BA 101 1st Edition Lecture 10 Outline of Last Lecture 1. Foundation update2. Lecture: A. Total Quality Management B. Human Resources Outline of Current Lecture I. FoundationII. Lecture: Financing your BusinessCurrent LectureI. Foundation: remember that the live rounds have started! Round 1 due Tuesday 10th at 11:59 pm, Round 2 due Thursday 12th at 11:59 pm. Also, quiz 4 due before class Tuesday 17th. Be on time with each round. You get 5 points just for updating your decisions on time. Remember your performance targets: - Contribution margin about 30%- Have a cash balance greater than 0 at the end of the year- Don’t run out of inventory, don’t have more than 60 days’ worth of inventory at the end of the year- Have a net income that is greater than 0- Increase the owner’s wealth by increasing your stock price- Each of these categories is worth a star in foundation, they are each worth 3 points towards your final grade. II. Lecture: Financing your Business: Financing: where do you get the money to start/run your company? You can borrow, reinvest some of your retained earnings, or sell stock, which dilutes the ownership ofyour company but also raises money. Operating: What you do with the money you have on hand to keep your business running smoothly. Buying materials, paying workers, etc. are all operating costs. Investing: Buying capacity is an example of investing in your business. Your investments pay off over the long term. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Planning and Finance: How much money do you need for operations and growth? The money you receive minus the money you spend is what you have to work with. If you have more cash than you need, invest it. If you have less than you need, searchfor sources to get more. Investing: in the short and long term: - Accounts receivable (credit sales to customers): short term- Inventory: short term- New product development: short term- Equipment (automation levels): long term- Facilities (additional capacity): long term- Buy other companies (not an option in foundation): long termSources: too little cash? You can: - Borrow (take on debt) pay interest to use someone else’s money- Reinvest earnings: Retained earnings, use your own net income to finance your own investments- Sell stock: dilute the ownership of your company for a price- Bank Loans: apply, the risk (determined by your debt) influences the amount of interest you pay. More debt, more interest- Interest rates in foundation: All companies are facing the same market risk. Moredebt, pay more interest, longer the loan means higher risk and higher interest also. Debt: Created by borrowing money from financial institutions. Loans from banks, savings and loans, etc. They can be short or long term (1-10 years usually). Or you can borrow money from the market in the form of bonds. Usually about 10 year loans. Risk: rated by Standard & Poor or Moodys, return: based on degree of risk and the interest rate. Equity Financing: Another way to bring in more cash. Instead of borrowing funds you take on new owners by selling stock. This can dilute ownership and be a negative factor for a company, but you don’t need to repay the money. Securities Market: - Primary market: firm sells new issues of security (stocks or bonds) publicly to the first time to investment bankers (or underwriters) - Secondary market: Owners of stocks and bonds trade shares. Ex: New York Stock Exchange, AMEX, London, Jakarta etc.Stock Ownership: if you as an individual purchase a share or shares of stock, you now own a piece of the company. This means you share in the risk and reward of the company, and benefit when the stock price goes up and when the company offers dividends. The company who issuedthe stock benefited by people buying it. They received money for the stock. Stock terms:- Close: the value of a share at the end of a trading day- Change: how much higher or lower the price is today than yesterday (in foundation this is yearly)- Shares: the amount (number of shares) of outstanding stock- Dividends: the cash payment to owners- Yield: dividends divided by stock price- P/E or price to earnings ratio: closing price divided by EPS- EPS or earnings per share: net income divided by total sharesThe effect of Accounts Receivable on CSS: Accounts receivable refers to selling to your customers on credit. How many days before they need to pay you? 0 days………………………………..35% of your CSS: The least appealing, lose some customers, but youget your cash right away30 days………………………………..8% of your CSS: About right. 8% of your base CSS.60 days……………………………..1.5% of your CSS120 days……………….……………..0% of your CSS: Most appealing to your customers, no reduction of your CSS, but you have to wait a long time for your money/deal with “squirrely”