Business formation greatly impacts the ability for a firm to raise capital. In sole proprietorship and partnerships – capital is raised strictly through the owners’ personal investments. If additional capital is needed, typically the private firms will rely on bank line of credit and loans. Public corporations have the easiest time on raising capital because they are able to sell company stock to the public.
I agree with your post, Sandra. The type of business formation impacts the ability of the company to gain capital. I think of profit and non-profit institutions and how they differ and the different types of partnerships like you have mentioned that exist.
I think that the business form used by their manager impact the firm’s ability to raise capital. We knew that they are using some common ways to try to raise capital such as credit or loan from the bank.
Some of the general categories of financing available for businesses are debt and equity. We should pay the loan because it is company’s debt, the other one is the equity which includes increasing capital by sell something of the business to investors. First of all companies owner or upper management level should analyze the companies for business needs If the companies without a report about the needs, their owner can have difficulty raising capital.
sole proprietor and partnership examples
I entered into an Outback Restaurant the other day, the sign next t the door read “sole proprietor.” One name was listed above the words, which was to let all that entered in know this person was in charge. He calls the shots.
Partnerships deal with 2 or more folks. Some fellows down the street from me are equal partners in a car wash business. They equally share the proceeds.
I worked for the Boys & Girls Clubs of America, this is a corporation. We were able to raise money for operations. We had to adhere to strict guidelines imposed by the government.
I never knew that Outback restaurant was “sole proprietorship” but there must be a lot of the owner to consider when deciding that he wanted to own the restaurant. For anyone wanted to start a business or sole proprietorship, you want to way out the advantages and disadvantages. The advantage to start off can be easiest and most inexpensive ownership to put together; all income made is for keep or reinvested; profits also go on the owner’s personal tax return. Disadvantages are owner’s are reponsible for all liabilities and debts and may not be able to raise funds and needs to use personal savings or pull out loans.
It’s more likely that the owner of that particular restaurant is a sole proprietor. As with McDonald’s, owners of any particular restaurant my be sole proprietors. They just happen to have a franchise agreement with the McDonald’s Corporation. Outback is probably similar.
outback is similar, but it has a some partnerships as well. This is the nature of business, people do what they need to do to make the venture mutually beneficial in a business.
sole proprietor and partnership examples
Sole proprietorship is the easiest way to start new companies. It is cheap and also not too much complicated. This is the good example, I found it. Shirley flower shop. “Shirley is the sole proprietor of a flower shop. One day Roger, one of Shirley’s employees, is delivering flowers using a truck owned by the business. Roger hits and seriously injures a pedestrian. The injured pedestrian sues Roger, claiming that he drove carelessly and caused the accident. The lawsuit names Shirley as a codefendant. After a trial, the jury returns a verdict against Roger — and Shirley as owner of the business. Shirley is personally liable to the injured pedestrian. This means the pedestrian can go after all of Shirley’s assets, business and personal.” According to my friends outback is the another good example also
what should be management’s primary objective?
Managements primary objective is to control costs to maximize the profit or growth of the company. For this to be attained management needs to have their hand in multiple aspects of a company, organization, or corporation. Multiple aspects include, growth models, forecasting future needs, lean processes, developing employees, and the task of hiring and firing employees based on the growth or direction of a company.
It is indisputable that financial manager try to decrease the companies risky situation.Their first goal can be control cost, the second step should be growth of the company as Matthew said. And also generally, it is really important to communication to public and business world. Manager is responsible for providing financial advice, support to clients and colleagues to enable them to make sound business decisions. Specific work environments vary considerably and include both public and private sector organisations, such as multinational corporations, retailers, financial institutions…
Management’s primary objective should be to pursue policies that enhance shareholder value. By value, we are speaking of the intrinsic value of the stock. This intrinsic price is the observed price in the market which reflects all relevant information to investors. Thus, the corporations number one objective is to maximize the fundamental price of the stock for the benefit of investors and, society.
I just wanted to add that part of management’s objective should also be social responsibility. What I mean is, not only doing right socially (in terms of conservation, pollution, etc.) but doing right by the public ethically. One of the best managers I ever had (while very numbers driven) always said that we want to win, but we want to do it nobly.
Sometimes what might be best from a social standpoint might not be in the best interests of the shareholders. For example, society might benefit if the company keeps an employee that is no longer needed. But the company’s profits will be lower. Shareholders may prefer that un-needed employees be let go.
This a dilemma for a company who needs to downsize or restructure. In trying to be socially responsible, the company retains an an employee instead of letting them go. Although that benefits society by decreasing the number of unemployed, it hurts the company’s after-tax profits due to higher labor costs.
