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Agency Costs Among Small Businesses

When compared to publicly traded firms, small businesses come closest to the type of firms depicted in the stylized theoretical model of agency costs developed by Jensen and Meckling (1976). At one extreme of ownership and management structures are firms whose managers own 100 percent of the firm. These firms, by their definition, have no agency costs. At the other extreme are firms whose managers are paid employees with no equity in the firm. In between are firms where the managers own some, but not all, of their firm's equity.

The muscles of ABB individual initiative and entrepreneurship combined with selforganized management councils and

By giving front line managers a great degree of freedom and by encouraging them to take the initiative, Barnevik and his executive colleagues succeeded in generating an entrepreneurship that is typical of a small organization, but not one for a large global business. As Barnevik constantly reminded his management team, it was an organization designed to encourage individual initiative and ensure personal responsibility. And they combined the entrepreneurship style of smaller companies with the possibilities of a large global business organization to leverage best practice and ideas on a global level. In many large corporations the divisional hierarchy has been accused of killing entrepreneurship. But, as ABB confirms, it is not the size and structure of an enterprise per se that is to blame. The real causes are the assumptions about the role and tasks of different management groups that are implied by that structure. Traditionally, top-level managers acted as chief corporate...

The Software Entrepreneur

At approximately the same time that Jennifer, Jean, and George were hatching their plans for entrepreneurial independence, Phil was cashing a seven-figure check for his share of the proceeds from the sale of the computer software firm he had founded seven years ago with four of his friends. Rather than rest on his laurels, however, Phil saw this as an opportunity to capitalize on a complex piece of software he had developed in college. Although Phil was convinced that there would be an extensive market for his software, there was

The advantages of an entrepreneurial culture and open dialogue

This, together with the unique management culture which encouraged entrepreneurial behaviour, bottom-up-top-down open debate, global knowledge and best practice sharing, allowed a management team which was used to traditional corporate top-down management for decades to excel and to convert themselves into ''young'' growth managers.

Taxation of Small Businesses S Corporations

The Tax Code provides that small businesses that meet certain restrictions as spelled out in the code may be set up as corporations and thus receive the benefits of the corporate form of organization especially limited liability yet still be taxed as proprietorships or partnerships rather than as corporations. These corporations are called

How Strong are the Entrepreneurs Control Incentives

We know that the original owner-entrepreneur unlike subsequently hired executives can capture the gains from agency controls. An important question is to what extent an entrepreneur would write contracts up front (ex-ante) that control all these agency issues. There are at least original entrepreneurs. two limiting factors 2. The entrepreneur's incentives to write the appropriate contracts may be surprisingly modest. Few companies are designed for greatness in the far future. When Thomas A. Edison designed the corporate charter of General Electric in 1880, he probably did not do so with an eye towards General Electric managers in the 21st century. Indeed, most companies that go public will never face large agency problems most will simply end up bankrupt. Only 1 out of 100 may become large enough to indulge significant agency conflict say, costing 1 of firm value. One percent of a 100 billion company is 1 billion (say, 100 million a year as a 10 perpetuity), but in ex-ante terms, it...

An External Analysts View Versus an Entrepreneurs View

PepsiCo is an Like analysts, entrepreneurs also create pro formas to assess value. However, they face some done a ot more simp y. Working Capital Entrepreneurs usually must worry about working capital projection and management. A small entrepreneurial firm could lose its entire business if it were to run out of cash, even if it were only temporarily and even if the underlying economics of its real business were sound. In contrast, working capital management is fairly unimportant for PepsiCo. PepsiCo is so big, stable, and currently with so few liabilities and so little financial debt that it can easily borrow more capital if it were to ever need more. Inside Knowledge Entrepreneurs often know the operational details of the proposed project in great detail. In contrast, external analysts (and sometimes even venture capitalist considering funding startup projects) rarely do and neither do you for PepsiCo. Startup vs. Mature Phase Entrepreneurs usually do not have a long prior history of...

