Online Stores Disadvantages

Creating a website and register a company for online sales of items and products will be easy but responsibility of this business is not easy as it looks at the first time. main goal of an online store is not establishing it and reach customers between competitors, the final goal is offer services and products as you announced on site else customers will complain from you to judges and that will be start of problem for you.

For example, you decided to sell spare parts of cars online to world wide, so that you should find real solutions for its steps as below:

  1. Advertisement of  site
  2. List of available spare parts (Fake list will put you in bad problem when customer ordered it and you could not provide it)
  3. Packaging of items (Bad packaging will cause damaged effects on items)
  4. Shipment methods  (Select a bad shipment methods will cause high charges and long time transport )
  5. Warranty of items if they will not work after delivery to customers

therefore you see the most duties are after sales and very important 

Online Sales vs Street Shops

When you have a shop in the street, your customers will come in shop and check items or goods and after a short consideration they will buy them or not. so that customer before delivery will check healthiness of item but in online sales, customer will check it after delivery and if that customer will be admire quality of order , it will be send back on the charges on your behalf. sometimes charges of freight are more that 3 times of item costs !!

Relevant Cash Flows

Investment decisions, like all other decisions, should be analysed in terms of the cash flows that can be directly attributable to them. These cash flows should include the incremental cash flows that will occur in the future following acceptance of the investment. The cash flows will include cash inflows and outflows, or the inflows may be represented by savings in cash outflows. For example, a decision to purchase new machinery may generate cash savings in the form of reduced out-of-pocket operating costs. For all practical purposes such cost savings are equivalent to cash receipts.

Relevant cash flows to capital investments

It is important to note that depreciation is not included in the cash flow estimates for capital investment decisions, since it is a non-cash expense. This is because the capital investment cost of the asset to be depreciated is included as a cash outflow at the start of the project, and depreciation is merely a financial accounting method for allocating past
capital costs to future accounting periods. Any inclusion of depreciation will lead to double counting.

Timing of cash flows

To simplify the presentation our calculations have been based on the assumption that any cash flows in future years will occur in one lump sum at the year-end. Obviously, this is an unrealistic assumption, since cash f lows are likely to occur at various times throughout the year, and a more realistic assumption is to assume that cash flows occur at the end of each month and use monthly discount rates. Typically, discount and interest rates are quoted as rates per annum using the term annual percentage rate (APR). If you wish to use monthly discount rates it is necessary to convert annual discount rates to monthly rates. An approximation of the monthly discount rate can be obtained by dividing the annual rate by 12.

However this simplified calculation ignores the compounding effect whereby each monthly interest payment is reinvested to earn more interest each month.
To convert the annual discount rate to a monthly discount rate that takes into account the compounding effect we must use the following formula:

Monthly Discount Rate = (¹²√ 1 + APR) – 1    (formula 6.6)

Assume that the annual percentage discount rate is 12.68 per cent. Applying formula 6.6 gives a monthly discount rate of:

(¹²√1.1268) – 1 = 1.01 – 1 = 0.01 (i e. 1 % per month)

Therefore the monthly cash flows would be discounted at 1 per cent, In other words, 1 per cent compounded monthly is equivalent to 12.68 per cent compounded annually Note that the monthly discount rates can also be converted to annual percentage rates using the formula:

(1 + k)¹² – 1 (where k = the monthly discount rate) (Formula 6.7)
Assuming a monthly rate of 1% the annual rate is (1 01;”-1 =0.1268(i e. 12 68% per annul) instead of using formula (6.6) and (6.7) you can divide the annual percentage rate by 12 to obtain an approximation of the monthly discount rate or multiply the monthly discount rate by 12 to approximate the annual percentage rate.

Internal Rate of Return

The internal rate of return (lRR) is an alternative technique for use in making capital investment decisions that also takes into account the time value of money, The internal rate of return represents the true interest rate earned on an investment over the course of its economic life This measure is sometimes referred to as the discounted rate of return.
The internal rate of return is the interest rate K that when used to discount all cash flows resulting from an investment, will equate the present value of the cash receipts to the present value of the cash outlays.