According to the textbook (p. 9), the primary goal of managers is to maximize stakeholders’ wealth. Managers are responsible for monitoring and controlling resources available to engage in the growth of the business and stakeholders. Management has many functions such as setting the tone on how employees need to behave in the working environment. For example, if a business want to avoid unethical behavior, the top management should advocate and follow a code of conduct even though in reality I do not think that it will eliminate the unethical behavior from occur such as sexual harassment, fraud, etc.
Managment’s primary objective should be “stockholder wealth maximization”-which really means to maximize the price of the company’s common stock. (Text, Page 9) So how is this done? Well, for starters, the first goal is to a provide a product/service that is sellable, reliable, profitable. If the consumer is happy, the stockholder will be happy
Management’s primary objective is stockholder wealth maximization. (Text pg. 9) The text also states that maximizing intrinsic stock value is the most important objective for most corporations.
What is the difference between a pure commercial bank and a pure investment bank?
I thought that this excerpt from this website was able to define the differences between pure commercial banking and pure investment banking.
A commercial bank on the other hand is in business to do two main things: hold deposits and make loans. The commercial bank creates money by lending out deposits to individuals seeking a loan for some designated purpose (for example, a car loan or a loan to start a small business). The commercial bank also keeps deposits on hand for individuals wishing to use the money to make payments (like a checking account). The commercial bank makes profit by lending out to individuals and other entities and collecting payments from these borrowers for principal and interest. The vast majority of the loans made by commercial banks are held on the bank’s balance sheet as an asset of the bank.
Pure investment banks raise funds for businesses and some governments by registering and issuing debt or equity and selling it on a market. Traditionally, investment banks only participated in underwriting and selling securities in large block. Also, Investment banks facilitate mergers and acquisitions through share sales and provide research and financial consulting to companies. Traditionally, investment banks did not deal with the general public Investment banks are simply intermediaries. They do not accept deposits. Instead, they sell investment. Also, any loans (or other debt or equity issues originated by an investment bank) are typically not held by the company, but instead sold to a third party
The biggest difference between commercial banks and investment banks is that investment banks do not accept deposits and make loans to individuals as commercial banks do. Hence, the primary function of an investment bank is to raise capital for companies by selling securities and managing corporate mergers and acquisitions. Whereas commercial banks offer its customers checking and savings accounts and provide consumer loans to customers with good credit standings.
what are financial intermediaries? What functions do they perform?
Financial intermediaries’ bears risk on behalf of investors by investigating their savings across various sectors of business. According to Jagish Hiray, Business management finance analyst, they transform risk-by-risk spreading and risk pooling; they can spread risk across a range of institution. In turn institutions can pool risk by spreading investment across firms and various projects. Diversification allows a financial intermediary to allocate assets and bear risk more efficiently. Financial intermediaries do risk screening, risk monitoring and risk evaluation; it is more efficient for institution to screen investment opportunity on behalf of individuals than for all individuals to screen the risk. It helps individual saver to save time and money and offers low risk investment opportunity. One of the common example of this function is; a dollar deposited in a checking or savings account, it is not redeemed at less than a dollar but in turn one get paid interest on it over period of time. Therefore without financial intermediaries it would really have been difficult for individual investor to screen prospect borrower or investment opportunity, which would have discouraged individual savers from lending money and would have affected economical developments.
Financial intermediaries are financial institutions that take money from depositors and then lend that money to borrowers. In exchange for the money deposited by savers, intermediaries issue securities to savers.
They use the money invested to buy securities to sell to individuals. For example, a saver lends money and is issued a certificate of deposit. That money is then loaned out to a small business in exchange for a note payable
Commercial banks raise funds from depositors and by issuing stock and bonds to investors. The example that the text book gives is when someone might deposit money in a checking account. In return, that person can write checks, use a debit card and even recieve interest on deposits.
When business is good, investment banks generate high fees and paid big bonuses to their partners.
A commercial bank is in the business of taking checking and savings accounts deposits from its customers. An investment bank acts as a financial intermediary and identifies buyers of stocks and bonds for its consumers (sellers). Recently, we have been seeing the mergers of both these types of banks, for example: JP Morgan and Chase.
An investment bank helps corporations design and price their securities. Then they buy securities from the corporation and resell them to investors.
Investment banks are typically part of a larger company. In addition to underwriting securities, they also provide consulting and brokerage services to clients.
Commercial banks are the typical banks most individuals use for their checking and savings accounts. These banks use the money from depositors’ accounts to pay interest and dividends payments.
Due to the use of the deposits, the government created the Federal Deposit Insurance Corporation to protect depositor’s accounts. Each deposit account is insured up to $250,000.
Capital Formation tells us the net capital accumulation during an accounting period. It is the combination of stock, equipment, building, and intermediate goods. The business life cycle is something that is constantly changing. When the business changes, it affects the accounting as well.
