Chapter 4 The Private Sector C H A P T E R 4

How Does the Private Sector Operate? The customer difference: Businesses rely on the value transaction with customers. Money is exchanged to meet customer needs. Businesses generally don’t take care of indigents; that’s what governments and nonprofits do.

Greed as a Motivator Greed motivates entrepreneurs to serve customers. Greed motivates entrepreneurs to be more efficient. Greed motivates entrepreneurs to be more effective.

Size of the Private Sector An estimated 89 million companies worldwide An estimated 29 million companies in the United States Employs 100 million people in the United States alone

New Business Ventures Most business ventures begin with a belief that there is a need for their products or services. Market research can reduce the probability of failure. Most entrepreneurs start their businesses because the product or service is what they want to provide.

How Business Ideas Originate 73 percent from the entrepreneur’s previous experiences with different businesses 33 percent from business associates 26 percent from experiences with similar businesses 19 percent from friends and relatives

Figure 4.2

Market Research Options Offer the product or service in a test market. Perform feasibility analysis from surveys, focus groups, and customer interviews. Create pro forma calculations that estimate the needed revenues to cover expenses.

Making a Profit Starts with a budget that shows a profit is possible At the end of the year, the income statement shows that revenues have exceeded expenses. Occurs when equity on the balance sheet grows

Equity In a startup company, equity is provided by venture capitalists. In an existing company, equity is the difference between assets and liabilities. It can be expanded when new stock in the company is sold to new investors.

Debt In a startup company, debt is typically loans from banks. In existing companies, debt can be long- term and short-term bonds. It can be expanded when companies desire to leverage their assets to increase sales.

Equity Versus Debt Debt needs to be repaid. Equity does not need to be repaid. Debtors are paid a defined percentage of interest. Equity holders are paid when the company makes a profit. Both can be used to acquire capital assets.

Venture Capitalists People who are willing to take a risk on a new company or a company that wants to go public Can be the original owners of the company or people who just want to own stock in a company Are often people who just want to make a quick profit if the value of the stock goes up

Stockholders People who own a share of the company Have voting rights in making management decisions Sometimes expect a return on their investment Expect the value of their stock to increase over time

Boards of Directors Elected by stockholders Typically stockholders themselves who own a large number of shares Sometimes are people who are put on the board for symbolic purposes Can be people who serve on multiple boards of directors

The Politics of Business People are elected to boards by stockholders and other board members. There are power struggles on the board for control of management decisions. There are power struggles on the board to determine who will be managers.

Summary The reason companies exist is to make a profit; therefore, greed is a motivator. Capital to start companies comes from debt and equity; debt owners get repaid with interest and equity owners decide how the companies are run. Wherever there are people, there are politics. Business is no different.