Financial services of business entities, their tasks and functions

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financial services of business entities, their tasks and functions

Financial services of business entities, their tasks and functions

  1. Theoretical bases of the financial services of business entities.

  2. Analysis of the financial services of business entities.

  3. The main directions of development of the financial services of business.



Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises.

In simplest terms, a business entity is an organization created by an individual or individuals to conduct business, engage in a trade, or partake in similar activities. There are various types of business entities sole proprietorship, partnership, LLC, corporation, etc. and a business’s entity type dictates both the structure of that organization and how that company is taxed.

When starting a business, one of the first things you want to do is choose the structure of your company in other words, choose a business entity type.

This decision will have important legal and financial implications for your business. The amount of taxes you have to pay depends on your business entity choice, as does the ease with which you can get a small business loan or raise money from investors. Plus, if someone sues your business, your business entity structure determines your risk exposure.

State governments in the U.S. recognize more than a dozen different types of business entities, but the average small business owner chooses between these six: sole proprietorship, general partnership, limited partnership (LP), limited liability company (LLC), C-corporation, and S-corporation.

Which business entity is right for you? This guide is here to help you make that decision. We’ll explain the types of business entities and the pros and cons of each so that you have all of the information you need to determine what’s best for your company.

As we mentioned above, at a very basic level, a business entity simply means an organization that has been formed to conduct business. However, the type of entity you choose for your business determines how your company is structured and taxed. For example, by definition, a sole proprietorship must be owned and operated by a single owner. If your business entity type is a partnership, on the other hand, this means there are two or more owners.

Similarly, if you establish a business as a sole proprietorship, this means for tax purposes, you’re a pass-through entity (the taxes are passed onto the business owner). Conversely, if you establish your business as a corporation, this means the business exists separately from its owners, and therefore, pays separate taxes.

If your business is in a more litigious industry, on the other hand, such as food service, child care, or professional services, that are a strong reason to create an LLC or corporation right off the bat. And regardless of industry, as your business grows and more dollars are at stake that can be the ideal time to “graduate” to an LLC or corporation. What works for a freelancer or hobbyist likely won’t work for someone who is trying to hire employees, bring on additional owners, or expand.

  1. Theoretical bases of the financial services of business entities.

The corporation is an enterprise chartered by the state according to law. The laws of the state limit the extent of the activities, the rights, and privileges of the corporate enterprise. Thus, the study of the legal aspect of the corporate enterprise is important.

Corporation is really a generic term used to denote that form of business organization which uses the legal device of a separate personality, as distinct from the real owners of the enterprise. It is a single unit operating independently, and although this unit may engage in many different types of business activity, it does so through a single corporate charter.

Since the corporate enterprise is established by law and operates by virtue of a state charter, the only way in which a corporation can be dissolved is by an act of the government. According to the law, the corporate enterprise which is established by law, the legal entity is not considered abolished, because of insolvency, a failure to elect officers, a cessation of business, or a sale or disposal of all of the corporate property. The corporate enterprise still exists, if in name only, and can sue or be sued as any other corporate enterprise which is doing business regularly.

Stockholders. In small corporations, it is difficult at times to distinguish between the owners of the corporate enterprise and the corporate enterprise itself because the owners are usually the managers. In large corporate enterprises, the distinction is more easily recognized because of the divorce of ownership and management. Because of the size and power of large corporate enterprises, it is said that the stockholder merely an investor and not a true over. This position would derive its foundation in the fiction theory because the authority and power of the corporate enterprise arises from the state and no transfer of authority from individuals is necessary as is the case with the association theory.

The fiction theory holds that the law of the land is the important factor in corporate enterprise theory because the law gives birth to the corporate enterprise. Some ideas are presented here which serve to bolster the fiction theory.

The possession of capital stock by a stockholder does not represent ownership but it is evidence of a right. The right or bundle of rights of the stockholder in the corporate enterprise entitles the stockholder to share in the profits of the corporation when dividends are declared, to attend stockholders meetings, to vote on corporate enterprise policies and business, to share in the management of the corporate enterprise, and many other privileges which may accrue to the stockholder because of the corporate charter and bylaws.

When it is impossible to distinguish between the business of the stockholder and that of the corporate enterprise or the business of the parent corporation and the subsidiary corporation, no corporate entity exists but the combination is just one enterprise. The identity theory which identifies the two corporate enterprises as one would be invoked. Even though the two corporate enterprises operate as separate units, they would be considered as one entity by the law. The law is very specific when it says that the corporate entity is a separate and distinct creature. This is exemplified by the fact that a stockholder can sue a corporation in which he owns stock or the stockholder can be sued by the corporate enterprise in which he has invested. Legally, the two persons, the stockholder and the corporate enterprise, are separate in the eyes of the law.

If the stockholder owes the corporate enterprise money, the stockholder is liable for the payment of the debt to the corporation and it must be paid to the corporate enterprise, especially, if the creditors sue. Here again, the law is very specific in the division between the corporation and the stockholders of the corporate enterprise.

There are cases where there are several classes of common stock and some of the classes of common stock do not have voting rights attached. Thus, the nonvoting common stockholder has limited rights in the corporate enterprise and in a sense; his position is weaker than the bondholder. This stockholder does not possess the right to elect directors which means he has no voice in the management of the corporate enterprise. Hence, he is just an investor and similar to the bondholder with the exception that the bondholder receives a fixed return each year and the nonvoting common stockholder depends on the directors to declare a dividend in order to receive a return on his investment.

Creditors. The creditors of a corporate enterprise, according to law, have no positive position in a corporation until there is a default in the payment of debts. The relation of the creditors to the corporate enterprise is a debtor-creditor relationship. The creditors must make their claims against the corporate enterprise except in a few restricted cases which are brought out in this chapter.

