BUS200 – Valuing a Professional Practice Paper.
i) Short Answer Questions
1. Discuss the unique characteristics that differentiate the professional practice from other
businesses.
Professional practice refers to an activity where an individual is supposed to extend the
knowledge that they have acquired from their classrooms to a practical work environment. BUS200 – Valuing a Professional Practice Paper. A
good example is where a medical student completes their degree course and then goes out to
practice their skills in a hospital, clinic or research facility (Mooya, 2015). On the other hand, a
business activity is characterized by the sale of either goods or services with the aim of making
profits in the long run.
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Professional practices differ from businesses in the sense that there is a specific code of
conduct that people are expected to follow and adhere to at all times. For instance, people in the
medical profession are supposed to obey the ethical code that expects them to save lives of
people brought in their care. Likewise, the marketing or commerce profession expects the people
to obey the code of conduct that upholds integrity and transparency at all times (Trugman,
2012). This is different from business where one individual can sell their goods differently from
another. BUS200 – Valuing a Professional Practice Paper.
One businessperson can decide to remain shrewd and candid such that they always
charge the right price for the right product. On the contrary, another businessman can choose to
be dishonest such that they charge exorbitant prices for their services or commodities (Morris,
2007). This brings out the major differences between professional practice and business where the former is streamlined by a code of ethics while the latter is mainly conducted depending on
the individual’s personality and character (Szczepankiewicz, 2013).
2. In Exhibit 18.12, two "Rules of Thumb" methods were applied to a professional practice.
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In terms of their usefulness, what is wrong with the results?
Rules of thumb are present in every profession and they provide guidelines as to how a
given task should be accomplished. These rules are often developed as a result of practicing a
given career or profession for a very long time as opposed to sticking to theoretical rules
(Szczepankiewicz, 2013). The exhibit in this case shows how one professional practice used
results through a wrong approach. One of the ways in which the rules of the thumb were not
applied correctly is because they did not explain the ways in which they would make investments
or savings for the venture.
Rules of thumb require one to at least put away some earnings in long-term investment
for the future success of the business (Trugman, 2012). Secondly, rules of thumb in any
professional practice require to follow strict financial guidelines so that the practice can remain
afloat. BUS200 – Valuing a Professional Practice Paper. The case was not the same in this case and there were no financial principles that were
stipulated (Reilly, 2015). As a result, a lot of mistakes were made and they could eventually
could damage to the operations of the firm.
3. Discuss the primary reasons why professional practices are valued.
One of the reasons why professional practices are valued is because they take different
forms that serve the public in different ways. Dentistry, accounts, marketing, law, medicine and
engineering are all different forms of professions that operate in various ways. Hence, their
valuation methods are also different and they strive to show the importance of each practice.
Secondly, the valuation of professional practices is important when it comes to transfer of ownership where one of the stakeholders wish to buy in or out of it (Trugman, 2012). What’s
more, valuation is also crucial when it comes to solving of business or legal disputes where
disagreements or even divorce become major concerns.
At the same time, a profession can also be valued for the purposes of taxation or planning
of real estates. This is when the individuals wish to know how much a practice is making and
whether it would be profitable to invest in real estate or other forms of estate planning (Merman
and Meyer, 2015). Professional practices are also valued for the purposes of reorganization
especially in times when there is a high likelihood of bankruptcy or liquidation. There is also the
issue of expansion when it comes to financing or the acquisition of other practices that may form
a reason for a profession to be valued.
4. Discuss the importance of "reasonable compensation" in professional practice and what
factors should be considered in the valuation.
Reasonable compensation refers to the amount of money that would ordinarily be paid
for a service that is rendered or for a commodity that is purchased. This amount is also consistent
with the duties or work that would be paid to an employee if they were carrying out a given
assignment. Reasonable compensation is important in professional practice in a scenario where
an employee who is senior in the company is found to be either underpaid or even overpaid
(Trugman, 2012). Additionally, this form of compensation is important when the person in
question is a major shareholder in the business, if there is a family relationship among some
company employees or members or even when the good will of the practice is of major concern.
In such a case, the factors that should be considered in the valuation process should be
the reasons that led to the current scenario (Hall, 2004). This means that the valuation method should consider if the person was underpaid or overpaid and then go ahead to calculate
accordingly how much should be given as reasonable compensation.
5. Discuss some of the unique aspects of valuation calculations for the professional
practice. BUS200 – Valuing a Professional Practice Paper.
One of the things that should be considered as a unique aspect in professional practice
valuation is the marginal cost that comes after adding up all the working hours. These costs
should also be calculated after considering the labor, time, supplies and additional transactions
carried out within a given fiscal year (Trugman, 2012). Additionally, valuation in any profession
should consider the net income, recurring expenses as well as the excess expenditure that can
affect the total amount of the professional total earnings.
ii) Professional Development Question
a) Compare and contrast Cash versus Accrual accounting for professional practice
valuations.
The cash method of professional valuation is mainly used in small businesses or in
occasions where personal finances are involved because the amount of money that is received is
not as large as compared to other sizes of businesses (Trugman, 2012). BUS200 – Valuing a Professional Practice Paper.At the same time, the cash method is used to account for revenue when money is pumped into the business or when
expenses are incurred after money is paid out. On the other hand, accrual accounting values a
professional practice when the transactions are happening in the exact moment in time.
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Hence, the cash method differs from the accrual valuation method in terms of when the
purchases and sales are either debited or credited into the business account (Hall, 2004). Some
professions prefer the cash method because it keeps track of how the money flows as opposed to
the accrual method that is suitable for businesses that do not receive cash for every transaction.The choice of the cash method over the accrual accounting technique depends on the profession
in question and how much is earned through its practice. BUS200 – Valuing a Professional Practice Paper.
References
Hall, S. C. (2004). Applying Income-Approach Business Valuation Methods to Professional
Practices. Journal Of Financial Service Professionals, 58(3), 91-99.
Merman, E., & Meyer, T. (2015). How To Value A Professional Practice. Fairfield County
Business Journal, 51(34), 6. BUS200 – Valuing a Professional Practice Paper.
Mooya, M. M. (2015). The education and professional practice of valuers in South Africa: a
critical review. Property Management,33(3), 245-274. doi:10.1108/PM-04-2014-0021
Morris, M. A. (2007). A Simple Method for Valuing the Small Local Business or Professional
Practice in a Divorce. American Journal Of Family Law, 20(4), 223-225.
Reilly, R. F. (2015). Goodwill Valuation Approaches, Methods, And Procedures. American
Journal Of Family Law, 29(2), 89-104.
Szczepankiewicz, E. I. (2013). Global unification of Business Valuation Standards. Management
(1429-9321), 17(2), 154-165. Doi:10.2478/Manment-2013-0062
Trugman, G. R. (2012). Understanding business valuation: A practical guide to valuing small to
medium-sized businesses. New York: American Institute of Certified Public Accountants.BUS200 – Valuing a Professional Practice Paper.