Financing a Business

When starting a business, an entrepreneur must combine: o 1. Human Resources— Employees and Managers o 2. Natural Resources—Products “from the earth.” o 3. Capital Resources— Buildings, tools, and machines.

Investment is the purchase of capital resources used to produce goods and services. It may consist of shares in a corporation, real estate, or plant and equipment. Every dollar invested is a dollar less of savings.

The money we save by giving up current consumption flows to the business community for investment dollars. This money flows to financial markets, where savers exchange funds with borrowers and others who are willing to pay for the use of the money.

Business often finance investment in new capital resources with long-term loans. These long term loans are called bonds. Governments also issue bonds to pay for huge expenses.

Corporations usually issue long-term bonds to pay for new technology, expand operations, or finance corporate mergers or takeovers. Sometimes, businesses will receive three different types of short-term relief for problems.

Trade Credit Loans from Financial Institutions Loans from Other Companies

In your notebook, please list the business financing options listed on page 79-80

Business can obtain financing by offering equity (ownership) to individuals or groups.. Sole Proprietors can “sell” part of their business in the form of a partnership.

New or existing companies can have an IPO (Initial Public Offering) where they sell equity in the form of stocks to individual shareholders.

Common Stock—Issued by all corporations. A claim to a share of the profits of a company after all expenses an taxes are paid. Common stockholders can vote for the board of directors of a company or vote directly on many issues.

Represent ownership. Owners do not have voting privileges. Sometimes receive dividend payments when common stockholders do not.

Two parts of the stock market o Organized Exchanges o Over-the-Counter Trading

The New York Stock Exchange (NYSE) is the largest in the world o Over 3,000 large and medium sized companies trade on the floor of the NYSE. American Stock Exchange-Over 700 common stocks—smaller companies with growth potential.

Not traded in a physical building. Best example—National Association of Securities Dealers Automated Quotation (NASDAQ)

Turn to p. 83 and copy the Diagram 8-4 into your notebook.

The SEC is an agency of the federal government that is responsible from protecting investors in the sale of stocks and bonds (securities). Its main objective is to prevent fraud, deceit, insider trading, and misrepresentation. The SEC requires all corporations to file a prospectus, or financial analysis.

The fundamental equations to perform a business balance sheet are: o Assets- liabilities = net worth o Assets= liabilities - net worth

What a company owns Machinery, buildings, plant, and other capital resources

What a company owes. Long and short term debt, loans, and expenses.

Measures the value of a business. Can be a positive or negative number.