Chapter 10 section 1

1. Chapter 10 section 1 • Reading Objectives • 1. How does a business decide whether to expand or not? • 2. Why are people willing to finance business investment? • 3. How does competition for financing determine how resources are allocated in a market economy?

2. Terms to Know • Financing • Cost-benefit analysis • Revenues • Profits

3. Vocabulary • Financing: obtaining funds or money capital for business expansion

4. Turning Savings into investments 1. Financing business operations and growth is an integral part of our free enterprise system.

5. 2. It all begins with people who save by depositing their funds in one of several types of financial institutions, which learned in chapter 6.

6. 3. The financial institutions in turn, make these deposits available to businesses to finance growth and expansion

7. Before You Pursue Financing When trying to expand a business and you are short funds some of the ways that you can get the money are……

8. 1. dig into personal savings

9. 2. ask friends and family to loan funds to the company.

10. 3. borrow from a financial institution

11. 4. sell more shares of stock

12. Vocabulary • Cost-benefit analysis: a financial process in which a business estimates the cost of any action and compares it with the benefits of that action

13. Profits: the money earned after a business subtracts its cost from its revenues

14. Revenues: total income from sales of output

15. 5 steps of cost-benefit analysis • 1. estimate the costs of expansion • 2. calculate expected revenues, or total income sales • 3. Calculate expected profits, or revenues minus costs • 4. Calculate how much it will cost you to borrow funds to finance your proposed business expansion • 5. If expected profits more than cover the cost of financing the expansion, then the expansion may be warranted.

16. Example of Cost-benefit Analysis • Borrowing a million dollars from a bank knowing that the bank is going to require you to pay back a 100,000 a year until the loan is paid. • If you make $200,000 a year in profits is it worth getting the loan to expand? • If you make $50,000 a year in profits is it worth getting the loan to expand?

17. Why People Are Willing to Finance Investment? • Businesses are interested in obtaining financing so that they can expand and make higher profits in the future. • The people who finance such business investments-whether intentionally or unintentionally-are also seeking rewards.

18. Example of unintentionally and intentionally financing businesses • Unintentionally Finance • Savers unintentionally finance business growth when they deposit funds in a savings account or certificate of deposit (CD). Their reward is the interest earned on the savings account or CD. • Intentionally Finance • For those who intentionally finance investment, the reward is the interest on a corporate bond that they purchase, or dividends from the stock that they buy in an expanding economy

20. Chapter 10 Section 2 Types of Financing for business operations • Reading objectives • 1. What are three general kinds of debt financing? • 2. What four factors should companies consider in choosing the right financing?

21. How do businesses borrow money? • 1. must show creditworthiness by undergoing a credit check. • 2. A credit rating of good, average, or poor is then assigned to the business. • 3. Much like a person who borrows money as business must repay any loan plus interest on any money borrowed.

22. Vocabulary • Debt financing: raising money for a business through borrowing • Short-term financing: money borrowed by a business for any period of time less than a year.

23. What are the three kinds of Financing? • 1. short-term • 2. intermediate-term • 3. long-term financing

24. Short-Term Financing • A business may seek short-term financing for many reasons. • 1. A company may have excellent business during the month but not be paid until the beginning of the following month. • 2. During a growing season, a farmer may have to borrow to buy seed, repair equipment, and pay workers.

25. Four examples of Short-term financing • Trade credit: is extended by one firm to another business buying the firms goods. • Unsecured Loans: Most Short-term bank credit for businesses is in the form of unsecured bank loans. These are loans not guaranteed by anything other than the promise to repay them • Secured Loans: are backed by collateral-something of value that borrowers will lose if they do not repay a loan • Line of credit: A line of credit is a maximum amount of money a company can borrow from a bank during a period of time, usually one year.

26. Vocab • Intermediate-term financing: money borrowed by a business for 1 to 10 years

27. Intermediate-Term financing • When a company wants to expand its business by buying more land, buildings, or equipment , short-term financing generally is not adequate. • Example: expanding your electronics repair business by opening another shop, you would not apply for a 90-day loan.

28. Two types of intermediate-term financing • (1.) loans • (2.) leasing

29. Vocab • Long-term financing: money borrowed by a business for a period of more than 10 years

30. Long-term financing • Long-term financing is used for major expansion, such as building a new plant or buying expensive, long lasting machines to replace outdated ones.

31. 3 Examples of Long-Term Financing • 1. Bonds • 2. Common Stocks • 3. Preferred Stocks

32. The four factors that determine whether to take out a loan, sell bonds or issue stock are…. • 1. Interest costs • 2. Financial Condition of the Company • 3. Market Climate • 4. Control of the company

33. Interest Rates • When interest rates in general are high, a business may be reluctant to take out a loan. • A company may delay its expansion until it can borrow at better interest rates. • Interest rates also effect the decision to issue bonds. When rates are high, corporations must offer high rates of interest on their bonds to attract investors.

34. Financial Condition of the Company • A company or corporation whose sales and profits are stable are expect to increase can safely take on more debt – if its managers use cost-benefit analysis

35. Market Climate • Financial managers need to be aware of the market climate when determining whether to sell bonds or issue stock to raise financing. • If economic growth in the overall market appears to be slow, investors may prefer the fixed rate of return of bonds or preferred stock to the unknown return on common stock.

36. Control of the Company • When debating issues of financing, financial managers may have to gain approval from the owners of common stocks before taking action. • Preferred stock they don’t give the stock holders the voting rights in a companies election • Bonds do not have voting rights attached to them.

37. Chapter 10 Section 3 The Production Process • Terms to Know • Production • Consumer goods • Mechanization • Assembly line • Division of labor • Automation • Robotics

38. Reading objectives • 1. What are the four major steps in production operations? • 2. How has technology changed production methods since the early 1800’s

39. Vocab • Production: process of changing resources into goods that satisfy the needs and wants of individuals and business

40. What does production involve? • Careful planning in getting raw materials from suppliers on time.

41. Steps in Production Operations • Besides the actual manufacturing of a good , the production process for both types of goods involves several other operations. • 1. planning • 2. Purchasing • 3. Quality Control • 4. Inventory Control

42. What is involved in planning? • Planning includes choosing a location for the business and scheduling production.

43. What are two factors that determine how successful a business will be? • Where is the business is located and how the business will get its products to consumers.

44. What does a business need to have access to? • Highways, railroads, airlines, and pipelines

45. Purchasing • In order to do business a company needs the raw materials to produce its goods or offer its services.

46. In order for a company to do business what do they need? • 1. machinery • 2. office supplies • 3. telephones/ internet/ website • 4. The people who purchase goods for a business

47. To get the best deal for the company, purchasers must find answers to such questions as… • 1. Is this the best price? • 2. Are these goods made well? Will they last? • 3. Does this supplier offer such services as equipment repair? • 4. Who pays shipping and insurance costs, and how will goods be shipped? • 5. How much time is there between ordering goods and receiving them?

48. Quality Control • Quality control involves overseeing the grade or freshness of goods, their strength or workability , their construction or design, safety , adherence to federal or industry standards.

49. Inventory Control • Almost all manufacturers and many service businesses, such as dry cleaners, need inventories of the materials they use in making their products or offering their services.

50. Technology and Production • Mechanization: combined labor of people and machines • Assembly line: production system in which the good being produced moves on a conveyor belt past workers who perform individual tasks in assembling it. • Division of labor: breaking down a job into small tasks performed by different workers • Automation: production processes in which machines do the work and people oversee them • Robotics: sophisticated computer-controlled machinery that operates an assembly line