Attracting Outside Investors The Entrepreneurs Path

The United States is without question the entrepreneurial capital of the world. More people start businesses here than anywhere else on the planet, and more of them succeed than anywhere else. Of course, it's also likely true that more of them fail here than anywhere else. But they try, because that's the kind of capitalistic system we have. People know that if they try and succeed, they will be rewarded both financially and socially. Even if they try and fail, they know they will not be ostracized. On the contrary, they might even get another chance. Some entrepreneurs tell stories of several failures before they ultimately became successful, and they tell those stories with understandable pride pride in their own perseverance and achievement and pride in a capitalistic economy and political system that not only permit but encourage that kind of effort. There are many sources for investment capital potentially available to the promising or proven entrepreneur. Sometimes the money...


A subject taught in many high schools and colleges, entrepreneurship is actually defined as the state of being an entrepreneur.'' An entrepreneur is an individual who owns, organizes, and manages a business and, in so doing, assumes the risk of either making a profit or losing the investment. According to the Small Business Administration (1999), the total number of businesses in the United States in 1995 was somewhere between 16 million and 24 million, of which approximately 15,000 were large. In 1997, there were an estimated 8.5 million businesses owned by women. For any business to be successful, an adequate level of funding must be furnished. The amount needed varies according to the scope and nature of the business. Another key factor in the success of an entrepreneurial organization is planning, including planning for the marketing, management, and financial aspects of the business. From a personal perspective, becoming an entrepreneur is not a simple task. It certainly has its...

Eric Tysons Keys to Personal Financial Success

I Understand and use your employee benefits. If you're self-employed, find the best investment and insurance options available to you and use them. I Invest the majority of your long-term money in ownership vehicles that have appreciation potential, such as stocks, real estate, and your own business. When you invest in bonds or bank accounts, you're simply lending your money to others, and the return you earn probably won't keep you ahead of inflation and taxes.

Authors Acknowledgments

Many people contribute to the birth of a book, and this book is no exception. First, I owe a deep debt of gratitude to James Collins who inspired me when I was a young and impressionable business school student. Jim encouraged me to try to improve some small part of the business world by being an entrepreneur and focusing solely on what customers needed rather than on what made the quickest buck.

Introduction to Corporate Finance

Of course, you can't keep a good entrepreneur down. Jobs formed Pixar Animation Studios, the company that is responsible for the animation in the hit movies Toy Story, A Bug's Life, and Toy Story 2. Pixar went public in 1995, and, following an enthusiastic reception by the stock market, Jobs's 80 percent stake was valued at about 1.1 billion. Finally, just to show that what goes around comes around, in 1997, Apple's future was still in doubt, and the company, struggling for relevance in a Wintel world, decided to go the sequel route when it hired a new interim chief executive officer (CEO) Steven Jobs How successful was he at his new (old) job In January 2000, Apple's board of directors granted Jobs stock options worth 200 million and threw in 90 million for the purchase and care of a Gulfstream V jet. Board member Edgar Woolard stated, This guy has saved the company. Understanding Jobs's journey from garage-based entrepreneur to corporate executive to ex-employee and, finally, to CEO...

Target Audience For This Book

Building Financial Models with Microsoft Excel is for business professionals, entrepreneurs, and students who currently, or would like to, create or use financial models and or statements as a part of their work. This book is targeted at individuals with a beginning to intermediate level of experience with both Microsoft Excel and finance accounting. As an entrepreneur, or someone starting a new business, you are required to prepare and submit a set of financial statement projections to your bank or other source(s) of financing, such as a venture capital firm. Nearly all business plans associated with a new (or existing) company business are required to have a set of pro forma, or projected, financial statements.

Introduction How to interpret IFRS Accounts

This book explains the methods used in accounting and business valuations by using the fictional story of a new start-up business, from original concept to eventual acquisition. Enamoured with entrepreneurial spirit, a business woman buys her family's secret salad dressing recipe from her brother and sets up a business. Chapter 1 illustrates double entry bookkeeping and how to prepare a Trial Balance, Profit and Loss Account and Balance Sheet and also discusses the working capital cycle, asset management and how to negotiate with banks. At the forefront of this chapter is how the combination of inexperience and insufficient funds can lead to near disaster, which is clearly illustrated via the fictional story. Accounting students are often faced with a series of bland exercises, none of which relates to each other accordingly, to many the subject is uninteresting. But accounts often tell an interesting story, in numbers rather than in words. The fictional story of Amanda was chosen to...

The structure of the book

Part 2 describes how companies react to the changing role they play in society and how they adapt their organization structures and processes and their culture in order to create value-added for their shareholders and stakeholders. Taking the case of ABB, we demonstrate how an enterprise developed from a traditional industrial company, based on a standard hierarchical structure, into a global enterprise that functions as a string of smaller entrepreneurial units. This part ends by giving an example of a company (Cisco) and describes its evolution from a global company into a networked e-business enterprise.

Innovation and Small Business Loan Underwriting

There is little doubt that technological and financial innovations over the past three decades have had a profound effect on the banking industry. There is no shortage of examples of this phenomenon. ATM machines and the shift to an electronic payments system, for example, have profoundly affected the way in which banking services are delivered. Innovation in back-office technology was an important factor driving the securitization of the residential mortgage market.4 Many researchers have also argued that technological innovation has had an equally powerful effect on small business loan underwriting essentially arguing that technological innovation has reduced the absolute and relative cost of transactions-based lending vis-a-vis relationship lending leading to increased credit availability and substitution effects.5 That is, innovation could lead to an increase in credit availability to formerly rationed small businesses for whom information production becomes 3 The lack of data on...

Future Failures Be Lessened Prevented

In the heyday of the late 1990s investment world, a frequent piece of advice given to young entrepreneurs seeking venture capital investments was to imagine finding themselves on an elevator ride with a VC, with approximately 30 to 45 seconds to make their pitch. Being able to reduce their entire business presentation to this blurb was supposed to be a way of honing them in on what was truly their so-called value proposition. History has since proven that perhaps everyone should have slowed down and taken some more time to analyze whether these businesses actually would produce profits, rather than well-crafted and bizarrely brief narratives. But just the same I like the idea of the elevator ride for the main premise of this book. Please take out your stopwatch, imagine we are on an elevator, then read on.

Banking Industry Consolidation and Small Business Lending

The world has seen a global trend toward banking industry consolidation. This trend has been associated with a decrease in the number of small banks and an increase in the average size and complexity of banks. Theoretical arguments suggest that small banks might be best suited to deliver relationship lending because their simple organizational structure does not require the internal transmission of soft information as part of the loan underwriting process (Stein 2002). Thus, banking consolidation could have negative consequences for small businesses if a reduction in small banks leads to a reduction of relationship lending, and transactions lending is not a good substitute for some types of opaque SMEs. Policy concern over this issue is heightened by the fact that large banks appear to have a lower propensity to lend to small businesses based on simple balance sheet calculations showing that large banks allocate a lower fraction of their assets to small business lending than do small...

Where to Go from Here

Perhaps you're a small business owner manager with a basic understanding of your financial statements, but you need to improve how you use accounting information for making your key profit decisions, and for planning and controlling your cash flow. You might jump right into Chapters 9 and 10, which explain the analysis of profit behavior and budgeting cash flows.

Who Is the Financial Manager

Instead of working in the finance department of a corporation, you may join a financial institution. The largest employers are the commercial banks. We noted earlier that banks collect deposits and relend the cash to corporations and individuals. If you join a bank, at some point you may well work in a branch, where individuals and small businesses come to deposit cash or to seek a loan. Alternatively, you may be employed in the head office, helping to analyze a 100 million loan to a large corporation.

The Accrual Basis Of Accounting

GAAP requires the use of the accrual basis, yet as previously discussed, cash flow information is also important to financial statement readers. Accordingly, GAAP also requires the statement of cash flows, which is discussed in Chapter 5, Statement of Cash Flows. Also note that some small businesses, which do not need audited financial statements, use the cash basis.