In other words, it is the discount rate that will cause the net present value of an investment to be zero. Alternatively, the internal rate of return can be described as the maximum cost of capital that can be applied to finance a project
without causing harm to the shareholders. The internal rate of return is found by solving for the value of K from the following formula:

Formula of internal rate of return in capital investment

Formula of internal rate of return

It is easier, however, to use the discount tables. Let us now calculate the internal rate of return (using discount factors based on four decimal places)for Project A in Example 6.1. The IRR can be found by trial and error by using a number of discount factors until the NPV equals zero. For example, if we use a 25 per cent discount factor, we get a positive NPV of lB4 800. We must therefore try a higher figure. Applying 35 per cent gives a negative NPV of 166 530. We know then that the NPV will be zero somewhere between 25 per cent and 35 per cent, In fact, the IRR is between 30 per cent and 31 per cent but closest to 30 per cent, as
indicated by the following calculation:

Example of IRR calculation for capital investment decision
Example of IRR calculation

The decision rule is that if the IRR is greater than the opportunity cost of capital, the investment is profitable and will yield a positive NPV Alternatively, if the IRR is less than the cost of capital the investment is unprofitable and will result in a negative NPV. The calculation of the IRR is illustrated in below photo:

Interpretation of IRR in capital investment
Interpretation of IRR

The dots in the graph represent the NPV at different discount rates. The point where the line joining the dots cuts the horizontal axis indicates the IRR (the point at which the NPV is zero). Figure 6 2 indicates that the IRR is approximately 30 per cent, and you can see from this diagram that the interpolation method can be used to calculate the IRR without carrying out trial and error calculations When we use interpolation, we infer the missing term (in this case the discount rate at which NPV is zero) from a known series of numbers. For example, at a discount rate of 25 per cent the NPV is =$84800 and for a discount rate of 35 per cent the NPV is -166 530. The total distance between these points is $151330 (+$84800 and – $66530). The calculation for the approximate IRR is therefore:

Calculation for the IRR
Calculation for the IRR

 

Next Page: Relevant Cash Flows

Capital Investment Decisions

Capital investment decisions are those decisions that involve current outlays in return for a stream of benefits in future years. it is true to say that all of a firm’s expenditures are made in expectation of realizing future benefits. The distinguishing feature between short-term decisions and capital investment (long-term) decisions is time.

Generally, we can classify short-term decisions as those that involve a relatively short time horizon, say one year, from the commitment of funds to the receipt of the benefits On the other hand. capital investment decisions are those decisions where a significant period of time elapses between the outlay and the recoupment of the investment. We shall see that this commitment of funds for a significant period of time involves an interest cost, which must be brought into the analysis. with short-term decisions, funds are committed only for short periods of time, and the interest cost is normally so small that it can be ignored.

Capital investment decisions normally represent the most important decisions that an organization makes, since they commit a substantial proportion of a firm’s resources to actions that are likely to be irreversible. such decisions
are applicable to all sectors of society. Business firms’ investment decisions include investments in plant and machinery, research and development, advertising and warehouse facilities investment decisions in the public sector
include new roads, schools and airports. individuals’ investment decisions include house-buying and the purchase of consumer durable. in this page, we shall examine the economic evaluation of the desirability of investment
proposals. we shall concentrate on the investment decisions of business firms, but the same principles, with modifications, apply to individuals, and the public sector.
For most of this chapter we shall assume that the investments appraised are in firms that are all equity financed. in other words, projects are financed by the issue of new ordinary shares or from retained earnings, Later in the
chapter we shall relax this assumption and assume that projects are financed by a combination of debt (i.e. borrowed funds) and equity capital. you will find throughout the chapter that mathematical formula and simple arithmetic
are used to compute the values that are used to evaluate investments. you can use either approach. if you have an aversion to mathematical formula you should ignore the formula calculations. All of the calculations are repeated using non-formula approaches.

Opportunity Cost of an Investment

Investors can invest in securities traded in financial markets. if you prefer to avoid risk, you can invest in government securities which will yield a fixed return.On the other hand,you may prefer to invest in risky securities such as the ordinary shares of companies quoted on the stock exchange, if you invest in the ordinary shares of a company, you will find that the return will vary from year to year, depending on the performance of the company and its future expectations. Investors normally prefer to avoid risk if possible, and will generally invest in risky securities only if they believe that they will obtain a greater return for the increased risk.

Suppose that risk-free gilt-edged securities issued by the government yield a return of ’10 per cent. Currently government securities yield a return that is significantly less than 10 per cent but we shall use 10 per cent in order to simplify the calculations.
With a return available of 10 per cent on government securities you should only be prepared to invest in ordinary shares if you expect a return in excess of 10 per cent. let us assume that you require an expected return of 15 per cent to induce you to invest in ordinary shares in preference to a risk free security. Note that expected return means the
estimated average future return. You would expect to earn, on average, 15 per cent, but in some years you might earn more and in others considerably less! .
Suppose you invest in company X ordinary shares. would you want company X to invest your money in a capital project that gives less than 15 per cent? Surely not.

