TOPIC 1

INTRODUCTION TO A
BUSINESS

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 Learning Outcomes
At the end of the lesson, students must be able to understand and explain:
1) The various methods to commence a business.
2) The types of business structures and the difference between these
business structures.
3) How to finance a business.
4) The purpose of a business plan, the needs and the content of a business
plan.
5) The nature of accounting and its roles.
6) The difference between Financial Accounting and Management
Accounting.
7) Users of accounting information.

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 Methods to Commence a Business
The first decision you need to make is how you are going to
enter the small business world. You can choose from one of
these options:

1. Start your own business

2. Buy an existing business

3. Obtain a franchise

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 1. Start your own business
Benefits
1. New start – no negative sentiment towards business.
2. You are in total control of your own business.

Limitations
1. Business may be slow for a start.
2. Problems – new staff, new technology and equipment.

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 2. Buy an existing business
Benefits
1. Existing business operation in place.
2. Easier to borrow addition funds.

Limitations
1. Pay a premium for the existing business.
2. May be stuck with poor decisions make by prior owners.

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 3. Obtain a franchise
Benefits
1. Training and support may be provided by franchise owner.
2. Have a existing pool of loyal customer.

Limitations
1. Lack of independence – conform to franchise policies.
2. Fees must be paid to franchise owner.
3. Damage to reputation of franchise name.

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Types of Business Structure

Business Structure

Sole
Proprietorship Partnership Company

Sdn Bhd Bhd

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 Sole Proprietorship
Business wholly owned by a single individual.
Owner have full authority to run the business.
Procedures of registration is simple.
The business and the proprietor are treated as separate
accounting entities.
Sole traders contribute most of the money and other resources
needed to begin a business. Therefore, they should:
1. Take most of the risks.
2. Stand to make all of the benefit.
3. Take most of the responsibilities for the business.

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 Partnership
Business owned by two or more persons but not exceeding 20 persons that
agree to start a business together and share its profit or loss.
Written or verbal partnership agreement.
If no agreement is formed, the partnership will be run based on Partnership Act.

Agreement must contains:

1) Partnership name and names of partners.
2) Profit sharing ratio.
3) Conduct of partnership affairs.
4) Authority of each partner in contractual situation.
5) Procedures to follow in the event of disputes.

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 Company
Owned by many owners known as the shareholders.
The investors who buy shares are called shareholders.
They are part-owners of a business.
They are paid a share of the profits called dividends.
Financial statements must be audited by qualified external
auditors.
There are two main types of companies: Private Company
and Public Company.

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 Private Company and Public
Company
PRIVATE COMPANY
• Number of shareholders is
between 2 and 50 only.
• The shares only can be sold to
other individuals by invitation
and is circulated among
members.
• Company cannot be listed in
the Bursa Malaysia.
• For a private company, the
word “Sendirian Berhad” or the
abbreviation “Sdn. Bhd.”
PUBLIC COMPANY
• Number of shareholders is
between 2 to unlimited.
• The shares can be sell, buy or
hold to any members of public.
• Company can be listed in the
Bursa Malaysia.
• For a public company, the word
“Berhad” or the abbreviation
“Bhd.”
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 Sources of Finance
From the owner
• Contribution from new capital.
• Retained earnings, which occurs
when the owner does not draw all
the profit from the business.
Finance from liabilities
• Trade credit, where suppliers don’t
expect immediate payments for
goods.
• Bank overdraft, where bank lends
money by allowing the business to
overdraw its cheque account.
• Term loan, which involve repayments
that include both interest and
principal repayments.
• Leasing, where the finance company
retains the ownership of the asset,
but the business has use of the asset,
make regular payments and usually
has a commitment to purchase the
asset for a predetermined price at
end of the lease agreement.
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 What is a Business Plan?
A business plan is a formal statement of a set of business goals,
the reasons they are believed attainable, and the plan for
reaching those goals. It may also contain background information
about the organization or team attempting to reach those goals.

Business plans may also target changes in perception and

branding by the customer, client, taxpayer, or larger community.
When the existing business is to assume a major change or when
planning a new venture, a 3 to 5 year business plan is required,
since investors will look for their annual return in that timeframe.

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A business plan consists of three main items:

Mission
Objectives
SWOT Statement
Analysis

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 Mission Statement
A formal document that state the organisation’s mission. They
are published within organisation to promote desired behaviour,
support for strategy and purposes, adherence to core values and
adoption of policies and standards of behaviour.

A mission statement is inextricably linked with that organisation‘s

objectives.