Under certain conditions, bondholders have been given the right to vote in a corporate enterprise. This usually occurs when the corporate enterprise is in financial difficulties and the company fails to meet the obligation of interest payments to the bondholders. Most bond indentures stipulate that the trustees of the bondholders will have the right to vote until the interest debt is settled in full or until other action is taken.

Since the creditors have loaned money or have extended credit to the corporation, some claim that the creditors possess rights against the assets of the corporate enterprise. In the use of double entry bookkeeping, they hold that this right can be seen for there must be a credit for liability or equity against all of the assets otherwise the debits and credits would not be equal.

Government. The governments of country are immune from the suits that must be faced by others. Permission for suing a governing body must be granted by that governing body before the claimant can go to court. However, in cases where the government is the sole owner of the corporate enterprise, the courts have held that the entity theory exists and the claimant is suing the corporate enterprise and not the governing body which does not necessitate the request of permission to sue. Hence, ownership by the government of a corporate enterprise does not give the corporate enterprise immunity but it must be remembered that these government owned corporate enterprises cannot be taxed by other governing bodies. Thus, some inconsistency is present since the reason for no tax is because the corporate enterprise is owned by a governing body.

Management. There is little doubt that management plays an extremely important part in the corporate enterprise structure. Since the growth of the corporate enterprises and the division of interest which has taken place in the last century, management has been given the part of directing the activities of the large corporate enterprises. The corporate organizations which were owned and operated by large family interests do not exist today as they did in the past. There are still a few family corporate enterprises but even here, the trend is to give management more and more power.

The authority of professional managers has been increasing because of the efficiency and good management which has been developing. In some of the large corporate enterprises, the officers power has become so great that the more usual situation is for management to select the directors. It is a right of the stockholder to select and elect the board of directors.

Management has been given a direct interest in some corporate enterprises with the introduction of a new policy for paying their salaries, partly in cash and partly in the capital stock of the corporate enterprise. Another method of salary payments is the paying of a regular salary plus a percentage of the corporate profits. Actually, the profits of the corporate enterprise belong to the owners of the business but now some claim that the earnings are being divided between the owners and the officers.

  1. Analysis of the financial services of business entities.

Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solventliquid, or profitable enough to warrant a monetary investment.

Financial analysis is used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment. This is done through the synthesis of financial numbers and data. A financial analyst will thoroughly examine a company's financial statements—the income statement, balance sheet, and cash flow statement. Financial analysis can be conducted in both corporate finance and investment finance settings.

One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company's own historical performance.

For example, return on assets (ROA) is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several companies in the same industry and compared to one another as part of a larger analysis.

Corporate Financial Analysis

In corporate finance, the analysis is conducted internally by the accounting department and shared with management in order to improve business decision making. This type of internal analysis may include ratios such as net present value(NPV) and internal rate of return (IRR) to find projects worth executing.

Many companies extend credit to their customers. As a result, the cash receipt from sales may be delayed for a period of time. For companies with large receivable balances, it is useful to track days sales outstanding (DSO), which helps the company identify the length of time it takes to turn a credit sale into cash. The average collection period is an important aspect in a company's overall cash conversion cycle.

A key area of corporate financial analysis involves extrapolating a company's past performance, such as net earnings or profit margin, into an estimate of the company's future performance. This type of historical trend analysis is beneficial to identify seasonal trends.

For example, retailers may see a drastic upswing in sales in the few months leading up to Christmas. This allows the business to forecast budgets and make decisions, such as necessary minimum inventory levels, based on past trends.

Investment Financial Analysis

In investment finance, an analyst external to the company conducts an analysis for investment purposes. Analysts can either conduct a top-down or bottom-up investment approach. A top-down approach first looks for macroeconomicopportunities, such as high-performing sectors, and then drills down to find the best companies within that sector. From this point, they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company's fundamentals.

A bottom-up approach, on the other hand, looks at a specific company and conducts similar ratio analysis to the ones used in corporate financial analysis, looking at past performance and expected future performance as investment indicators. Bottom-up investing forces investors to consider microeconomic factors first and foremost. These factors include a company's overall financial health, analysis of financial statements, the products and services offered, supply and demand, and other individual indicators of corporate performance over time.

Evidence from enterprise-level surveys suggests there is more room for growth to extend financial services to smaller enterprises. According to a World Bank/International Finance Corporation Survey conducted in Uzbekistan in 2018, 13 64% of surveyed firms in Uzbekistan reported using bank financing and 8% – having family and friends’ support. Nevertheless, a large proportion of Uzbek SMEs finance their growth internally – 64% report self-financing. See Figure 1. Among micro and small businesses there are low levels of financial leveraging: Almost two thirds of businesses do not attract financing. Banks constitute almost exclusively the only formal source of financing in Uzbekistan. The majority of respondents who participated in the in-depth interview claimed that they would register their informal business in order to take a bank loan, which provides the opportunity to develop this segment.

Fig. 1. Source of Finance

Twenty-one percent of the respondents stated that the biggest reason for choosing family and friends was that no collateral was needed and the money was available in cash (19% of total respondents), 37% of the respondents noted, that they had no other choice than to go to the banks. Respondents noted that only banks can provide the requested amounts. Sixty-seven percent of the respondents used microfinance institutions (MFIs) services because they are fast and easy to deal with, and 33% of the respondents noted there is no choice except an MFI loan. For trade and services, the most important item that was quoted was availability in cash. For agriculture producers, no collateral required and low interest rates are the most important (governmentsupported programs available). See Figure 2.

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