3.2 : types of business organisations

• Describe the different types of organisations • Apply the key theory on different organisation to a given case study • Use exam techniques to complete a past exam question

Features of a sole trader

• Organisations owned by one person

• unlimited liability

• Easy to set up – minimal paperwork

• Owner makes all decisions

• Lack of expertise

• take days off no cover

Features of a partnership

• Two or more people owning the business

• Unlimited liability

• Conflict in decision making

• people bing different skills

• to split profits

Features of a limited company

• Limited liability

• Owners have shares in the company

• Can be public and private

• Must publish the annual accounts

Source of finance internal

• Retained profit

• Tighter credit control

• Tighter inventory control

• Delaying payments to trade payables

Description of retained profits

When the business makes a net profit they can reinvest it back into the business

Advantages of retaining profits

Debt free

Flexible as management have full control

No risk of loosing ownership

Disadvantages of retaining profits

Danger of having too much cash

Shareholders can be disappointed if profits are not shared

Sometimes debt can be a good solution for profitable business

Description of tighter credit control

Ensuring customers are paying on time improving cash flow

Advantages of tighter credit control

Improve cash flow

Ensures you always have enough capital to keep your business running

Disadvantages of tighter credit control

Could loose customers

Competitors may have a more flexible credit

Description of inventory control

Holding a large amount of stock could mean cash is tied up

Advantages of tight inventory control

Free up cash

Cot of storage will decrease

Reduce risk of loosing stock due to time

Disadvantages of tight credit control

Increase in demand

Unprepared for unexpected

Description of delaying trade payables

Increases the cash we have to our disposal

Advantages of dealing trade payables

Allows money to be spent in other areas to generate a higher profit

Disadvantages of delaying trade payables

Negative reputation

Poor relationship with supplier

Could incur with a fee

Sources of finance - eternal

Owners and partners capital

Bank Overdraft

Loan

Mortgage

Ordinary shares

Debentures

Features of owners and partners capital

Funds provided by owners and partners

Advantages of owners and partners capital

Very flexible

No legal documents required to raise finance

Disadvantages of owners and partners capital

The owner might not have enough savings or may need cash for personal use

Once the money is gone its gone

Description of bank overdraft

When a person or business uses more money then they have in the bank with their bank going into the minus figures

Advantages of bank overdraft

Quick access

Allow emergency purchases

Disadvantages of overdraft

High interest rate

Short term solution

Description of a bank loan

Finance provided by the bank for a purpose

Advantages of a loan

Easy and quick access

Can get a large sum at one time

Disadvantages of a loa

Interest paid

Diffract for a new business to access

Description of a mortgage

A loan you get in order to get property

Advantages of a mortgage

Easy to repay

Cot effective

Disadvantages of a mortgage

Debt

Interest rate can increase

Description of limited company ordinary shares

a business may sell more of their ordinary shares to raise money.

Advantages of limited company ordinary shares

Can gain lost of money quickly

No interest payable

Disadvantages of limited company ordinary shares

Give away part of the business

Shareholders receive dividends

Can be a hostile takeover