While the organisational objectives comprise broad aims of the

firm, the mission encapsulates the reason why the entity exists in
terms of the service and utility provided to meet specific needs
of stakeholders.
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 Objectives
Objective must be SMART:

Specific - unambiguous

Measurable – quantified

Achievable – within reach

Relevant – congruent with the mission

Time bound – with a completion date

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 Examples of Objectives
1) To provide sound investment for shareholders by
increasing shareholder value and also worthwhile job
prospects for employees.
2) To increase customer satisfaction, real growth in
earnings per share and a competitive return in capital
employed.
3) To play a leading role in meeting the requirements of
the widening and expanding home entertainment
industry.
4) To increase profit by 20% at end of the year.
5) To increase market shares by 5% end of the year.
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 What is SWOT Analysis?
1) A SWOT analysis is one means of summarising the key
opportunities and threats from the external environment as
well as key strengths and weaknesses from the internal
analysis.
2) It can have a useful impact on strategy selection i.e. the
extent to which current strengths and weaknesses are
capable of dealing with the opportunities and threats from
the environment.

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 SWOT Analysis?
STRENGTHS WEAKNESSES OPPORTUNITIES THREATS

• Affordable and • Perception of • Customers shift • Credit risk

innovation low quality • New government • Foreign currency
products • Lesser range of regulations risk
• Good location of product • Sufficient capital • Decline industry
branches • Profit margins to grow or • Rapid technology
• Long established are falling diversify development
brand • Products are • Booming • Government
• Industrial leader undifferentiated industry legislation with
• Established • Lack of negative impact
distribution experience
network

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 What is Accounting?
Nature
• Provide vital service in
today’s business
environment.
• Concerns primarily with
quantitative financial
information on entities that
is used in together with
qualitative evaluations, in
making rational economic
decisions.
Roles
• Managers: help to facilitate
strategic planning.
• People (e.g. managers, investors,
creditors) need information to
help them plan, make decisions,
evaluate and control their
business.
• This information is provided in
the form of financial statements.
• Shows where money is spent
• Helps to assess performance
over a period
• Helps to identify problems and
opportunities
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 What is Accounting?
… continued …
What • Concerning financial
information
accounting • The basis is monetary
deals with? concept

What • For decision making

• For accountability
accounting
is used for?

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 Accounting Process
Communication
Identification Recording Accounting
Reports

Prepare accounting
reports
SOFTBYTE
Annual Report

Select economic events Record, classify

(transactions) and summarize

Analyze and interpret for

users
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 Accounting Process
… continued …
Identification
• Involves the observing and determining of internal / external transactions.
Recording
• Accounting transactions are measured and recorded in terms of some monetary units.
• The recorded data must be classified and summarised to be useful for decision-making.
• Classification involves grouping transactions into more meaningful groups or categories.
• Summarisation is presenting financial data for a period in reports and financial statements.
Communicating
• Preparing and distributing accounting reports to users of accounting information.

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 Financial Accounting
It is a systematic process of identifying, recording, measuring, classifying,
verifying, summarizing, interpreting and communicating financial information.
It reveals profit or loss for a given period, the value and nature of a firm's
assets, liabilities and owners' equity.

Users. Focus on reporting on the business to external users i.e. the investors and
creditors.
Summarized. An overview of the business is often more important and as a result
detail may not be included.
Historical. Reports are usually confined to actual position and performance, rather
than budgeted information.
Infrequent. Many statutory requirements call for annual reports and this is the
common frequency for financial accounting. Once in a year to prepare the full
accounting report.
Standardized format. Due to the requirements and standards, financial statements
are produced in a particular format, disclosed certain minimum information and
adopt predetermined accounting policies. This provides more uniform statements
when external users are comparing the statements of different businesses.

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 Management Accounting
The process of preparing management reports and accounts that
provide accurate and timely financial and statistical information
required by managers to make day-to-day and short-term decisions.

Users. Focuses on providing internal information i.e. operation activities to the

managers of the business.
Detailed information. For example, costs relating to a particular product, such as in
the break-even point analysis.
Forward looking. Budgeted information is usually prepared for management rather
than external users. It can be an important ingredient in management decisions.
Frequent reports. Once in a year is usually inadequate for management purposes
when regular and timely feedback is necessary to assist sound, on-going
management decisions.
Flexibility. Reports can be presented in the manner that is most useful to
managers. External requirements, such as accounting standards do not need to be
met for these purposes.

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Users of Accounting Information
Users

Internal External

1. Managers Indirect Interest

Direct Interest 1. Government
2. Employees
1. Investors 2. Inland Revenue Board
2. Creditors 3. Customers
3. Lenders 4. Public
5. Trade union

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 Users of Accounting Information
… continued …
Internal Users
Managers: information for the purposes of
planning, control and decision making.
Employees: information on their employer’s
stability and profitability (ability to provide
remuneration, employment opportunities and
other benefits).
External Users
Investors: information on the effectiveness of management’s
stewardship role to make decisions to buy, hold or sell stock.
Creditors: information to decide on the creditworthiness of the
business.
Lenders: information to decide whether to lend to the entity and
on what terms (loans will be re-paid when due).
Governments and their agencies: information that assists in the
allocation of resources and the regulation of the activities of
entities.
Customers: information about the entity’s continued existence.
Public: information for assessing the entity’s prosperity and the
range of its activities (e.g. corporate social responsibility).
Trade union: Information as a basis for enterprise bargaining
negotiations and can meet workers’ long-term entitlements.
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… End of Topic 1 …

Topic 2

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