Chapter 2 Financial Environment of Business 2 1

Chapter 2 Financial Environment of Business 2. 1 BASIC ECONOMIC SYSTEMS AND PRINCIPLES 2. 2 LEGAL FORMS OF BUSINESS 2. 3 TYPES OF FINANCIAL MARKETS 2. 4 GLOBAL FINANCIAL ACTIVITIES Chapter 1 Slide Business Finance © Thomson/South-Western

Lesson 2. 1 Basic Economic Systems and Principles Goals n Identify and describe basic economic principles. n Discuss how economic decisions are made. Chapter 2 2 Business Finance © Thomson/South-Western

Terms n n n n economics scarcity choice resources demand supply market price market economy Chapter 2 3 Business Finance © Thomson/South-Western

Understanding Economics n state of the economy n factors that drive the economy Chapter 2 4 Business Finance © Thomson/South-Western

DEFINING ECONOMICS n economics n the science of decision making about the allocation of scarce resources n Economists are scientists who study how decisions can be made that result in the best match of needs and resources. Chapter 2 5 Business Finance © Thomson/South-Western

ECONOMIC PRINCIPLES n Scarcity and Choice n scarcity n when wants and needs are greater than can be satisfied with the available products and services n choice n deciding which wants and needs will be satisfied and which will go unsatisfied Chapter 2 6 Business Finance © Thomson/South-Western

n Limited Resources n resources n the means that are available to develop solutions for unsatisfied wants and needs n natural resources n materials in the world around us n renewable n non-renewable Chapter 2 7 Business Finance © Thomson/South-Western

n capital resources n human-made goods used in the production of other products and services n human resources n people and their skills Chapter 2 8 Business Finance © Thomson/South-Western

n Supply and Demand n demand n the amount of a product or service that individuals want to buy to satisfy their needs and wants n supply n the quantity of a product or service that has been produced by businesses with the hope of making a profit from sales to customers Chapter 2 9 Business Finance © Thomson/South-Western

n The price of a product or service provides the balance between supply and demand. n market price n the price at which an equal number of products will be produced and purchased Chapter 2 10 Business Finance © Thomson/South-Western

n Describe three important principles of economics. Chapter 2 11 Business Finance © Thomson/South-Western

Making Economic Decisions n microeconomics n economic decisions related to the choices of individuals and businesses n macroeconomics n economic decisions made at a national level Chapter 2 12 Business Finance © Thomson/South-Western

n When planning economic activity for a country, three important decisions should be considered: n 1. What products and services will be produced? n 2. How will the needed products and services be produced? n 3. For whom will the products and services be produced? Chapter 2 13 Business Finance © Thomson/South-Western

TYPES OF ECONOMIC SYSTEMS n traditional economy n economic decisions are made the same way they have always been made n little government influence or control n command economy n the government has primary influence on economic decisions Chapter 2 14 Business Finance © Thomson/South-Western

n market economy n based on the combination of decisions made by individual consumers and businesses Chapter 2 15 Business Finance © Thomson/South-Western

THE U. S. FREE ENTERPRISE ECONOMY n Most countries have a blend of the three economic systems. n free enterprise economy n mixed economy n individual and business freedom n government regulations for fairness Chapter 2 16 Business Finance © Thomson/South-Western

n Principles of a free enterprise economy include n n 1. Right of Private Ownership 2. Freedom of Choice 3. Competition among Businesses 4. Consumer Influence on Economic Activity n 5. A Limited Government Role in the Economy Chapter 2 17 Business Finance © Thomson/South-Western

n What is the difference between microeconomics and macroeconomics? Chapter 2 18 Business Finance © Thomson/South-Western

Lesson 2. 2 Legal Forms of Business Goals n Recognize differences in the legal forms of business ownership and organization. n Explain financial implications of the business ownership decision. Chapter 2 19 Business Finance © Thomson/South-Western

Terms n n sole proprietorship partnership corporation limited liability company (LLC) Chapter 2 20 Business Finance © Thomson/South-Western

Organizing a Business n form of business ownership n determines the financial, managerial, and legal responsibilities of business owners Chapter 2 21 Business Finance © Thomson/South-Western