The Expanding British Empire

Skipping through time, some banking and financial markets nearer to those we know today began in the coffee houses of European financial centres. In the seventeenth century these coffee houses became the meeting places of merchants wishing to trade their finished products and of the entrepreneurs of the day. Soon after the Battle of Waterloo, during the nineteenth century, foreign trade from the expanding British Empire - and the finance required to fuel the industrial revolution - increased the size and frequency of international monetary transfers. For various reasons, a substitute for the large-scale transfer of coins or bullion had to be found (the 'Dick Turpin' era) and the bill of exchange for commercial purposes and its personal account equivalent, the cheque, were both born. At this time, London was building itself a reputation as the world's capital for trade and finance, and the City became a natural centre for the negotiation of all such instruments, including foreign-drawn...

A proven model of governance structure

LBO associations and venture capital funds provide a blueprint for managers and boards who wish to revamp their top-level control systems to make them more efficient. LBOs and venture capital funds are, of course, the preeminent examples of active investors in recent U.S. history, and they serve as excellent models that can be emulated in part or in total by virtually any corporation. The two have similar governance structures, and have been successful in resolving the governance problems of both slow growth or declining firms (LBO associations) and high growth entrepreneurial firms (venture capital funds).50 Finally, the close relationship between the LBO partners or venture fund partners and the operating companies facilitates the infusion of expertise from the board during times of crisis. It is not unusual for a partner to join the management team, even as CEO, to help an organization through such emergencies. Very importantly, there are market forces that operate to limit the...

Survey Of Corporate Governance

At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward.The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. While we agree that product market competition is probably the most powerful force toward economic efficiency in the world, we are skeptical that it alone can solve the problem of corporate governance. One could imagine a scenario in which entrepreneurs rent...

Your Goal Learning All The Facts

Most of us are brought up not to be too nosy. We develop an instinct to mind our own business and stay out of other people's affairs. This attitude can be deadly when you're thinking of buying a business. Everything concerning the target business's operations is your affair, because you'll have to live with it all should you buy the business. You should take the position that absolutely nothing about this business is going to surprise you after you buy.

Identifying Unusual Transactions and Events

2-46 As the staff accountant for Gil's Plumbing, you notice that a 1,000 check is drawn (payable to Cash ) on the third Monday of each month and is charged to miscellaneous expenses. You also notice that a sleazy character with a canvas bag comes into the office on the third Tuesday of each month for a 30-second meeting with Gil. After inquiring about what the 1,000 check is for and to which account it might more properly be charged, Gil suggests that you should mind your own business and just record the expenses where you are told.

Introduction to Financial Management

Of course, you can't keep a good entrepreneur down. Jobs went on to found Pixar Studios, the company that is responsible for the animation in the hit movies The Incredibles Cars, and Ratatouille, And just to show that what goes around comes around, Apple found itself struggling for relevance in a Winter world and decided to go the sequel route when it hired a new interim chief executive officer (CEO) Steven Jobs With Jobs back on the job, Apple's fortunes improved considerably. In November 2001, Appie introduced its first iPod music player, By early 2007, sales passed 100 million units. Over the same period, the companion Tunes Store sold over 2.5 billion songs, 50 million TV shows, and 1.3 million movies. And in a long-anticipated move, Apple announced its entry into the mobile phone business with its new, and very cool, Phone.

Step 1 List All Sources of Income

The main source of income for most people comes from what is earned from their occupations in the form of salaries, wages, self-employment income, and commissions. Other sources of income include bonuses, interest, dividends, rent, alimony and child support payments, income from Social Security, gains on the sale of assets, and gifts and inheritances. All sources of income should be included in order to make the income statement complete and accurate.

Economic Profit versus Accounting Profit Share Price versus Earnings Per Share

Economic profit is the difference between revenues and costs, where costs include both the actual business costs (the explicit costs) and the implicit costs. The implicit costs are the payments that are necessary to secure the needed resources, the cost of capital. With any business enterprise, someone supplies funds, or capital, that the business then invests. The supplier of these funds may be the business owner, an entrepreneur, or banks, bondholders, and shareholders. The cost of capital depends on both the time value of money what could have been earned on a risk-free investment and the uncertainty associated with the investment. The greater the uncertainty associated with an investment, the greater the cost of capital.

