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COMM 103
Gregory Libitz

Chapter 13 9/14/2013 9:34:00 AM Chapter 13 Business Ownership Options Proprietorships: have a single owner called the proprietor. They tend to be small businesses or individual professional organizations (lawyers, accountants etc). Legally, the proprietor is personally liable for all the business debts. Partnerships: joins two or more persons. Income and loss of partnership “flows through” to the partners and they recognize it based on their agreed upon xhtakes a proportionate or corporate rate (>?????). The partnership is treated distinctly from personal affairs. Normally each partner is personally liable for a;ll the partnership’s debts. Limited Liability Partnerships (LLP) can limit claims against the partners to the partnership assets. Many partnerships include Buy Sell Agreements: which are a written agreement amount the partners tht detail the sale by one partner and the purchase by another of the business interest of the selling partner. Corporation: is an incorporated business owned by shareholders. A corporation is like an artificial person and possess many of the rights that a person has. Shareholders are not responsible for the company’s debt (they have limited liability). Unlike the other two types of organizations, a corporation pays income taxes (in the other cases, income tax is paid personally by the proprietor or partners). Incorporation: is the legal process of setting up a corporation Board of Directors: is an appointed or elected body of a for-profit or not-for- profit corporation that oversees and advises management on issues challenging the organization on behalf of its stakeholders and shareholders. Private Corporations: are corporations whose ownership is private. The shares of stock of the corporation are not publically traded Public Corporations: are corporations whose shares of stock are traded on at least one stock exchange or are publically available in the over the counter market Exchange: is an organization hat facilitates the trading of securities, stocks, commodities, and other financial instruments. Exchanges provide a platform for selling these financial instruments to the public at large. Over-the-Counter (OTC): refers to stocks being publically traded through a dealer network versus an exchange Funding the Organization Capital Structure: refers to an organizations’s mixture of debt, internal cash reserves, and external equity-based investments in financial support of operational acivites. Sources of Funds (view chart pg 362) Funds derived from operations The two internal sources of funds are: Operating Profits (or Operating Surplus in the case of Non Profits): equal total revenue minus total operating expenses. Represents the excess dollars that organizations have generated, and have at their disposal, during the current operating period as a result of their business activites after their current expense obligations have been paid. This profit (unless paid out to investors/shareholders) becomes an immediate source of new capital for an organization, which can be used to support future growth, R&D exploration, or acquisition or replacement of equipment. Retained Earnings: refers to the dollar amount of net earnings accumulated over the history of an organization that it has chosen to hold within the organization Funds obtained via credit facilities (debt) Credit Facilities: refers to debt that an organization has taken on in support of its business activites. There are two categories: Short Term Credit Facilites: refers to debt obligations that an organization takes on for a short period of time, generally less than one year. Accounts Payable: refers to money wed by an organization to its suppliers and other short term service providers. Accounts Recievable: refers to money owed by customers of the organization for products or services that the organization has delivered to such customers, but has not yet received payment for. Line of credit: refers to an arrangement with a lending institution that provides an organization with a pre arranged borrowing celining tat the organization can draw on at any time, and in any amount up to the agreed upon limit Collateral: refers to capital assets or monetary assets used to secure a credit facility. The collateral would be used to pay off the lender in the event that the organization cannot meet the credit facility repayment obligations Long Term Credit Facilities: represent debt that an organization obligates itself to repay over a time fame that exceeds one year Cost of borrowing: refers to the total sum of money over and above the principal borrowed paid by an organization as a result of incurring and repaying a debt obligation. This would include interest paid as well as costs incurred in setting up the credit facility. Bond: refers to a credit facility with which an organization borrows money for a stipulated period of time. In return for the use of these funds, the organization promises to pay the holder of the bond an agreed upon amount of interest at regular intervals (generally, semi annually) during the period if tune for which the funds are borrowed. (ELABORATE ON BONDS) Rating Agencies: refers to organizations that offer an objective and independent creditworthiness assessment of an organization’s solvency, liquidity, and