Бизнес (Talking Business)
Ministry of Education
University after I.N.Ulyanov
Business and Management
Student: N.I. Nikitin, FBM-61-02
Advisor: M.V. Emelyanova
Cheboksary – 2003
Chapter 1. Setting up a
Chapter 2. Company
Chapter 3. The stock
The given course paper represents a brief material. It has
the recommendations of successful management of business. The experience of the
entering business and the achievements of positive results are generalized in
it. I have chosen the theme of my course paper as I think that each person has
an opportunity of opening his own business in our country now, but not everyone
can do it. And that's why I have decided to help the beginning businessmen to
The given course
paper consists of three parts. In the first part it is considered preparatory
steps of the setting up of business. Work of the company is analyzed in the
following chapter of the course paper. And I have tried to study the stock
market in the third chapter.
Setting up business
If a person wishes to launch a new
business, he has to make some preparatory steps. The first step is the
selection of an appropriate legal form. In various countries these forms
differ. But usually they are as follows: a limited liability company, a
partnership and a sole proprietor.
There is a basic difference between
these forms. A limited liability company is a legal entity (legal person). In
case of a bankruptcy, it has to reimburse (cover) its debts with all its
assets, but the creditors cannot seize the assets owned by the company’s
Sole proprietors or partners do not
form a legal entity and have unlimited liability. If their business goes
bankrupt, they have to reimburse the debts not only with the firm’s assets but
also with their personal belongings: money, houses, cars, etc.
For this reason, most businesses are
set up as limited liability companies. The name of such a company ends with
“Limited” in the UK or Canada and with “Inc.”, “Corp.” or “LLC” in the USA.
A limited liability
company may be private or public. A private company is usually founded by a
small group of people who know each other and intend to do business together. A
private company cannot sell its shares to the public and if it the business is
not successful the founders loose their own money only.
A public company’s shares
are traded on the stock market and may be purchased by millions of people all
over the world. These shareholders are not aware of the company’s day-to-day
performance and must rely on the professionalism of the company’s managers and
their reports. If the management is poor or in case of the managers’ fraud, the
shareholders may loose billions of dollars.
Many countries have
special regulatory bodies to supervise public companies, such as the US
Securities Exchange Commission. Yet, corporate disasters sometimes happen. One
of the most recent examples is the bankruptcy of Enron Corporation, a giant supplier
of energy resources in the Western part of the United States.
Every new business is to
be registered with the official company register. The UK has such registration
offices in London and in Edinburgh, while in the USA each of the 50 states has
its own register.
Any business is set up to make profit. But the
founders sometimes do not have enough experience or make serious mistakes,
which result in losses. The financial results of the company’s operations can
be seen from its financial reports.
There are at least three
reasons for preparing such reports. First, every government needs to collect
taxes and therefore requires detailed information on the company’s performance,
revenues and expenses. Second, the shareholders need to know, whether the
company’s management is professional enough, and ask for confirmation with
facts and figures. Third, the company’s top executives must control the efficiency
of the company’s various departments and the input of each department in the
company’s operational results. The reports prepared by the company’s accounting
department are often verified by an auditor, which is an independent public
accountant. The auditor has to confirm that the reports comply with legal
requirements and they reflect the company’s actual performance.
There are a lot of
reports submitted annually, semi-annually and quarterly. The most important one
is the balance sheet, which describes the company’s assets and liabilities as
on the last date of each year. The assets are the values, which the company
owns: money, buildings, equipment, raw materials, computer hardware and
software, trade marks. The liabilities specify what the company owes, such as:
share capital, credits received from banks and suppliers, other debts. If the
amount of assets is higher than that of the liabilities, the company has
profit. If the liabilities are higher than the assets, the company has losses.
In the latter case they say that the company is “in the red”.
Money transfers between
the company and its partners during the year are shown on the statement of cash
flows. Cash is the most liquid asset, which is as important for the company’s
activities as blood for a human body. If a company has huge fixed assets (land,
buildings, equipment) but does not have enough money, it is a sign of financial
There are many other
reports, letters, notes and messages, which a company has to submit. Some of
them are very
photographs and illustrations and look like advertising material. But their
contents are usually a summary of the above two documents and additional
comments to them.
