Finance Unit 2

What does it mean to be ex-dividend?

Between the Record date and the Distribution date, any new share purchases do not receive the dividend.

Who oversees the general affairs of a corporation? Do they also make the day to day decisions?

Board of Directors oversees the general affairs. Corporate officers and managers make day-to-day decisions.

Why can commercial finance companies charge higher interest rates?

Not regulated by the government, and they are willing to accept more risk. With higher risk comes higher interest rates.

Limited Liability Company disadvantages

Only intended for smaller businesses.

What are common operating costs? (list 6)

Payroll, rent, utility bills, advertising, delivery charges, bank fees, insurance premiums

Net Income

Revenue minus all expenses and costs of doing business, when revenue is greater than the costs.

Describe an example of price competition.

Walgreens, Target, CVS, Walmart, Kmart. Offering weekly coupons. Offering to match any competitor's price.

Routine

regular, recurring expenses

What are the legal owners of a corporation called?

Stockholders or shareholders.

Revenue

The money received by a business for selling their product or services.

What are the steps involved in getting an SBA Guaranteed Loan?

1. Apply for a loan with a bank 2. If your application is denied, complete an application with the SBA 3. SBA reviews your application 4.If approved, the SBA tells the bank to give you the funds, and they will guarantee to repay a percentage of the loan in the event that the you can't repay it.

What must be included in the Partnership Agreement? List the six elements.

1. Names of the partners 2. Name and nature of the business 3. Amount of investment by each partner 4. Duties, rights, and responsibilities of each partner 5. Procedures for sharing profits and losses 6. How assets will be divided when and if the partnership is dissolved

What is a Venture Capital Firm? What is the typical minimum amount of investment from a Venture Capitalist?

A company that provides private funding for a small business that needs a substantial amount of immediate cash. The minimum is usually $500,000.

What is collateral? What are the most common forms of collateral?

A form of security that helps guarantee the creditor will be repaid. The most common forms are homes and vehicles.

What is a business "angel"?

A private investor, outside the entrepreneur's circle of friends and family who provides funding because they are interested in seeing new businesses succeed.

Corporation advantage

Ability to raise capital through selling stock. Limited Liability. Continued life. Separation of ownership and management.

Can a Sole Proprietor purchase a franchise? What about a corporation? Can a business be a franchise without being one of the other 5 types of business ownership?

Any of the other five types of business ownership can purchase a franchise. A franchise is a legal contract to sell another company's product and use their names. A franchise must be purchased by a sole proprietorship, partnership, corporation, LLC, or cooperative, so NO to the third question.

What would be a good example of a type of business to use the partnership form of ownership?

Any type of business where people can bring different areas of expertise to the business. Example: A cupcakery where one partner is an excellent cook, and the other partner has good business and marketing skills. Typically a smaller business.

What is required to start a corporation?

Articles of Incorporation: the application to operate as a corporation. Must include corporate name and type of business Corporate by-laws: the rules by which a corporation will operate, including how the company will choose a board of directors and when stockholders will meet. Corporate charter: the license to operate a corporation. States the purpose of the business and spells out the laws and guidelines which the company will operate under.

What are the two categories of start-up capital and some examples of items that fall into each.

Assets and start-up costs. Assets are owned items of value such as cash, supplies, equipment, merchandise, computers, and furniture. Start-up costs include permits, legal and accounting fees, utility deposits, and insurance.

How does a line of credit work?

Businesses have a set amount of money they can borrow at any time, when they need it. They only need to repay it if they borrow. Businesses use these for unexpected and routine costs.

How do corporations raise capital?

By selling shares of stock (part-ownership of the company)

What are different uses for a business's profits?

Can reinvest in the company for expansion or developing new products. Can pay out the profits to the owners - for a corporation in the form of dividends.

What are the disadvantages of using a small bank to finance a small business? List 3.

Closely regulated by the government, extensive paperwork, they are conservative by nature and may reject your loan if it is too risky

What is the difference between commercial debt financing and commercial loans?

Commercial debt financing refers to any form a business uses to finance itself through debt. Commercial loans are a type of debt financing only given to more established business operations with revenue in the millions of dollars.

What are the differences between a corporation and an LLC?

Corporations have double taxation and can have shares publicly traded.

Corporation disadvantages

Double taxation, complex and expensive to start, slow decision making process.

Partnership advantages

Easy set-up. More skills and knowledge. More capital available. Total control by all partners. Taxed only once.

Sole proprietorship advantages

Easy set-up. Total Control. Only taxed once. All profits go to owner. Fewer regulations.

Where do you get your money from when you use private financing?

Friends and family.

What is the difference between a general partner and a limited partner?

General partners have unlimited liability and an active role in the management of the partnership. Limited partners have limited liability and are usually not active in the management of the partnership.

What are the disadvantages of a business credit card?

High interest rates. Fees.

What are the advantages of using a small bank to finance a small business? List 3.

Highly experienced in dealing with small businesses Wide variety of loan plans Offer advice Community oriented, interested in seeing local businesses succeed

What does Earnings Per Share tell you about a potential investment?

How much of a company's profit is allocated to each outstanding share of stock

What does it mean for a company to have a Limited Life?

If the owner(s) die, or the partners agree to terminate the business, the company ceases to exist. In the case of a partnership, If one partner dies, the original partnership ends, but a new business can be formed with the existing assets.

How can you use Price-to-Earnings Ratio to identify a potential good investment?

In general, a high P/E ratio suggests that investors are expecting higher earnings growth compared to companies with a lower P/E Ratio. It should always be compared to other companies in the same industry

What are common start-up costs? (list 6)

Inventory, Equipment, security deposit, Insurance, Fixtures and display cases, supplies, professional fees

Why do entrepreneurs often need to find outside sources for funding their businesses?