IMPORTANCE OF THE ORGANIZING DECISION n Careful financial planning and adequate financial resources are necessary for a successful business. n plan to encourage profit potential n plan for taxes n plan for investor compensation Chapter 2 22 Business Finance © Thomson/South-Western

ROLE OF GOVERNMENT n In a free enterprise economy, government is involved with n legal requirements n citizen protection n fair environment for businesses n taxation n funding for government organizations Chapter 2 23 Business Finance © Thomson/South-Western

LEGAL FORMS OF BUSINESS OWNERSHIP n sole proprietorship n owned and managed by one person n almost no legal requirements n partnership n owned and managed by two or more people under the conditions of a written legal agreement Chapter 2 24 Business Finance © Thomson/South-Western

n corporation n a distinct legal entity formed by completing legal documents in a specific state n owned by one or more shareholders n managed by a board of directors n limited liability company (LLC) n a hybrid of a partnership and a corporation n more financial protection for investors than a partnership n legally more simple than a corporation Chapter 2 25 Business Finance © Thomson/South-Western

n Why should business owners carefully consider the legal form of ownership for their business? Chapter 2 26 Business Finance © Thomson/South-Western

Analyzing Forms of Business Ownership n Many factors influence the decision of how to organize a business. n the amount of individual responsibility n the complexity of managing the business n differences in legal requirements Chapter 2 27 Business Finance © Thomson/South-Western

SOLE PROPRIETORSHIP n the owner has total responsibility for and control over the business n financing n debt n taxes Chapter 2 28 Business Finance © Thomson/South-Western

PARTNERSHIP n from a financing viewpoint, similar to sole proprietorships n partners provide or obtain financing n partners are responsible for debt n taxes are assessed at the individual tax rate of each owner Chapter 2 29 Business Finance © Thomson/South-Western

n limited partnership n limited partners n are investors n liability is limited to the amount of their investment n do not participate in daily operations Chapter 2 30 Business Finance © Thomson/South-Western

CORPORATION n private corporation n can limit n the number of owners n who is allowed to purchase stock n public corporation n stock is sold on the open market n ownership and management are separate Chapter 2 31 Business Finance © Thomson/South-Western

n corporations have a higher success rate n stockholder liability is limited to the amount invested n profits can be taxed twice n dividends n a percentage of corporate earnings allocated to each share of stock Chapter 2 32 Business Finance © Thomson/South-Western

n Subchapter C corporations n majority of corporations are taxed according to Subchapter C of the IRS code n Subchapter S corporations n profits are not taxed at the corporate n stockholders pay individual taxes on their earnings Chapter 2 33 Business Finance © Thomson/South-Western

LIMITED LIABILITY COMPANY (LLC) n relatively new n ownership restricted to partners n partners have limited liability for firm’s debts n income is taxed at the individual rate of each owner Chapter 2 34 Business Finance © Thomson/South-Western

n Why does the corporate form of ownership offer more likelihood of greater initial financing than either the sole proprietorship or partnership? Chapter 2 35 Business Finance © Thomson/South-Western

Lesson 2. 3 Types of Financial Markets Goals n Discuss the purpose and general structure of financial markets n Describe the major types of financial markets. Chapter 2 36 Business Finance © Thomson/South-Western

Terms n n n n financial market financial return financial risk term commodity markets capital markets stock market money markets Chapter 2 37 Business Finance © Thomson/South-Western

The Need for Financial Markets n Money allows companies to obtain the resources they need to operate their businesses. n Money is the resource that allows consumers to meet their wants and needs. Chapter 2 38 Business Finance © Thomson/South-Western

EXCHANGING FINANCIAL RESOURCES n financial market n an organized process for the exchange of capital and credit n n Chapter 2 39 stock markets bond markets commodity markets currency markets Business Finance © Thomson/South-Western

PRINCIPALS OF FINANCIAL EXCHANGE n financial return n profit earned from an investment n financial risk n the possibility that an expected return will not be achieved n term n the length of time the invested money is controlled by others Chapter 2 40 Business Finance © Thomson/South-Western

n How is financial risk related to financial return? Chapter 2 41 Business Finance © Thomson/South-Western

Common Financial Markets n Financial markets help to identify the supply and demand for a specific resource in order to determine its current market price. Chapter 2 42 Business Finance © Thomson/South-Western

