Private Sector Business Organisations

Private Sector. Businesses that are set up by individuals or groups of individuals.

Businesses that are in the private sector vary according to the legal form they take and their
ownership. The types of business in the private sector can vary considerably.

Unincorporated Businesses. Businesses where there is no legal difference between the

owners and the business. Everything is carried out in the name of the owner or owners.
These firms tend to be small, owned by either one person or a few partners.

Incorporated Businesses. An incorporated business is one which has a separate legal

identity from its owners. The business can be sued, taken over and liquidated.

Unincorporated businesses can be subdivided into two types of business - Sole Traders and
Partnerships.

Sole Trader
 This type of business is owned by just one person
 That person runs the business and may employ any number of people to help
 They can be found in all three sectors of business activity, but they're most prominent
in the tertiary sector - examples would be hairdressing, or retailing
 Setting up as a sole trader is straightforward - there are no legal formalities needed

Advantages and Disadvantages

 Distinct lack of legal restrictions

 They can be set up with a small capital
 Any profit made after tax is kept by the owner
 The owner is in complete control, and has the flexibility to choose their hours
 Offer personal service to customers, and may be entitled to government help

 They have UNLIMITED LIABILITY - if the business has debts, the owner is
personally responsible.
 Can be incredibly risky for their owners
 Illness is a big issue, and they face continuity problems
 Miss out on economies of scale

Partnership
 "The relationship that subsists between persons carrying on business with a common
view to profit"
 More than one owner - profits are shared
 Often found in professions such as doctors or solicitors
 Usual for partners to specialise

Advantages and Disadvantages

 No legal formalities to set up

 More finance can be raised due to multiple sources of capital
 Workload can be shared
 No legal requirement to publish accounts to the public
 The individual partners have UNLIMITED LIABILITY

 Profits have to be shared

  Any decision made by one partner is legally binding on the others
 Partnerships end when a partner dies

The two most important types of incorporated businesses are Private Limited Companies
and Public Limited Companies.

Private Limited Company

 Tend to be relatively small
 Short name is Ltd
 Shares can only be transferred privately and all shareholders must agree on the
transfer - they cannot be advertised for general sale
 Often family businesses that are owned by members of the family
 Directors tend to be shareholders involved with the running of the business

Advantages and Disadvantages

 Shareholders have LIMITED LIABILITY - less risk

 More capital can be raised
 Control of the business cannot be lost to outsiders
 May be tax advantages for the owners
 Have to keep proper accounts so therefore more likely to be run well

 Profits have to be shared over a large group

 Legal procedure in setting up - costs money
 Financial information can be viewed by the public
 Shares can't be sold to the public, this restricts potential capital

Public Limited Company

 Tends to be considerably larger than a Ltd
 Short name is PLC
 The shares of these companies can be bought or sold by the public on a stock
exchange
 When a Ltd goes public it is called flotation

Advantages and Disadvantages

 LIMITED LIABILITY, more power enjoyed due to larger size

 Huge amounts of capital can be raised from the sale of shares to the public
 Can easily dominate the market due to scale
 Financial institutions are more willing to lend to PLC's
 Productions costs may be lower as PLC's enjoy economies of scale

 Setting up costs can be ridiculously expensive

 Possible for an outside interest to take control of the company
 All their accounts can be seen by the public
 Less able to deal with customers on a personal level
 It's argued that many PLC's are inflexible due to their size

Worldwide PLC's are called MULTINATIONALS.

Private equity company - a business usually owned by private individuals backed by financial
institutions.
Working Capital and the Cash Flow Cycle
Working Capital. The funds left over to meet day-to-day expenses after current debts have
been paid. It is calculated by current assets minus current liabilities.

Cash Flow Cycle. The flow of liquid resources into and out of a business.

In accounting terms..
working capital = current assets - current liabilities
The amount of working capital a business has is an important issue - it can reflect how well a
business is performing. It is also known as net current assets

Why is it important?
 Working capital keeps a business running.
 Businesses use the funds to finance stock through the production process.
 it facilitates the smooth flow of production and the supply of goods to customers.
 In financing debtors, it allows the sales force to offer TRADE CREDIT

Not enough working capital? Results in..

 The inability to buy in bulk and benefit from discounts
 Lack of cash to cash discount
 Difficulties in offering credit to customer with the danger of losing sales
 Reduced ability of the firm to innovate
 Loss of reputation if there are difficulties in settling debts
 The inability to respond to opportunities
 The danger of OVERTRADING

Overtrading - a condition in which a business enters into commitments in excess of short

term resource

Managing working capital..

 Stock levels - need to avoid stock out but also the need to contain the high cost of
stockholding
 Debtor levels - debtors slow up cash inflow
 Cash levels - cash is liquid but holding it involves an opportunity cost
 Creditors - need to balance the benefits of delaying payment with the need to retain
the goodwill of suppliers

Improving working capital

 Effective credit control, managing debtors - making sure money comes in on time
 Obtaining increased credit from suppliers
 Handle stocks more effectively, don't overstock as this is expensive to hold
 Handle cash more effectively, control spending, be careful of overtrading
The Working Capital (Cash Flow) Cycle
 The time taken between making payment for goods taken into stock and the receipts
of cash from customers for the sale of the goods.
 The period of time between the point at which cash is first spent on production of a
product and the final collection of cash from customers.
 The working capital cycle determines the short term financing requirements of the
business.
 The shorter the time between the business laying out the cash for the purchase of
stocks and the collection of cash for the sales of stocks, the better it is for the
business.

The operating cycle

 It is equal to :
 The time that goods are in stock, plus the time that debtors take to pay, minus the
period of credit received from suppliers.
 The working capital cycle can be shortened by reducing the level of stock - this
lowers the number of days the stock is held
 Also, speeding up the rate of debtor collection - the faster businesses collect from
their debtors the better