It costs more money to fund their business than they have saved.

Name three reasons it is important to have an effective and thorough financial plan.

It helps you determine the amount of money you need to establish a business, the amount of money you need to operate a business for the first few months, and expand once it stabilizes. It helps address where you will get the money from and how you will purchase required items. It will help you qualify for financing.

Sole proprietorship disadvantages

Limited capital. Unlimited Liability. Only one person's ideas. Limited life.

What is limited liability?

Limited liability means the owners are only liable for up to their initial investment in the company. (i.e. if you only purchased $5,000 worth of stock to invest in a corporation, you could only lose up to $5,000 to repay the company's debts).

Limited Liability Company advantages

Limited liability. Only taxed once.

What are benefits to using private financing? List 3.

Little or no paperwork, little or no interest charged, and no collateral.

When looking at potential investments, would you rather have a higher or lower Debt to Equity Ratio? Why?

Lower. That indicates the company has less debts to repay and is in better financial health.

What are some of the services the Small Business Administration offers? Name 4.

Management training, organizational guidance, research on start-up costs, and the guaranteed loan program.

Cooperative Disadvantages

Managers are responsible to the members or board of directors. All decisions must be approved by board of directors, which could slow growth.

Name two examples of businesses in the private sector

McDonald's. Sears. Chicago Bears. Sony.

Franchise disadvantages

Must report to parent corporation, and follow their directives.

A sound financial plan should include at least 6 financial statements. What are they?

Projected Statement of Cash Flows Projected 1-year Income Statement Projected 1-year Statement of Cash Flows Projected 3 or 5-year Income Statement Projected 3 or 5-year Statement of Cash Flows Projected Balance Sheet

Cooperative advantage

Provides benefits, control, and ownership to the user/member. Pooled resources lead to greater purchasing power. Efficient marketing through pooling resources.

Name two examples of services in the public sector

Public school system. Fire and Police departments. US Postal Service.

How often are dividends usually paid?

Quarterly, or 4 times a year.

What is the difference between a dividend record date and a distribution date?

Record date is when the dividend is announced, and all shareholders as of that date are eligible to receive the dividend. The distribution date is when the dividend is paid to the shareholders.

What is reserve capital? Describe a situation where it would be important to have reserve capital.

Reserve capital is money set aside for unexpected costs or opportunities. It can be used for emergencies, such as replacing broken equipment or repair bills. It can also be used to take advantage of opportunities for your business, such as a competitor going out of business and offering you a great deal on their merchandise.

Net Loss

Revenue minus all expenses and costs of doing business, when revenue is less than the costs, so the company has lost money for the period of time.

What is the difference between a secured loan and an unsecured loan? Who can get an unsecured loan?

Secured loans are backed by collateral. Unsecured loans are not. Well-established, profitable businesses can get unsecured loans.

Closely held corporations are most commonly owned by who?

Small groups of people, usually family.

Which ownership form offers the greatest amount of control to the owner(s)?

Sole proprietorship

What type of business ownership is the most common form in the United States?

Sole proprietorship.

Which ownership types have each type of liability?

Sole proprietorships and general partnerships have unlimited liability. Corporations, LLC's, cooperatives, and Limited Partnerships have limited liability.

Name and describe the three types of required capital?

Start up capital - is the money required to start your business, including purchasing assets and paying other costs or fees such as permits and deposits. 2. Operating capital - is the money required to operate your business the first few months until it is profitable. 3. Reserve capital - money set aside for unexpected costs or opportunities

Double Taxation

The fact that corporations get taxed "twice"- the corporation pays taxes on its profits, and the stockholders pay taxes on their share of the profits which are paid as dividends.

Profit

The money left after paying the expenses of doing business

Capital

The money needed to start a business

What reasons that an investor holds?

To collect regular dividends, and because history indicates that stocks have the greatest return over the long-run.

What are reasons that an investor sells?

To collect their profits or protect against further loss if a stock price is dropping.

What is operating capital used for? Why do you need to include operating capital in your financial plan?

To keep a business running for the first few months - to pay for expenses since most businesses do not earn enough revenue to pay for ALL of their expenses at first. If you do not include operating capital, you will not be able to keep your business open for very long.

What are reasons that an investor buys?

To make a future profit or save for retirement.

Why do banks want to review a Business Plan before agreeing to lend money to a business?

To measure the risk of lending money. They want to see that the business has a clear vision and has identified the necessary steps to achieve the goals.

Why is it important to have projected financial statements that cover different period of time (i.e. 1- year and 3 or 5 year Projected Income Statements)?

To plan for the short-term and the long-term.

What is unlimited liability?

Unlimited liability means the owners are personally responsible for paying all debts of the company, including and beyond their initial investment. Their personal assets (i.e. home, savings accounts, television set) can be used to repay debts of the business.

Partnership disadvantages

Unlimited liability. Possible disagreement among partners. Shared profits. Limited Life.

Why is important to have an accurate and realistic estimate of various start-up costs for your financial plan? What are some good resources to find these estimates?

Unrealistic plans could lead to the business failing, for example underestimating the cost of merchandise or rent or other expenses. The Small Business Administration offers resources for business owners.

What is personal financing? What are three commonly used types of personal financing?

Using your own assets to fund a business. This includes money saved up, consumer loans, and home equity loans.

Franchise Advantages

Usually associated with well-known products and established names.

Statement of Cash Flows

a financial statement that reports how much cash a business took in and where the cash went

LowDoc Program

a government program which allows businesses applying for loans of less than $150,000 to submit a one-page application with a small amount of documentation.

Chart of Accounts

a list of all general ledger accounts a business will use

Balance Sheet

a report of the balances of all asset, liability and owner's equity accounts at the end of a period of time.

Income Statement

a report of the net income or net loss for a period of time