25 Jun 2010
in Disadvantages of Sole Proprietorship
Tags: ability, able, accounting, advancement, advantage, Advice, among, area, asset, attract, available, bank, benefit, bond, bookkeeping, borrow, business, capable, car, cause, choose, commercial, compete, competent, condition, consider, contrast, corporation, credit, creditor, current, debt, deciding, decision, depend, determine, difficult, direct, disadvantage, diverse, employee, encounter, expectancy, experience, factor, fail, failure, family, field, final, finance, financial, following, force, found, friend, function, fund, goal, great, guarantee, hand, help, high, holding, home, illness, income, incorporate, individual, large, level, liability, life, like, little, loan, lose, manage, management, marginal, Marketing, match, meet, money, obtain, offer, owner, pay, pay off, perform, person, personal, Personnel, pledge, possess, problem, professional, profit, profitable, proprietor, proprietorship, provide, public, purpose, qualified, raise, rate, real estate, relate, relative, rely, result, retain, Role, room, seen, sell, serious, Skill, small, sole, source, specialize, standing, start, stock, talent, tax, taxation, unlimited, usually, wage, wealth, work
What may be seen as an advantage by one person may turn out to be a disadvantage to another. The goals and talents of the individual owner are the deciding factors. For profitable businesses managed by capable owners, many of the following factors do not cause problems. On the other hand, proprietors starting out with little management experience and little money are likely to encounter many of the disadvantages.
- Unlimited Liability: The sole proprietor has unlimited liability in meeting the debts of the business. In other words, if the business cannot pay its creditors, the owner may be forced to use personal, non-business holdings such as a car or a home to pay off the debts. The more wealth an individual has, the greater is the advantage of unlimited liability.
- Limited Sources of Funds: Among the relatively few sources of money available to the sole proprietorship are a bank, friends, family, or his or her own funds. The owner’s personal financial condition, then, determines his or her credit standing. Often the only way a sole proprietor can borrow for business purposes is to pledge a car, a house, or other real estate, or other personal assets to guarantee the loan. And if the business fails, the owner may lose the personal assets as well as the business. Publically owned corporations, in contrast, can not only obtain funds from commercial banks but can sell stocks and bonds to the public to raise money. If a public company goes out of business, the owners do not lose personal assets.
- Limited Skills: The role proprietor must be able to perform many functions and possess skills in diverse fields such as management, marketing, finance, accounting, bookkeeping, and personnel. Although the owner can rely on specialized professionals to provide advice, he or she must make the final decision in each of these areas.
- Lack of Continuity: The life expectancy of a sole proprietorship is directly related to that of the owner and his or her ability to work. The serious illness of the owner could result in failure if competent help cannot be found.
- Lack of qualified Employees: It is usually difficult for a small sole proprietorship to match the wages and benefits offered by a large competing corporation because the proprietorship’s level of profits may not be as high. In addition, there is little room for advancement within a sole proprietorship, so the owner may have difficulty attracting and retaining qualified employees.
- Taxation: Although it is considered that taxation is an advantage for sole proprietorships, it can also be a disadvantage, depending on the proprietor’s income. Under current tax rates, sole proprietors pay a higher marginal tax rate than do small corporations. The tax often determines whether a sole proprietor chooses to incorporate his or her business.
My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.
30 May 2009
in Information for Wealth Creation
Tags: account, allocation, balance, business, case, competence, concern, control, cost, costitute, creation, creditor, current, diagnostic, enable, enterprise, executive, fact, formation, foundation, inform, information, judgment, kit, liquidation, manage, measurement, normal, obvious, paid, portray, productivity, provide, reflect, require, scarce, sheet, student, taught, tool, traditional, Value, wealth, worst
Enterprises are paid to create wealth, not control costs. But that obvious fact is not reflected in traditional measurements. First year accounting students are taught that the balance sheet portrays the liquidation value of the enterprise and provides creditors with worst-case information. But enterprises are not normally run to be liquidated. They have to be managed as going concerns, that is, for wealth creation. To do that requires information that enables executives to make informed judgments. It requires four sets of diagnostic tools: foundation information, productivity information, competence information, and information about the allocation of scarce resources. Together, they costitute the executive’s tool kit for managing the current business.
My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight
21 Mar 2009
in Leveraging better Payment Terms
Tags: abruptly, achieve, aggravation, always, arrangement, asset, assume, balance, bankruptcy, bargaining chips, better, brink, building, business, circumstance, company, competitor, condition, conserve, costs, create, creditor, crisis, critical, debtor, defensive, deferred, detrimental, develop, driver, easier, Ego, entrepreneur, evicted, expense, extended, failure, focre, forced, formal, gain, grant, higher, house, income, landlord, lease, legal, lessor, leverage, liquidate, list, material, monthly, negotiate, negotiating, party, payment, payroll, period, ploy, position, precaution, price, priority, Product, reasonable, recalcitrant, receive, rental, safeguard, seat, secret, sell, situation, successful, supplier, terms, threat, trade-off, ultimate, uncommon, up front, vanish
Negotiating better payment terms is always easier if a company has some bargaining chips. The party with the most to lose or the most to gain is always on the defensive; therefore, the secret to successful negotiating is to develop leverage that forces the other party into one or the other of these positions. Other than not meeting payroll, only two conditions might create circumstances more detrimental to a company on the brink of failure than to a creator: (1) being evicted from the building that houses the business, and (2) not receiving critical materials and services to keep the business going.
Not much can be done about either situation. A business must be housed, and it must have materials and services to make and sell products. That’s why landlords and critical suppliers top the payment priority list. Some leverage can be achieved, however. Most lessors would rather work out an extended payment arrangement than go to the expense and aggravation of a formal eviction. As long as the renter’s market holds, deferring rent payments for at least several months should be a real possibility. That’s not a permanent solution, but it does provide some breathing space.
It might be possible to leverage critical suppliers to gain better terms. The threat to go to a competitor usually brings even the most recalcitrant supplier to terms. In most cases, a supplier has more to lose (the overdue amounts plus legal costs to sue) or gain (future sales) than a debtor company does. At least making suppliers think that’s the case is good negotiating ploy.
Assuming that you have taken reasonable precautions to safeguard your personal assets, the worst thing that can happen is that you will be forced to liquidate the business. Granted, this can be a blow to any entrepreneur’s ego. It might also reduce personal income for a while, however, once the liquidation is over, you can always begin again. As long as creditors believe that they have the most to lose, you’re in driver’s seat. The ultimate creditors’ threat is to force the company into bankruptcy. By making it clear that this won’t hurt and that other plans for the future are in the works anyway, such leverage vanishes abruptly.
My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please contact www.asifjmir.com, Line of Sight