Sources of Advantage from Geographic Proximity

While some small business lenders will also utilize information from credit bureau records of the owner of the small business,6 the data sources on the past credit experiences of small businesses are much less developed.7 Additionally, consumers may be more able to produce documentation of income levels and other pieces of information that provide additional hard information to the lender, thereby reducing the extent of asymmetric information in consumer loan markets. Consequently, one might expect the reduced potential for information asymmetries in consumer lending markets to make geographic proximity less important in these credit markets than in small business lending markets. Nevertheless, transaction costs incurred by households or consumers in conjunction with preferences to conduct financial business in person may still provide a rationale for the importance of distance for these bank customers.

Technological Changes and the Importance of Distance

The existing evidence on the extent to which these new service delivery mechanisms have allowed consumers to reduce their need for in person interaction with their financial services suppliers is mixed. Regarding online banking, Khan (2004) finds that a household's use of online banking services is not affected by the distance to the closest bank branch and suggests that online banking services may be a supplement to, rather than a substitute for, personal interaction with banks. Amel and Brevoort (2005) reach a similar conclusion for small businesses based on an analysis of survey data in which firms that used the Internet for banking reported fewer alternative services available than other small businesses not using the Internet. These studies suggest that while the development of online banking has the potential to reduce the transportation costs incurred by consumers in obtaining financial services, at present it is operating as a service enhancement, rather than a substitute for...

Corporate Governance in the Context of Chinas Overall Approach to Reform

These were in the form of a fiscal contracting system known by the nickname eating from separate kitchens, which replaced the previous system of unified revenue collection and unified spending. The new system encouraged and rewarded local governments for promoting development of their local economies. The growth and development of local economies became the main criteria for promoting local cadres. As a result, the bureaucracy functions as a helping hand for economic development, is directly involved in economic activity, pursues industrial policy, and often has close economic and family ties to entrepreneurs (Frye and Shleifer 1997 Walder 1995).

The four models illustrated for a company with cash purchases and sales

We will illustrate the effect on the profit and net assets of Entrepreneur Ltd. Entrepreneur Ltd commenced business on 1 January 20X1 with a capital of 3,000 to buy and sell second-hand computers. The company purchased six computers on 1 January 20X1 for 500 each and sold three of the computers on 15 January for 900 each. The following data are available for January 20X1

Enterprise culture and strategy as capital

For example, human capital and structural capital reinforce each other when a company has a shared sense of purpose combined with an entrepreneurial spirit when management places a high value on agility when management governs more by motivation than by punishment. Human, customer and partner capital grow when individuals feel responsible for their part in the enterprise, interact directly with customers and partners, and know what knowledge and skills customers and partners expect and value. Customer and partner capital grow when the company, its customers and partners learn from each other when they actively strive to make their interactions informal when customers and partners, for example, actively participate in new product developments of the company or when employees and

The Goal of Finance Relative Valuation

Finance is such an important part of modern life that almost everyone can benefit from understanding it better. What you may find surprising is that the financial problems facing PepsiCo or Microsoft are not really different from those facing an average investor, small business owner, entrepreneur, or family. On the most basic level, these problems are about how to allocate money. The choices are many money can be borrowed or saved money can be invested into projects, undertaken with partners or with the aid of a lender projects can be avoided altogether if they do not appear valuable enough. Finance is about how best to decide among these alternatives and this textbook will explain how.

Step 1 Estimate Your Future Income

Self-employed workers receive income that is not subjected to payroll tax withholdings. This does not mean that they do not have to pay taxes on this income. The tax laws require such taxpayers to estimate their tax liability and pay it in quarterly installments by April 15, June 15, September 15, and January 15 for the tax year. The amount of these payments depends on a person's total income from all sources, deductions, exemptions, and credits, which determine taxable income.