overall long term organizational health Mortage: refers to a credit facility that is backed by real estate collateral (generally, the real estate the mortgage underwrites), and that sets forth a defined schedule of periodic payments for the full repayment of the debt owed, plus interest, over a defined period of time Principal: refers to the amount borrowed or the amount remaining on a loan separate from the cost of borrowing, as represented by the interest expense charges applicable to the credit facility (loan). Amortization Period: refers to the length of time over which a credit facility (loan) will be paid off. Long Term Note: refers to a credit facility under which an organization borrows a stipulated amount of money for a fefined period of time (which exceeds one year) and with a defined interest rate schedule (fixed or variable) Prime Lending Rate: refers to the base lending rate used by banks. It is also often interpreted to be the rate at which banks lend money to their most preferred customers. Lease Obligations: that cover periods in excess of one year are considered long term debt obligation of an organization. They represent a legal obligation to pay a service provider with an agreed upon amount of money, via a defined periodic payment schedule over an identified period in return for the use of property, equipment, or some other service. At the end of this period, provisions may, or may not, be included in the lease to provide the organization with an opportunity to purchase the asset that has been leased. Impact of Credit Facilities: the ability to utilize credit facilities to assit with financing the cash operating cycle, and with enabling organizations to develop and grow their capital asset base, is a major reason for the creation of the incredible global business marketplace that we have today. This ability to secure access to significant amounts of capital, at reasonable costa of borrowing is what enables companies to utilize the capital assets acquired to generated revenues and investment returns that exceed the cost of borrowing. Debt Leverage: refers to the use of debt to finance an organization’s capital asset base Funds obtained via equity financing The two sources of equity funding options are: Private Equity: refers to equity capital that is obtained by an organization from private sources (not through one of the public exchanges) Stock: is a security that represents a percentage of ownership in a corporation’s assets, and entitlement to a pro-rata claim on earnings when released Public Equity: refers to equity investments in an organization, by investors, as a result of the purchase of publically traded shares (stock) due to an initial public offering or an additional public offering (APO), also referred to as a secondary offering Secondary Offering: refers to an additional public offering of an organization’s stock for the purpose of raising new capital Price Dilution: means that the price of existing shares of stock will decline due to the fact that a larger number of shares (which represent ownership in the company) now exist Market Capitilization Value: refers to the current market value of an organization. It is calculated by taking the number of shares outstanding multiplied by the current value of its shares Prospectus: refers to a legal document to be filed with the securities commission that has jurisdiction for the share issuance; it provides information relating to the current financial stability of the company and the intent of the share issuance, thereby enabling investors to make an informed decision on the risk associated with the purchase of the shares being offered Putting it All Together Managers typically use a mixture of the three funding sources in order to meet the needs of our cash operating cycle and capital asset development requirements Decisions relating to funds generated from internal operations will focus on how much of the current profit being generated should be used today and how much should be reserved for the future (transferred to retained earnings) It will be influenced by the need or desire to return a portion of the profits to owners as a reward for their investment in our organization A Note Pertaining to Not-for-Profits One of the key differences from For Profit organizations lies in their capital structure For Profit have 3 main sources of Capital Funding (cash available from internal operations, the use of debt dinancing via a variety of credit facility options, and equity investments that are acquired in exchange for an ownership stake in the for profit business) Not for Profit organizations can utilize cash available from internal operations, as well as debt financing via credit facility options. This does assume,that NEP delivers its products and services for a fee, and therefore has revenue-generation capabilities. It also assumes that the NEP has established credit and has sufficient capital assets that can serve as collateral on a loan. Both of hese situations may NOT exist… Many rely on funding and support from various levels of government Philanthropy: refersto the recipt of funds from another person or organization for the purpose of using them to enhance the well being of others NEP Sources ofCapital Operation Debt Financing Philanthropy/Fundraising Events Annual Campaigns Capital Campaigns Management