• Superior product performance,
• Unique selling points,
• Strong brand names.

Weaknesses are the absence of certain strengths on which your competitor may take an advantage. Examples of weaknesses are:

• Weak brand name,
• Limited budget,
• Limited personnel,

Opportunities are external elements that can uncover new opportunities where a company can exploit its advantages for profit and growth. Examples of opportunities are:

• Changes in technology,
• Change in government policies on a particular area,
• Unfulfilled customer needs,
• Local events.

Threats are changes in external environment and opportunities taken by other companies which can have a competitive advantage over your business. Examples of threats are:

• Appearance of alternative products,
• New legislations,
• Retention of key staff,
• Negative publicity.

(SWOT Analysis, n.d.)

Answer 3

SWOT analysis for Bank of Valletta plc.

Task C

References

A Guide to the Registration of Companies. (n.d.). Retrieved 01 15, 2014, from MFSA: https://registry.mfsa.com.mt/otherPDFs/ROCGuide.pdf

Advantages and disadvantages of double entry book-keeping. (n.d.). Retrieved 01 12, 2012, from Figurate Ltd Chartered Management Accounts: http://www.figurate.co.uk/2007/07/03/advantages-and-disadvantages-of-double-entry-bookkeeping/

Averkamp, H. (n.d.). Accounting Basics (Explanation). Retrieved 1 12, 2014, from Accounting Coach: http://www.accountingcoach.com/accounting-basics/explanation/5

Balance Sheet. (n.d.). Retrieved 01 14, 2014, from Investopedia: http://www.investopedia.com/terms/b/balancesheet.asp

External Environment Theory – PEST Analysis. (n.d.). Retrieved 01 16, 2014, from The Times 100 Business Case Studies: http://businesscasestudies.co.uk/business-theory/external-environment/pest-analysis.html#axzz2qb3hjMJw

Henderson, D. R. (n.d.). Library of Economics and Liberty. Retrieved January 10, 2014, from http://www.econlib.org/library/Enc/OpportunityCost.html

Profit & Loss Statement. (n.d.). Retrieved 01 14, 2014, from Investopedia: http://www.investopedia.com/terms/p/plstatement.asp

SWOT Analysis. (n.d.). Retrieved 01 18, 2014, from Businessballs: http://www.businessballs.com/swotanalysisfreetemplate.htm

What is a Cash Flow Statement. (n.d.). Retrieved 01 14, 2014, from Investopedia: www.investopedia.com/articles/04/033104.asp