Patterns of ownership and control

Concentrated in the hands of an entrepreneur or dispersed among many investors The research in this area originates in the work of Grossman and Hart (1988) and Harris and Raviv (1988), who examine the optimal allocation of voting and cash flow rights in a firm. The specific question of how control is likely to be allocated has not received a clear answer. For several reasons, entrepreneurs may wish to keep control of their firms when investor protection is poor. La Porta et al. (1999) note that if expropriation of investors requires secrecy, sharing control may restrain the entrepreneur beyond his wishes. Zingales (1995), La Porta et al. (1999), and Bebchuk (1999) argue that if entrepreneurs disperse control between many investors, they give up the private benefits premium in a takeover. In Bebchuk's (1999) model, diffuse control structures are unstable when investors can concentrate control without fully paying for it. Finally, an entrepreneur or his family may need to retain control...

Location of Financial Service Suppliers by Type of Supplier

Suppliers of financial services to small businesses are divided into two broad categories or institution types - depository and nondepository institutions. Depositories include commercial banks, thrifts (savings banks and savings and loans), and credit unions. Nondepository institutions include finance and factoring companies, brokerage and pension firms, leasing companies, and insurance and mortgage firms.22 Mean and median distances between each small business and its suppliers of financial services are provided in Table 3.1.23 In addition, this table provides the proportion of the institutions that are local, defined as those institutions located within 30 miles of the firm's main office.24 These data suggest that the distribution of distances is highly skewed. In 2003, the mean distance among all firm-institution pairs was 134 miles, while the median distance was 5 miles. This is a pattern that repeats itself across all institution types. Depository institutions were located an...

Negotiating with banks

Individuals and small businesses tend to bank with one institution and stay there. The bank chosen might be the one used by parents, or it might be because of perceived convenience, such as having a branch at a university campus. It never occurs to individuals that they may be getting a poor deal or that banks are in business to make a profit. Banks are very clever in that they market their products in a way that creates the illusion that they are doing their customers a favour, whereas they are unveiling their latest money-making schemes. Like the individual customer, business customers believe that they are in a very vulnerable position if they owe their bank money, but they can also clear any monies due by agreeing a loan with another bank. For many though, it is simply a case of not being bothered. Small business owners seem prepared to spend weeks and weeks chasing potential customers, but they will not reserve a week to visit all the banks in the area. It is a simple matter of...

Possibilities For Reform

Reformers see as protection of investors, the founding families call expropriation of entrepreneurs . No wonder,then, that in all countries - from Latin America to Asia to Europe - the families have opposed legal reform. There is a further reason why the insiders in major firms oppose corporate governance reform and the expansion of capital markets. As Mayer (1988) shows, existing large firms typically finance their own investment projects internally or through captive or closely connected banks. In fact, La Porta et al. (1997) show that the lion's share of credit in countries with poor creditor protection goes to the few largest firms. These firms obtain the finance they need, the political influence that comes with the access to such finance, and the protection from competition that would come if smaller firms could also raise external capital. When new entrepreneurs have good projects, they often have to come to the existing firms for capital. Poor corporate governance delivers the...

Free and feebased site

Hoover's is a portal that provides more than 3 million businesspeople with timely and reliable information and research tools. Hoover's is well-known for its cleverly written business descriptions of public and private companies. Hoover's own business description states Hoover's wants to be the business world's homepage. The company offers proprietary business information through the Internet, wireless devices, and co-branding agreements with more than 30 other services.