Reflection-The Need for Capital Organizations have ongoing thirst for capital, they have the need to fund new marketing initatives, new products and services, new technologies, new equipment, new business locations, and the acquisition of the general capital assets required to make us more efficient and effective appears to be never- ending The ability to acquire capital and affectively allocate it to generate new revenue sources can be used as a definite and sustainable competitive advantage Chapter 3: The Global Marketplace 9/14/2013 9:34:00 AM Our Changing World  The development of new markets in Asia, the middle east, central and south America have caused a resurgence of the demand workldwisde for Canadian natural resources, resulting in significant new growth within these economic sectors  Although today’s growth continues to rely on significant U.S. economic capacity, the next few decades will see a significant shift in this regard as China, India, Brazil, and other economies mature and benefit from the sign ificant foeign direct investment (FDI) currently underway within these counties, and from the overall development of their monetary banking systems, intermodal transportation facilities, and competitive business models and operating platforms The Global Marketplace  Home to some of the largest international focused business organizatinos in many sectors (i.e. Exxon, Shell, Walmart, BP, Total)  Many small and medium sized businesses are also expanding betond local, regional, and national borders to become players in the global market  Whether it is through operational growth, strategic alliances, formal partnerships, mergers, or acquisitions, the global marketplace is becoming home to an increasing number of businesses seeking to operate via an international-based business model Why go Global?  New market opportunities  Cost reduction opportunity  Resource base control  Closeness to markets  Economies of sale Cost Reduction Opportunity  Organizations will locate in, and purchase inputs from, countries where the costs of productive resources enable them to generate a competitive advantage  They are attracted to countries where labour costs are relatively low and occupational skills are realitivley high-this allows the company to lower its price to remain competitive in today’s competitive market  Offshoring: is transferring a component (operations, service, support) of a firm’s business system to another country for the prupose of reducing costs, improving efficiency or effectiveness, or developing a competitive advantage  Outsourcing: is contracting out a portion of, a firm’s business system for the purpose of reducing cots, improving efficiency or effectiveness, acquiring expertise, or developing a competitive advantage  Organizations facing increasingly competitive markets will seek the most efficient and cost-effective product/service delivery systems as a methodology for maintaining cost competitiveness and earning higher margins and profits  Also, by investing in these markets, foreign firms can also diminish concerns relating to protectionism, duties, and other tax levies designed to protect domestic economies Resource Base Control  In some business sectors, organizations look globally in a effort to ensure their business portfolios continually add the required resource base necessary for an adequate future supply to support the products and services they offer in the marketplace (especially energy and commodity based resource industries)  The key fundamental in resource base acquisition strategies lies in seeking to control supply sources or influence the use of such sources, as well as being able to generate lower costs or better value by having more control over resource based factors of production Closeness to Markets  Companies also look to expand their business operations across the globe for the purpose of being “close to markets”. Establishing facilities within developing economic regions enables companies to operate closer to these emerging markets and to react more quickly to market opportunities and trends o becoming a domestic producer in these areas also enables such companies to create a stronger affiliation for their products and services and overall brands, thereby reinforcing the value of their presence to the local market Economies of Scale  To create competitive advantages, organizations seek to develop, manage and leverage global production and distribution networks  Economies of Scale: are reductions in the cost base of an organization as a result of greater size, process standardization, or enhanced operational efficiencies Global Market Stability: The Role of Government  The free flow of debt services and credit facilities, along with an absence of a unified financial regulatory system for the global markets, resulted in a significant domino effect across the global financial services sector, with the end result being severe liquidity and solvency issues within numerous worldwide banking and financial institutions  The G20, G7/8 organizations are seeking to initiate protocols and regulatory policies that will ensure the situation does not reoccur  Liquidity: refers to the cash position of a company and its ability to meet its immediate debt, and operational obligations. It also refers to the ability of the company to convert exisiting assets to