You are definitely right it provide us information about companies accounting department also. If we want to start a business the most obvious way to get money is to borrow from our relatives or from a financial institution. But we have also other way that raising capital is for the company to use our own funds. As the company grows and expands, its need for additional capital increases. Some of that could be provided out of past earnings, if there were any, which was retained in the company.
As a result we have couple of ways to raise our company’s capital formation as I stated before.
Capital formation begins with the formation of a the business. There are three main forms of business: 1) sole proprietorship, 2) partnerships, and 3) corporation. Proprietorship are easy to form and usually involves one person. Sole proprietors often raise their own capital using their own personal resources,such as savings or credit card-to start their business. It is often difficult for proprietors to obtain capital needed for growth from lending institutions. Partnerships are formed by two or more people or entities, and can be either informal (oral) or written agreements. Formal partnerships may be either unlimited liability or limited liability partnerships. Limited liability partnerships are more common and capital is raised by the partners initial investment into the partnership. Therefore, losses and business debts are limited to the partner’s actual investment. Corporations are a third form of business. Of the three business forms, it is the only entity that is separate and distinct from its owners and managers. The business life cycle of a corporation is first, to prepare a charter detailing all of the pertinent information about the corporation. Next, the founders must write a set of bylaws that establish the rules and governing of the corporation. The corporation can raise capital by selling stock (IPO) or borrowing from banks. This is a significant advantage of forming a business as a corporation versus a sole proprietor.
As mentioned before, the business formed by the owner plays a significant role in the firm’s ability to raise capital. Sole proprietors must use their own resources to raise capital. Partnerships raise capital through business profits and the investments of additional partners. Corporations, on the other hand, can easily raise capital through bank loans (debt securities) and selling stock.
Your post is very thorough and easy to follow. I believe you covered all the points and answered both questions in a way that it would not be hard for most people to understand. I agree with your answers to this question.
The life cycle is how a business grows and how it becomes more or evolves to the next level. The manager has the ability to help move the company forward or make it fall behind based on their investments and business decisons.
Capital formation is a concept used in macroeconomics, national accounts and financial economics. Occasionally it is also used in corporate accounts.
Business Life Cycle: Seed, Startup, growth, established, expansion,mature, expansion.
Capital formation is important because it promotes the economic growth of both the business and the individual economic sectors. By promoting the transfer of money from the individual to the business sector and promoting investing in the business sector, each sector succeeds together. Basically, both are working with each toward the same goal of economic success, and this leads to a heightened standard of living in the society.
The business form used by the manager/owner would impact firm’s ability to raise capital depending on the advantages and limitations the company has according to which form of business type used by the firm, being a partnership, corporation, or sole proprietorship. Sole proprietorship may be easily started but the capital needed for growth may be difficult to obtain and losses could exceed the investments the company has made. Partnerships are similar to sole proprietorship in this manner but the losses are evenly divided up between each partner. Corporations losses are only limited to what is invested.
Now that I feel that my week has slowed down and I have been able to dig into the text more I can hopefully talk more on the subject. In a life cycle people will accumulate more stuff i.e. equipment, vehicles, tools, property etc… that is why it is hard sometimes especially in tokays market to determine capital asset because of what the net worth may or not be. I know I acquired several things with my years of being self employed and I do remember each year having to do an inventory on everything and for several reasons, insurance, taxes are the two biggest reasons that I can think of right now.
what are some factors that affect the cost of money?
The cost of money can be significantly affected by Governmental policies. The FED (U.S.), European Central Bank (ECB) in Europe, and China all have monetary policies and rules that affect the exchange rates and alters the risk levels that investors are willing to take on for their projects.
Current events details the struggle for Congress to raise the debt limit in order to continue borrowing and paying interest on outstanding loans. The results are mixed; however, not paying your interest on outstanding loans can have significant effects on credit ratings, peoples lives, and future development.
The followings below are factors affect the cost of money:
1. Production opportunities: the returns available within an economy from investment in productive (cash generating) assets.
2. Time preference for consumption : the preferences of consumers for current consumption as opposed to saving for future consumption
3. Risk: in a financial market context, the chance that a financial asset will not earn the return promised.
4. Inflation: the tendency of prices to increase over time.
Economic indicators are reports released by the government or a private organization that detail a country’s economic performance. Economic reports are the means by which a country’s economic health is directly measured, but do remember that a great deal of factors and policies will affect a nation’s economic performance.
Instead of talking about all four factors I will focus on one, retail sales. You always hear how about specials and holidays sales things to stimulate this factor. I know as a parent black Friday and school specials. Their is an acculate report that comes out and a measurement is derived from a diverse sample of retail stores throughout a nation. The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables.