Professional Practice

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Lecture Outline
Structure
of
Organization

Financing a strat-up
company

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What Is an Organization
 Anorganization is a group of people
working together in a formal way.

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Commercial organizations
 inbusiness to make money
 several different ways of setting up

and operating a commercial

organization.

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Organizations
 Depending on the circumstances, the
business may be operated as (but
not limited to):
 sole trader
 a partnership
 a limited company.

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Sole trader
A sole trader is an individual who
runs their own business.
 There are no legal formalities

attached to becoming a sole trader

 you become a sole trader simply by

starting to run a business.

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Sole trader
 If
the income of your business is
large enough, you will need to
register with Customs and Excise for
VAT (value added tax) purposes, and
you may need to negotiate with the
Inland Revenue about your income
tax status.

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Partnership
 If
a group of people carry on a
business with a view to making
profits, and the business is not a
limited company, then the law will
treat them as being in a partnership.

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Partnership
 Suppose that you and a friend are
working together to write software
for local company.
 Your friend is doing most of the work

and you have agreed that he will get

most of the money.

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Partnership
 Unfortunately,
his software doesn’t
work and the company decides to
claim damages for the harm it has
suffered because of the defective
software.

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Partnership
 You own a house and a car and have
money in the bank; and your friend
doesn’t.
 The company can sue (charge

petition) you for the entire amount of

the damages, despite the fact that it
was your friend’s software that didn’t
work.

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Limited Company
 the commonest form of commercial
organization is the limited company.
 It is the most suitable form of

organization for most businesses.

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Limited Company
 Threeprinciples are fundamental to
the concept of a limited company:

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Limited Company
1) The company has corporate legal
identity

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Limited Company
 Corporate Identity is a strong concept
that builds the image of the company.
 It creates branding value to the

company and its products.

 It includes designing of complete

collaterals/collection such as unique

Logo, Brochure, Website, Presentation,
Letterheads, Envelopes, Business
cards etc.
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Limited Company
 Such Firm need a strong corporate
identity to reflect their
professionalism because they do not
produce anything and their corporate
identity is the only way for them to
show their seriousness towards the
clients.

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Limited Company
2) The ownership of the company is
divided into a (usually large) number
of shares. These shares can be
bought and sold individually.

 Thepeople who own these shares

are known as the members of the
company or shareholders.

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Limited Company
3) In the event that the company
incurs debts or other legal liabilities.
The most that shareholders stand to
lose whose share was more.

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Limited Company
 Types of Limited Company
1) The public limited company (plc)
2) The private limited company.

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Limited Company
 The essential difference is that a plc
can, if it so wishes, offer its shares
for sale to the public, but a private
limited company cannot.

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Limited Company
The constitution of a limited
company
 In order for a company to be

registered, it must have a

constitution.
 This consists of two documents: the

memorandum of association and the

articles of association.

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Limited Company
 memorandum will conclude with a
declaration of association as follows:

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Limited Company
 We, the several persons whose
names, addresses and descriptions
are written.
 We are desirous of being formed into

a company in pursuance of this

Memorandum of Association, and we
respectively agree to take the
number of shares in the capital of
the company.
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Limited Company
 The articles of association
related to (but not limited to)
following matters:
 number of directors
 how directors are appointed and

removed

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Limited Company
 what their powers are
 what happens when new shares are

to be issued
 what process is required in order to

modify the articles, and so on.

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Practice
 Write short notes on the following:
a) the advantages and disadvantages
of limited company status

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Practice
 You and a few friends are thinking of
going into business together to offer
software development and system
integration services to small
businesses.
 Explain why it would be wise (or,

alternatively, why you think it would

not be wise) to form yourselves into
a limited company.
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Practice
 Explain the following terms:
 sole trader
 partnership
 company

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Financing a Start-up
Company

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Start-up Company
 New graduates in computing are
often tempted by the idea of setting
up their own company.
 They might, for example, decide to

try to use their skills in website

design and programming, however
besides their ambitions, they will
need some money to start the
venture.
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Start-up Company
WHY CAPITAL IS NEEDED

 It
is very difficult to start any
commercial venture without having
some money in hand

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Start-up Company
 Ifyou are setting up a company to
build websites, you have to have a
fair amount in your hand.
 your customers are likely to be other

companies, and it will take you

longer to get paid.

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Start-up Company
 Innormal commercial practice,
invoices for services are issued at
the end of a month to cover the work
that has been done during the
month.

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Start-up Company
 Two months is more likely with
commercial clients and three months
is not uncommon
 some large companies are notorious

(badly famous) for not paying

invoices for as much as 6 or even 12
months.