Risk-Return Trade-Off

Assuming the project has the same risk as the alternative investments in shares of other companies that are yielding a return of 15 per cent. You would prefer company X to invest in other companies’ ordinary shares at 15 per cent or, alternatively, to repay your investment so that you could invest yourself at 15 per cent.

The rates of return that are available from investments in securities in financial markets such as ordinary shares and government gilt-edged securities represent the opportunity cost of an investment in capital projects; that is, if cash is invested in the capital project it cannot be invested elsewhere to earn a return. A firm should therefore invest in capital
projects only if they yield a return in excess of the opportunity cost of the investment. The opportunity cost of the investment is also known as the minimum required rate of returncost of capitaldiscount rate or interest rate.

The return on securities traded in financial markets provides us with the opportunity costs, that is the required rates of return available on securities. The expected returns that investors require from the ordinary shares of different companies vary because some companies’ shares are more risky than others. The greater the risk the greater the expected returns.

Consider below chart.

Expected return on investment
Expected return on investment

You can see that as the risk of a security increases the return that investors require to compensate for the extra risk increases, Consequently, investors will expect to receive a return in excess of 15 per cent if they invest in securities that have a higher risk than company X ordinary shares, if this return was not forthcoming, investors would not purchase high-risk securities. it is therefore important that companies investing in high-risk capital projects earn higher returns to compensate investors for this risk You can also see that a risk-free security such as a gilt-edged government security yields the lowest return,i.e 10 percent Consequently,if a firm invests in a project with zero risk,it should earn a return in excess of 10 percent. if the project does not yield this return and no other projects are available then the funds earmarked for the project should be repaid to shareholders as dividends. The shareholders could then invest the funds themselves at 10 percent.

Next Page: Compounding and Discounting in FV

 

Partnership and Types of Companies

The three most common types of business enterprise are sole traders, partnerships and public corporations. For example in 2004, in the UK, there were 514,820 sole proprietors (or sole traders), 309385 partnerships and 753020 companies and public corporations (Office for National Statistics, 2004). Of these 1,256 were listed companies. So far, in this page, we have focused on sole traders. Sole traders are, typically, relatively small enterprises owned by one person. Their businesses and accounts tend to be less complicated than those of either partnerships or companies. They are thus ideal for introducing the basic principles behind bookkeeping and final accounts. Here, we look at the profit and loss accounts and balance sheets of partnerships and limited companies.

Partnerships are normally larger than sole traders. However, basically their accounts are similar to those of the sole trader. This reflects the fact that partners, like sole traders, generally own and run their own businesses. For companies, however, the owners provide the capital, but the directors run the company. This divorce of ownership and management is reflected in the accounts of limited companies. In certain respects, particularly the capital employed, the accounts of limited companies thus appear quite different to those of partnership and sole traders. These differences are heightened by the fact that from 1st January 2005 listed companies in the UK and other European union countries had to follow accounting standards set by the International Accounting Standards Board (IASB).

In below photo, all types of companies have been compared.

Comparing types of companies as sole traders, partnership and llc
Comparing types of companies

 

Partnerships

Partnerships may be seen as sole traders with multiple owners. Many sole traders take on partners to help them finance and run their businesses. As in all human relationships, when partners are well-matched partnerships can prove very successful businesses.

However, when they are ill-suited problems can occur. Except for certain occupations (such as firms of accountants or solicitors) the maximum number of partners in the UK is 20. An important aspect of both sole traders and partnerships is that liability is generally unlimited. In other words, if a business goes bankrupt the personal assets of the owners are not ring-fenced.

Bankrupt partners may have to sell their houses to pay their creditors. Recently, however, for professional partnerships, particularly accounting partnerships, a new organisational form, the limited liability partnership (LLP), has been created. For these organisations, liability is capped. Sole traders and partners prepare accounts for use in their own personal internal management, but also for external users, such as the tax authorities and banks. The key issue which underpins partnerships is how the partners should split any profits. The ratio in which the profits are split is called the profit sharing ratio (PSR). The allocation of profits between the partners is presented in the appropriation account. The appropriation, or ‘sharing out’, account appears after the calculation of net profit. In other words, we add a section at the bottom of the sole trader’s trading and profit and loss account.
So we now have the trading and profit and loss and appropriation account.

Main elements in the appropriation account
Main elements in the appropriation account

Capital Accounts

These accounts represent the long-term capital invested into the partnership by the individual partners. when new partners join a partnership it is conventional for them to ‘buy their way’  into the partnership. This initial capital introduction can be seen as purchasing their share of the net assets of the business they have joined. This initial capital remains unchanged in the accounts unless the partners specifically introduce or withdraw long-term capital. It represents the amount which the business owes the partners.