COMMODITY MARKETS n commodity markets n trade raw materials and other basic production resources n spot markets n products are bought and sold for immediate delivery n futures markets n contracts are negotiated for the sale of products at a future date Chapter 2 43 Business Finance © Thomson/South-Western

STOCK MARKETS n stock market n the organized exchange of the ownership shares of public corporations n stock exchanges n where the buying and selling of stocks occurs Chapter 2 44 Business Finance © Thomson/South-Western

OTHER FINANCIAL MARKETS n capital markets n finance intermediate or long-term debt of one year or longer n bond n a financial instrument that obligates the issuer to pay the bondholder the principal plus agreed-upon interest at the end of a designated period n bond market n offers newly issued bonds n buy and sell existing bonds Chapter 2 45 Business Finance © Thomson/South-Western

n money markets n buy and sell financial instruments for short time periods of a year or less n treasury bills n short term securities offered by the federal government n certificates of deposit (CDs) n commercial paper Chapter 2 46 Business Finance © Thomson/South-Western

PRIMARY AND SECONDARY OFFERINGS n primary offering (initial public offering) n when an organization makes stock available for the first time or issues new bonds n the organization receives the proceeds of the IPO n secondary offering n when an investor resells stocks or bonds Chapter 2 47 Business Finance © Thomson/South-Western

n What is the difference between a primary and a secondary offering? Chapter 2 48 Business Finance © Thomson/South-Western

Lesson 2. 4 Global Financial Activities Goals n Recognize the importance of global business. n Identify several types of international financial activities. Chapter 2 49 Business Finance © Thomson/South-Western

Terms n n global business foreign currency exchange rate foreign exchange market Chapter 2 50 Business Finance © Thomson/South-Western

Going Global n global business (multinational business) n a company that transcends national boundaries and is not committed to a single home country Chapter 2 51 Business Finance © Thomson/South-Western

IMPORTANCE OF INTERNATIONAL BUSINESS n Over the last 20 years, the magnitude of international investments has grown substantially. Chapter 2 52 Business Finance © Thomson/South-Western

n Reasons companies might make international business investments include: n market expansion n to increase operating efficiencies and reduce costs n to reduce legal hurdles n diversification n increase return on investments Chapter 2 53 Business Finance © Thomson/South-Western

PROBLEMS FACED IN INTERNATIONAL BUSINESS n Businesses need to consider n n Chapter 2 54 language and cultural differences government instability government’s role in business fluctuating monetary values Business Finance © Thomson/South-Western

n List several reasons businesses may want to make multinational business investments. Chapter 2 55 Business Finance © Thomson/South-Western

International Finance n International business involves the flow of money from one company to another across country borders. Chapter 2 56 Business Finance © Thomson/South-Western

FOREIGN CURRENCIES AND RATES OF EXCHANGE n foreign currency n the currency of another country n exchange rate n the value of one currency in terms of another n foreign exchange market n where one currency is exchanged for another Chapter 2 57 Business Finance © Thomson/South-Western

INTERNATIONAL CAPITAL INVESTMENTS n There are multiple ways for businesses to participate in the global economy. n investing in foreign businesses n investing in foreign stock markets Chapter 2 58 Business Finance © Thomson/South-Western

n What determines a country’s foreign exchange rate? Chapter 2 59 Business Finance © Thomson/South-Western

Performance Indicators Evaluated n Demonstrate knowledge and understanding of management and international business concepts. n Communicate research in a clear and concise manner both orally and in writing. n Demonstrate teamwork skills needed to function in a global marketing environment. Chapter 2 60 Business Finance © Thomson/South-Western

n Demonstrate an understanding of price and international exchange rates. n Demonstrate effective persuasive and informative communication and presentation skills. n Recognize economic, social, legal, and technological trends that affect global marketing. n Develop a written international marketing plan. Chapter 2 61 Business Finance © Thomson/South-Western

Think Critically 1. Why is it important to understand the culture when developing a marketing plan? 2. Why is insurance an important issue when conducting international business? Chapter 2 62 Business Finance © Thomson/South-Western

3. Why is it important to understand the economic system of the country where you want to conduct business? 4. Who are two professional experts that a business should contact for advice when considering expansion into international markets? Chapter 2 63 Business Finance © Thomson/South-Western