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Start-up Company
 The result is that you need enough
cash in hand to be able to live for at
least three months.
 Additional money will be needed for

the expenses of starting the

company.

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Start-up Company
Other Expenses:
 salaries, however small, for the

founders and for any other staff they

may need to employ rent, rates,
heating and lighting of the premises
used;
 equipment and consumables

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Start-up Company
 costs of advertising and marketing
the products;
 miscellaneous expenses, ranging

from company stationery to

travelling
 expenses for any trips that may be

necessary;
 interest on any money borrowed.

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The business plan
 The first step in raising the money is
to produce a business plan.
 What is a Business plan?

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The business plan
 Thisis a document that explains your
plans to potential funders and tries
to convince them that these plans
are well thought out and realistic and
that the venture is likely to be
successful.

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The business plan
It should contain:
 a description of what the company

will be doing, together with

information to show that it is
technically feasible and that the
founder of the company have the
necessary expertise.

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The business plan
It should also contain:
 a description of the market the

company is aiming at, an estimate of

its size, and an assessment of the
competition.

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The business plan
It should also contain:
 a prediction of the financial

performance of the company. This

will include budgets, cash flow
predictions, and projected balance
sheets and profit and loss accounts.

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Sources of finance
 Grants
A grant is a sum of money given to
the company; while the company is
obliged to demonstrate that it has
been used for the purposes for which
it was given.

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Sources of finance
 itis not intended that the grant
should ever be paid back to the
organization which gave it
 Not surprisingly, grants are only

available from government and or,

very occasionally, from charities.

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Sources of finance
A variety of programmes offer grants
to assist in the development of high-
technology products.

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Sources of finance
 Loans
A loan is a sum of money lent to the
company; with or without interest.
 If with interest then interest rate may

be fixed or variable, and the loan is

usually for a fixed period.

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Sources of finance
 The company has to pay back the
loan eventually and, if it goes into
liquidation, the lender is entitled to
recover the loan from the sale of the
assets of the company.

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Sources of finance
 In most cases, security is required for
the loan.
 In other words, the company agrees

that if it fails to make repayments,

the lender is entitled to sell some of
the company’s assets in order to
make up for the shortfall.

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Sources of finance
 Insome cases, if you borrow money
to buy a house and then fail to keep
up the repayments, the lender can
sell the house to recover the loan.

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Sources of finance
 It
often happens that small
companies do not have sufficient
assets to cover the loan they are
looking for.

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Sources of finance
 Inthis case, the lender may ask for
personal guarantees from the owner
or director of the company; this may
mean that the Owner or director
have to use their own homes or other
property as security for the loan.

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Sources of finance
 Equity capital
 Equity capital is money paid to the

company in exchange for a share in

the ownership of the company.
 If a company looks to have good

prospects but needs to raise more

capital, it will usually need to consult
to business angels or venture
capitalists.
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Sources of finance
 Business angels are wealthy
individuals who provide equity
capital for start-up companies and
small firms that are seeking to grow
rapidly.

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Sources of finance
 Venturecapitalists are companies
whose business is investing in small
companies with high growth
potential.

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Sources of finance
 Both business angels and venture
capitalists aim to make money by
helping the company to expand and
become successful and then selling
their shares at a profit.

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Gearing
 Therelationship between loan capital
and equity capital in a company is
important. It is known as gearing or
leverage.

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Sources of finance
 Shareholders are at a much greater
risk of getting a poor return on their
capital or even losing it completely
than are lenders, but, in
compensation for this, they stand to
make a greater profit than lenders if
all goes well.

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Sources of finance
 Suppose a company is started with a
share capital of £100, owned by its
two founders, and that it has a fixed
term loan of £100,000, at an interest
rate of 10 per cent.
 If, in its first year the company

makes an operating profit of

£10,000,

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Sources of finance
 the interest charges will consume all
the profit and the shareholders will
receive nothing.
 If the company’s operating profit

doubles, to £20,000, the lender will

still receive £10,000 but, neglecting
taxation and assuming that all the
profit is distributed to the
shareholders
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Sources of finance
 the shareholders will receive
£10,000, a very handsome return on
an investment of £100.
 Furthermore, as the profits increase,

the value of the company, and hence

the value of the shares, increases.

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Sources of finance
 If
the company is sold, the
shareholders will get much more
than their original £100 investment,
but the lenders will still only be
entitled to their original £100,000,
plus interest.

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Sources of finance
 If,on the other hand, the company is
unsuccessful and goes into
liquidation (Downfall)
 the lenders will be at the front of the

queue of people to whom money is

owed, whereas the shareholders will
get nothing until everyone else has
been paid in full.

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References
 F.Bott, Professional Issues in
Information Technology
 F.Bott, Professional Issues in Software

Engineering

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