Location of Financial Service Suppliers by Type of Service

Table 3.2 provides mean and median distances between small businesses and their financial service providers, as well as the percentage of these providers that are local, by type of service for 1993, 1998, and 2003. Services are grouped into three categories asset services, which include checking and savings accounts loan services, which include lines of credit, capital leases, mortgages, equipment loans, motor vehicle loans, and other loans and financial management services, which include cash management, credit-related, pension, brokerage, transactions, and credit and debit card processing services.25

Agency Costs of Local Government Ownership and Enterprise Autonomy

The agency costs associated with local government ownership and enterprise autonomy have been an important factor in determining the speed and direction of the market reforms that led to the current emphasis on corporate governance. Because of China's distinctive approach to reforms, local governments emerged as dominant owners and powerful regulators of companies under their jurisdiction. While bureaucratic entrepreneurialism at the local level generated much of the growth dynamism in the early years of reforms, tensions between powerful local incentives and national interests have been growing. The coexistence of different ownership forms has created additional incentives and opportunities for managers to realize private benefits from their control over state assets. With the rapid development of the nonstate sector, managers or their relatives and friends often have their own businesses, which provides opportunities for diverting state assets to private benefits. A large body of...

Agency Costs And Ownership Structure

In 1997, the Federal Reserve Board released its National Survey of Small Business Finances (NSSBF), which collected data from a nationally representative sample of small businesses. Data from the NSSBF enable us to analyze the relationship between agency costs and ownership structure because the survey provides financial data on a group of firms whose management owns 100 percent of equity. These firms enable us to estimate the expected expense for the no-outside-equity agency-cost base case. Furthermore, the database includes firms with a wide range of ownership and manager owner structures, including firms owned by two individuals as well as firms managed by outsiders with no equity stake. As a consequence, small firms appear well suited for a study of equity-related agency costs.

Careers In Management

Managers are involved with planned and unplanned activities. These activities include scheduled and unscheduled meetings, inspection tours, report writing, new product launches, disagreements among employees, customer grievances, and changes in business trends. According to Miller and associates (1996), a manager should be able to shift continually from person to person and from one subject or problem to another. A manager who is also the business owner makes all the daily decisions involved in the business.

The Case Where the Managers of the Issuing Firm Have Better Information Than Investors

A number of academic papers have noted that entrepreneurs who expect their firms to do well, and who have opportunities for further investment, will have the greatest incentive to underprice their shares.15 These papers argue that investors understand that only the best-quality firms have the incentive to underprice their issues therefore, these investors take a more favorable view of the subsequent issues of firms that underpriced their IPOs. The incentive to underprice an issue is therefore determined by a firm's intention to seek outside financing in the near future. Although this argument seems plausible, empirical research on the pricing of new issues provides no support for this hypothesis.16

Thirteenth Century Interest Rates

High interest rates were a subject of widespread complaint at this time by Church, State, the common man, and especially by the entrepreneur. States tried to fix legal limits above which would be incurred the sin of usury. In Milan, 15 was the legal maximum in Sicily, 10 . In Verona, in 1228, it was 1212 . In Modena, in 1270, it was 20 , and in Genoa throughout the thirteenth century it was 15 . (230) In England pawnshop limits were set at 43 3 in the thirteenth century in some places pawnshop limits were much higher for example, 300 in Provence and 173 in Germany. (233)

Towards Human Consistent Data Driven Decision Support Systems via Fuzzy Linguistic Data Summaries

We present the use of fuzzy logic for the derivation of linguistic summaries of data (databases) for providing efficient and human consistent means for the analysis of large amounts of data to be used for a more realistic business decision support. We concentrate on the issue of how to measure the goodness of a linguistic summary, and on how to embed data summarization within the fuzzy querying environment, for an effective and efficient computer implementation. Finally, we present an implementation for deriving linguistic summaries of a sales database at a small-to-medium size computer retailer. By analyzing the linguistic summaries obtained we indicate how they can help make decisions by the business owner.

Summary And Conclusions

In this article, we use data on small businesses to examine how agency costs vary with a firm's ownership structure. Because the managerial ownership of small firms is highly variable, with a range from zero to 100 percent, we are able to estimate a firm's agency costs across a wide variety of management and ownership structures.15 By comparing the efficiency of firms that are managed by shareholders with the efficiency of firms managed by outsiders, we can calculate the agency costs attributable to the separation of ownership and control.