cash in order to meet such obligations  Solvency: refers to the long term stability of the company and its ability to meet its ongoing debt and operational obligations, and to fund future growth  The 6 fundamentals that governments need to commit to are: 1. Ongoing commitment to international trade system 2. Market openness 3. Absence of protectionism 4. Adherence to the fundamentals of fair trade 5. Balanced economic development 6. Responsible sovereign debt management Ongoing commitment to international trade system  Refers to the need for countries to commit to the trade policies and agreements overseen by the WTO  The TWO’s main role is to establish the parameters for multilateral trading now and for the future. These topics include guidance relating to the flow of goods and services, the protection of intellectual property, dispute resolution associated with trade quarrels between countries, and trade policy review associated with the policies individual countries are putting into place  The WTO ensures that transparency exists between countries and globally with respect to the manner in which trade is conducted.  Its overriding objective is to ensure that trade flows smoothly, fairly, and predictably. This includes creating rules relating to the use and acceptance of tariffs and above, the WTO also provides a variety of support services to developing countries and emerging economies Market Openness  Refers to the need for developing economies to maintain a focus on the core elements of an open economy: the law of supply an demand, the encouragement of entrepreneurship and wealth creation, and the willingness to encourage and support private ownership  Also relates to the willingness of countries to open their borders to competitive goods and services in order to maximize benefits to their citizens and residences. Absence of Protectionism  Protectionism is the intent of economic policies that are put in place to protect or improve the competitiveness of domestic industries via impending or restricting the openness of a market or markets to foreign competitors through the use of tariffs, trade, restrictions, quotas, artificial control of currency values, or other related activities  Protectionism largely has detrimental effects on the marketplaces in the long run and often results in economic inefficiencies and higher prices for consumers due to the absence of, or significant restrictions levied against, external competitors Adherence to the Fundamentals of Fair Trade  Relates directly to the commitment on the part of governments to support and enforce the intellectual and patent property rights of companies, adhere to generally accepted labour practices, and commit to environmental standards agreed upon by the global marketplace  The expectation associated with fair trade compliance is that governments will seek to eliminate black market activates, which violate the intellectual and property rights of developers an manufacturers or products or services  Black market: is the illegal market that arises within economies where goods are scarce, taxation on such goods is high, or the prices of legitimate goods are beyond the capacity of significant segments of the population to buy Balanced Economic Development  Governments must look to ensure that the total focus of an economy is not export driven, with the intent of simply supplying products or services to other countries. The development of the domestic side of the economy must be pursued in order to minimize reliance on external buying sources.  The development of internal markets for goods and services results in a stronger economic base and expanded standard of living for their citizens and residents  The internal exchange of goods and services drives economic vitality, which creates domestic based wealth, enabling the emergence of buying power and the ongoing demand for additional goods and services Responsible Sovereign Debt Management  Refers to the obligation that government leaders have to manage their economies in a fiscally prudent manner  Sovereign debt: is debt issued or guaranteed by a national government  In many cases, countries will need to develop and carry deficits to effectively manage economic volatility and meet the diverse needs of their citizens  When sovereign debt gets out of hand, the end result can be significant negative pressures on the ability of the economy to grow, loss of control over inflation, political unrest due to the magnitude of taxation, or the reduction in services required to restore fiscal balance Global Market Trends 1. The global marketplace will continue to grow, with emerging economies growing at roughly twice the rate of the fully developed economies of the world 2. Economic specialization will continue to be the trend as the ongoing evolution toward the implementation of global free trade continues 3. The global financial meltdown of 2008, and the related long term consequences of the sovereign debt incurred by many countries in reponse to it, will continue to impact the global marketplace in the near term 4. Energy prices will continue to have a strong influence on the cost base of many businesses 5. The US and China’s political and trade relations will remain critical to global health 6. Demographics, globally, will continue to influence both trade and political decisions. 