If we deduct the
company’s expenses from its revenues, the result is gross profit before
taxes. If we further deduct taxes from the gross profit, the result is net
profit, which may be distributed among the shareholders as their dividends or
may be reinvested. The shareholders adopt a resolution on this matter at their
annual meeting. Often they decide to use half of the net profit for
dividends and to reinvest the other half. The net profit may also be carried
forward to the next year. The amounts brought forward from the previous year
are known as “retained earnings” of the company.
are usually reluctant (do not wish) to pay taxes and there are legal ways to
avoid some of them. The company’s ability to save on taxation depends on the
professionalism of its accountants. The easiest way to avoid taxes is to increase
expenses through purchasing new machinery, investing in new technologies,
making money transfers to charity foundations.
tax avoidance is allowed, tax evasion is a crime. The company’s executive body
(the board of directors) is responsible for the correctness of the information
submitted to the government. The personal liability is on the chief executive
officer (the board chairperson) and the chief financial officer who sign the
reports. If the information contained in the documents is not correct and if
the company tries to evade taxes, these persons may be fined or even jailed.
Otherwise, they may escape to another country, which sometimes happens.
The stock market
A century ago, the size of
enterprises was rather small, each of them usually employed several dozen
workers, and most business companies were family-owned. Further industrial
growth required more intensive financing and family capitals became
insufficient. This gave birth to share capital, which can combine financial
resources of many people into a pool for starting a big project.
The most visible representatives of
share capital are public limited companies, such as British Petroleum, Royal
Dutch Shell or General Motors. They raise money on the stock market by issuing
securities, mostly shares and bonds.
Ordinary shares (common stock in USA)
form the largest part of the whole securities market. A shareholder owning
ordinary shares can vote at the annual shareholders’ meeting, which reviews the
company’s reports, takes decisions on the company’s plans and the distribution
of the company’s profit. The meeting may decide to distribute the dividends to
the shareholders or to reinvest the profit. If the company has no profit or has
losses, the owner of ordinary shares will receive no dividends.
Each ordinary share has its face
value and its market price. The face value is indicated on the share
certificate but one cannot sell or buy the share at the face value. The market
price is established at the stock exchange, where the shares are quoted and
traded. The market price may be several times higher or lower than the face
value because it depends on the general market situation and on the performance
of the company.
When the country’s economy grows, the
stock market usually has an upward trend, the market prices of shares go up and
the stock exchange traders say that the market is “bullish”. If the market has
a downward trend, the market prices of shares go down and the market becomes
Many companies issue preference
shares (preferred stock in USA). These shares give the shareholder a
guaranteed, stable income fixed as a percentage of their face value. But
preference shares do not let their owner to vote at the shareholders’ meetings.
Some companies issue bonds. These
securities provide their owner with stable income, the same as preference
shares do. But unlike ordinary or preference shares, bonds are redeemable. It
means that the company issuing bonds has an obligation to redeem them or buy
them back at the face value after a certain period of time, usually after
There was a stock market boom during
the latest decade of the twentieth century. Many people became active in
shopping for financial products and invested much of their wealth in
securities. They expected that the markets would grow rapidly in the coming
years and hoped to earn money through buying securities at lower prices and
selling them at higher prices.
But these expectations were ruined by
a sudden economic crisis. Now the Western economies have been in recession for
about two years and the market price of most securities is much lower than
their face value. It is a very sad situation for the shareholders, because they
cannot return their shares to the issuing companies and get their money back.
They can only sell these shares at their market price, if somebody will buy
In the conclusion I want to tell, that the knowledge of the basic
economic principles creates conditions of safe existence for the person. The public
phenomena, which are studied with the economic theory, influence various layers
of the population. The size of the received income plays an important role in
the position of the person in the society.
Certainly, I cannot
say that if you study the basic economic principles,
you will understand all essence of economic events.
I hope that my work
will help the beginning businessmen in the future.
Financial management of the enterprise. – Moscow: "Finance", 1997.
Osipov J.M. Bases
of enterprise activity. – Moscow, 1992.
Bulatov A.S. The
economic theory (2 edition). – Moscow, 1997