CHAPTER 22 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 Basic Economic Systems and Principles Terms economics scarcity choice resources demand supply market price market economy Slide 2 Understanding Economics Defining Economics economics the science of decision making about the allocation of scarce resources Economists are scientists who study how decisions can be made that result in the best match of needs and resources. Slide 3 1
Understanding Economics (cont ) Economic Principles Scarcity and Choice scarcity when wants and needs are greater than can be satisfied with the available products and services choice deciding which wants and needs will be satisfied and which will go unsatisfied Slide 4 Limited Resources resources the means that are available to develop solutions for unsatisfied wants and needs natural resources materials in the world around us renewable non-renewable Slide 5 capital resources human-made goods used in the production of other products and services human resources people and their skills Supply and Demand demand the amount of a product or service that individuals want to buy to satisfy their needs and wants supply the quantity of a product or service that has been produced by businesses with the hope of making a profit from sales to customers The price of a product or service provides the balance between supply and demand. market price the price at which an equal number of products will be produced and purchased Slide 6 2
Basic Economic Systems and Principles Making Economic Decisions microeconomics economic decisions related to the choices of individuals and businesses macroeconomics economic decisions made at a national level Slide 7 Making Economic Decisions When planning economic activity for a country, three important decisions should be considered: 1. What products and services will be produced? 2. How will the needed products and services be produced? 3. For whom will the products and services be produced? Slide 8 Types Of Economic Systems traditional economy economic decisions are made the same way they have always been made little government influence or control command economy the government has primary influence on economic decisions market economy based on the combination of decisions made by individual consumers and businesses Slide 9 3
The U.S. Free Enterprise Economy Most countries have a blend of the three economic systems. free enterprise economy mixed economy individual and business freedom government regulations for fairness Slide 10 The U.S. Free Enterprise Economy Principles of a free enterprise economy include 1. Right of Private Ownership 2. Freedom of Choice 3. Competition among Businesses 4. Consumer Influence on Economic Activity 5. A Limited Government Role in the Economy Slide 11 Legal Forms of Business Terms sole proprietorship partnership corporation limited liability company (LLC) Slide 12 4
Legal Forms of Business Importance of the Organizing Decision Careful financial planning and adequate financial resources are necessary for a successful business. plan to encourage profit potential plan for taxes plan for investor compensation Slide 13 Role of Government In a free enterprise economy, government is involved with legal requirements citizen protection fair environment for businesses taxation funding for government organizations Slide 14 Legal Forms of Business Ownership sole proprietorship owned and managed by one person almost no legal requirements partnership owned and managed by two or more people under the conditions of a written legal agreement Slide 15 5
Legal Forms of Business Ownership corporation a distinct legal entity formed by completing legal documents in a specific state owned by one or more shareholders managed by a board of directors limited liability company (LLC) a hybrid of a partnership and a corporation more financial protection for investors than a partnership legally more simple than a corporation Slide 16 Analyzing Forms of Business Ownership Many factors influence the decision of how to organize a business. the amount of individual responsibility the complexity of managing the business differences in legal requirements Slide 17 Sole Proprietorship the owner has total responsibility for and control over the business financing debt taxes Slide 18 6
Partnership from a financing viewpoint, similar to sole proprietorships partners provide or obtain financing partners are responsible for debt taxes are assessed at the individual tax rate of each owner limited partnership limited partners are investors liability is limited to the amount of their investment do not participate in daily operations Slide 19 Corporation private corporation can limit the number of owners who is allowed to purchase stock public corporation stock is sold on the open market ownership and management are separate Slide 20 Corporation (cont ) corporations have a higher success rate stockholder liability is limited to the amount invested profits can be taxed twice dividends a percentage of corporate earnings allocated to each share of stock Slide 21 7
Corporation (cont ) Subchapter C corporations majority of corporations are taxed according to Subchapter C of the IRS code Subchapter S corporations profits are not taxed at the corporate rate stockholders pay individual taxes on their earnings Slide 22 Limited Liability Company (LLC) relatively new ownership restricted to partners partners have limited liability for firm s debts income is taxed at the individual rate of each owner Slide 23 Types of Financial Markets Terms financial market financial return financial risk term commodity markets capital markets stock market money markets Slide 24 8
The Need for Financial Markets Money allows companies to obtain the resources they need to operate their businesses. Money is the resource that allows consumers to meet their wants and needs. Slide 25 Exchanging Financial Resources financial market an organized process for the exchange of capital and credit stock markets bond markets commodity markets currency markets Slide 26 Principals of Financial Exchange financial return profit earned from an investment financial risk the possibility that an expected return will not be achieved term the length of time the invested money is controlled by others Slide 27 9
Common Financial Markets Financial markets help to identify the supply and demand for a specific resource in order to determine its current market price. Slide 28 Types of Financial Markets Commodity Markets commodity markets trade raw materials and other basic production resources spot markets products are bought and sold for immediate delivery futures markets contracts are negotiated for the sale of products at a future date Slide 29 Stock Markets stock market the organized exchange of the ownership shares of public corporations stock exchanges where the buying and selling of stocks occurs Slide 30 10
Other Financial Markets capital markets finance intermediate or long-term debt of one year or longer bond a financial instrument that obligates the issuer to pay the bondholder the principal plus agreedupon interest at the end of a designated period bond market offers newly issued bonds buy and sell existing bonds Slide 31 Other Financial Markets (cont ) money markets buy and sell financial instruments for short time periods of a year or less treasury bills short term securities offered by the federal government certificates of deposit (CDs) commercial paper Slide 32 Primary and Secondary Offerings primary offering (initial public offering) when an organization makes stock available for the first time or issues new bonds the organization receives the proceeds of the IPO secondary offering when an investor resells stocks or bonds Slide 33 11
Global Financial Activities Terms global business foreign currency exchange rate foreign exchange market Slide 34 Going Global global business (multinational business) a company that transcends national boundaries and is not committed to a single home country Slide 35 Importance of International Business Over the last 20 years, the magnitude of international investments has grown substantially. Reasons companies might make international business investments include: market expansion to increase operating efficiencies and reduce costs to reduce legal hurdles diversification increase return on investments Slide 36 12
Problems Faced In International Business Businesses need to consider language and cultural differences government instability government s role in business fluctuating monetary values Slide 37 International Finance International business involves the flow of money from one company to another across country borders. Slide 38 Foreign Currencies and Rates of Exchange foreign currency the currency of another country exchange rate the value of one currency in terms of another foreign exchange market where one currency is exchanged for another Slide 39 13
International Capital Investments There are multiple ways for businesses to participate in the global economy. investing in foreign businesses investing in foreign stock markets Slide 40 14