Current Accounts

In contrast to the capital accounts, current accounts are not fixed. Essentially, they represent the partners’ share of the profits of the business since they joined, less their withdrawals. In basic current accounts, the main elements are the opening balances, salaries, profit for year, drawings and closing balances.

These elements are set out in below photo

Main elements in partners's current account
Main elements in partners’s current account

 

External Financing of Short Term Finance

Cash

If a company is not generating enough cash from trading it may need to borrow. The most common method of borrowing is via a bank overdraft or a bank loan. Bank overdrafts are very flexible. Most major banks will set up an overdraft facility for a business as long as they are sure the business is viable. A bank overdraft is a good way to tackle the fluctuating cash flows experienced by many businesses. An alternative to a bank overdraft is a bank loan. The exact terms of individual bank loans will vary. However, essentially a loan is for a set period of years and this may well be more than two years. The rate of interest on a loan will normally be lower than on a bank overdraft. Loans may be secured on business assets, for example specific assets, such as stock or motor vehicles.

Debtors

Since debtors are an asset, it is possible to raise money against them. This is done by debt
factoring or invoice discounting.

  1. Debt factoring Debt factoring is, in effect, the subcontracting of debtors. Many department stores, for example, find it convenient to subcontract their credit sales to debt factoring companies. The advantage to the business is twofold. First, it does not have to employ staff to chase up the debtors. Second, it receives an advance of money from the factoring organisation. There are, however, potential problems with factoring. The debt factoring company is not a charity and will charge a fee, for example 4 % of sales, for its services. In addition, the debt factoring company will charge interest on any cash advances to the company. Finally, the company will lose the management of its customer database to an external party. As Soundbite 10.1 shows, debt factoring has traditionally been viewed with some suspicion.
  2. Invoice discounting Invoice discounting, in effect, is a loan secured on debtors. The financial institution will grant an advance (for example, 75 %) on outstanding sales invoices (i.e., debtors). Invoice discounting can be a one-off, or a continuing, arrangement. An important advantage of invoice discounting over debt factoring is that the credit control function is not contracted out. The company, therefore, keeps control over its records of debtors. Figure 10.5 compares debt factoring with invoice discounting.

 

Comparison of Dept Factoring and Invoice Discounting

Element Debt Factoring Invoice Discounting
Loan from financial institution Yes Yes
Sales ledger (i.e., keeping records of debtors) Management by financial institution Managed by company
Time period Continuing Usually one-off, but can be continuing

The aim of debtors management is simply to collect money from debtors as soon as possible.
For an optimal cash balance, with no considerations of fairness, a business will benefit if it can accelerate its receipts and delay its payments. Receipts from customers and payments to suppliers are measured using the debtors/creditors collection period ratio.

Stock

As with debtors, it is sometimes possible to borrow against stock. However, the time period is longer. Stock needs to be sold, then the debtors need to pay. Stock is not, therefore, such an attractive basis for lending for the financial institutions. However, in certain circumstances, financial institutions may be prepared to buy the stock now and then sell it back to the company at a later date.

Starting A Business

For establishing a company or shop in any country, you should have a license for it, so register a legal a license to starting a business is the first step.

In some country like U.A.E, you can register a general trading license then you can do any business with it but in some country like china you should register a license for any trading products.

Start a Business with open a showroom
Start a Business with open a showroom

Steps to Begin A Business

From country to country it is different but to get started, generally we can do some steps as below:

  • Select the product or services that you would like to be active in its business
    • This is very important step and we suggest you have enough meeting with some of your friends or have many times consulatation with trusted attornies in your country
  • Register a name for your business
  • Rent or buy a shop or showroom
  • Decorating your showroom or shop with the most beautiful interior design
  • Hire the best salesperson as you can
  • Start a marketing by some resources as magazines, flyers, TV, internet or door-to-door visitors

Start A Business in USA

Choose type of your business and select a state

USA has 50 states so you should select one of them then you should choose which type of business you will be in. for foreigner the best and the most friendly states are : Nevada,  Wyoming, and Delaware.

 There are two types of business: 1- LLC 2-C Corporation

A Registered Agent

You should give your official papers and documents to a registered agent that located in the state where you have plan for it.

Get Your Tax ID No.

With you tax ID number, your business will be identified by the IRS. The official site of IRS: www.irs.gov.

To obtain an ITIN from IRS organization you should use form W-7  to apply for it

Open an account in a bank inside U.S.

It is easy to open an account in bank. you will offer: Your passport copy, the incorporation documents , and Tax ID number.