7. Agricultural subsidy programs will remain a major focal point of global trade discussions 8. Inflation could become a potential drag in the global marketplace in the upcoming years 9. Global warming, carbon cap and trade legislation, the Kyoto Accord, and other macrolevel encironmental issues and policies will become more and more integrated into the decision making process of businesses and governments. 10. The global marketplace will become more and more a political economy. The interdependence between countries and companies will continue to grow. Free trade agreements: facilitate international trade between companies that is not constrained or regulated by governments, and that is not impacted via the use of tariffs, duties or other monetary restrictions The Concept of International Trade What has allowed trade to flourish is a willingness on the part of the marketplace to engage in the concept of specialization Evolution of a Global Presence  Shifting to a global presence for an organization is a strategic decision that requires considerable thought as to where and how to compete. This assessment would include decisions relating to not only the identification of potential foreign buyers, thereby opening up new markets, but also an assessment of the organization’s business system to determine if there are parts of the business system that could be made more efficient and cost competitive if they were initiated elsewhere  (read more pg 77) A Note on Currency Exchange Rates: How Are They Influenced?  In general, the value of a nation’s currency is influenced by 6 predominant factors: 1. GDP movement: the movement (economic expansion or contraction) in the GDP of the country in question 2. Governmental budget deficits/surpluses: The ability of the country’s leaders to develop and adhere to realistic governmental budgets that present to the global communitystable and realistic spending pattersns and maintain sovereign debt exposure at acceptable levels 3. Trade balance: the ability of the country to operate within an acceptable balance or trade range, avoiding huge balance of trade deficits that will necessitate ongoing borrowing to cover such deficits 4. Consumer price movements (PPP): The ability of the country to maintain its rate of inflation within acceptable target ranges, thereby ensuring real growth versus purely inflationary growth within its economy, resulting in improvement in the purchasing power parity (PPP) of the currency 5. Capital mobility and supply: The supply of capital and the ability to establish and utilize credit by a country and its businesses and individuals 6. Movement in domestic income level: The movement (growth or decline) in the domestic level of income its citizens are earning. Increases in the domestic level of income have positice influences on the standard of living of a country’s citizens, resulting in a positive influence on the value of the currency  Strong economic growth, which is balanced domestically and internationally and improves the standard of living of the citizens of a country, and which is developed within a context of prudent government debt and fiscal management policies in an environment of controlled inflation, will result in an upward value of nation’s currency when measured against other countries’ currencies Challenges of Managing in Today’s Global Environment  Competing in today’s global economy requires a combination of efficient and effective production and manufacturing systems, well organized and expertly supported trade facilitation processes and distribution logistics, and a solid network of financial intermediation and support. In other words, its not just about selling products overseas, but it requires organizations and their management teams to view their business system as an integrated trading model.  Shifting the organization’s focus to that of an international player beyond Canada’s boundaries requires a comprehensive review of the financial risks, political risks, legal risks, and reputation risks the organization will face  o   Chapter 6: Developing a Business Strategy 9/14/2013 9:34:00 AM The Concept of a Business Strategy  The development of an organization’s business strategy is fundamentally one of the most important responsibilities of a senior management team, or in the case of small business, the business owner  The long term success of an organization and its ability to evolve and grow, is predicted on two fundamental principles: 1. The ability to define and create a strategic direction and market position for the organization (strategic plan) 2. The ability to execute the core tactical initiatives within the plan in a manner that ensures the organization’s success Strategy Made Simple  Strategies are generally customized for each business, given the market conditions that they face and the desired business goals they aspire to reach  Business strategy is about understanding what opportunities exist in the marketplace and which ones should be pursued Core Elements for Assessing Business Strategy  The development of a business strategy means making decisions and determining direction in 6 key areas: 1. Purpose 2. Markets 3. Products and services 4. Resources 5. Business systems configuration 6. Responsibility and accountability Purpose:  Refers to the
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