Tutor profile: Alexandra P.
How are businesses financed? Which way is best?
All businesses are financed using a mix of debt and equity. Debt is borrowing money which will eventually have to be repaid with interest, and equity is selling some ownership in the business, and in some cases, a dividend will be paid. By financing a business through debt, there are some advantages. You haven't sold any ownership in the company, so the owners of the company still get to call the shots and don't have any new parties to answer to. Debt, however, can be expensive. It has to be repaid, with interest, regardless of how the business is doing. By financing through equity, you now have shareholders. For some types of shareholders, this can mean that you have invested business mentors with industry connections, who have a vested interest in your business doing well. This cash also doesn't have to be repaid, and dividends are payable only when the business has the profit to do so. Equity funding does however mean that a business has more stakeholders to answer to and more reporting and audit requirements (depending on whether the equity is publicly traded). The original owner also doesn't get to keep all the profit! Overall, most medium-large businesses will have a mixture of debt and equity funding. Creditors and investors will consider the ratio of debt to equity funding when considering the risk of the company, but acceptable ratios will vary depending on the industry, location and age of the business.
How will businesses change due to COVID-19?
While the dust certainly hasn't yet settled on COVID-19, we can already see some impacts on businesses. Where business have been forced to lay off a significant number of employees, we can expect that the re-hiring of these employees might be done in a more thoughtful, and potentially leaner way. Let's say you were forced to lay off all your social media managers - what was the impact of having this department down for a period? Was there an immediate impact on sales? Did you come up with an alternative (i.e. upskilling a member of staff from another department, outsourcing the service, automating the function?). Where some larger businesses have invested significantly in their location historically (because who doesn't like to show off a fancy downtown office?), having employees working remotely, and successfully, might see businesses letting some of this prime real-estate go. We should expect businesses to become more globally conscious of their supply chain. Businesses who thought "Who cares where every single element of your production comes from? You just order it and it arrives!" might have had a rude awakening, when suddenly a factory in China is forced to close and your operations drive to a halt! Businesses might start mitigating this risk, and considering whether locally sourced materials, even at a higher cost, might stabilise productions during a time of uncertainty.
How is the accounting industry going to change in the next 10 years?
There's a few different ways we expect the accounting industry to change. Firstly, we have ABCD, as defined by the Institute of Chartered Accountants of England and Wales: Artificial Intelligence, Blockchain, Cyber Security, and Data Analytics. Big accounting firms are already using elements of artificial intelligence to streamline their operations and 'big data' analysis to derive data-driven analyses, and it's expected that accountants of the future will be comfortable with using these tools, and understanding the inherent risks that this will bring. Secondly, we have non-financial accounting. Since (literally!) before modern civilisation, accountants have been used to understand money and it's movements. "How much money do I have?" is a question we've been asking ourselves for a really long time. It's taken us millenia to come up with the systems of accounting we have today where this question is answered in line with international standards, and on the whole, this is calculated consistently, wherever you ask the question. It's only in the last century we've been asking ourselves other questions; "How sustainable is the money I make?", or "What is the human impact of my business". We don't have an internationally recognised way of measuring sustainability and human impact yet, but there are groups of accountants working on this! Over the next 10 years, we can expect to see accountants put their skills to more non-financial information.
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