Present Value With State Contingent Payoff Tables

Almost all companies and projects are financed with both debt and levered equity. You already know what debt is. Levered equity is simply what accrues to the business owner after the debt is paid off. (In this chapter, we shall not make a distinction between financial debt and other obligations, for example tax obligations, and we will not cover different control rights. This is left to Part IV.) You already have an intuitive sense about this distinction. If you own a house with a mortgage, you really own the house only after you have made all debt payments. If you have student loans, you yourself are the levered owner of your future income stream. That is, you get to consume your residual income only after your liabilities (including your nonfinancial debt) are paid back. But what will the levered owner and the lender get if the company's projects fail, if the house collapses, or if your career takes a turn towards Rikers Island What is the appropriate compensation for the lender and...

Fourteenth Century Interest Rates

In Florence and Pisa, merchants and entrepreneurs in the fourteenth century could finance private business ventures at 7-15 . (253) It is stated that a decline in interest rates occurred at this time. In Venice loans were made to traders for activity within the city at 5-8 in the middle of the century. Later in the century 5 became the rule.

How Many Interest Rates Are There in a Competitive Market

This process of striking a deal in one market and an offsetting deal in another market simultaneously and at more favorable terms is called arbitrage, and doing it is called arbi-traging. Of course, someone must be paying for all this free money, and it must be the record keepers because the borrowers and the lenders are all making money. Our intrepid entrepreneurs will lose their proverbial shirts and go out of business. The moral of this is clear As soon as different interest rates are offered for essentially the same risk-free loans, arbitrageurs will take advantage of the situation by borrowing at the low rate and lending at the high rate. The gap between the two rates will be closed quickly, and for all practical purposes there will be only one rate available in the market.

The Squeaky Collection Wheel Gets The Check

An accounts receivable aging schedule was shown in Exhibit 2.4. The next step is to use it as an analytical tool and as a collection trigger. With most small businesses now using microcomputers and sophisticated accounting software, they can get instantaneous accounts receivable aging schedules and can use the computer as an analytical tool. The company can define the criteria that meet its needs and correspond to its collection philosophy. For instance, the system could highlight on a weekly basis all receivables coming up to 30 days old and those over 30 days old and still unpaid, and on an every-other-day basis all receivables over 60 days old. This allows the company to stay current on all overdue invoices and take appropriate action regularly and persistently. The company may also wish to identify those bills that have been paid each day and

Saving to Buy a Home or Business

When saving money for starting or buying a business, most people encounter the same dilemma they face when deciding to save to buy a house If you fund your retirement accounts to the exclusion of earmarking money for your small-business dreams, your entrepreneurial aspirations may never become a reality. Generally, I advocate hedging your bets by saving money in your tax-sheltered retirement accounts as well as toward your business venture. As I discuss in Part III, an investment in your own small business can produce great rewards, so you may feel comfortable focusing your savings on your own business.

Saving for Big Purchases

If you want to buy a car, a canoe, or a plane ticket to Thailand, do not, I repeat, do not buy such things with consumer credit (that is, carry debt month-to-month to finance the purchase on a credit card or auto loan). As I explain in Chapter 5, cars, boats, vacations, and the like are consumer items, not wealth-building investments, such as real estate or small businesses. A car begins to depreciate the moment you drive it off the sales lot. A plane ticket is worthless the moment you arrive back home. (I know your memories will be priceless, but they won't pay the bills.)

Who controls firms what are their objectives and why should it matter

The main current within this literature took shareholders to be principals, and managers to be agents, in a classic principal agent relationship (Jensen and Meckling 1976 Fama and Jensen 1983 Shleifer and Vishny 1997). A principal, who is too busy or otherwise disinclined to run his or her own business, employs an agent to do it. The terms of employment are set by the principal - subject of course to there being a suitable person prepared to accept them. So the principal is in ultimate control but the agent has the advantage of being on the spot. And the agent, like everyone else, is (to repeat) selfishly rational looking after Number One. Given information asymmetry between principals and agents - that is, the agents are much better informed both about their own actions and about their outcomes - it is never likely to be optimal for the agents to act in a way that is optimal for the principals.3 We can conclude that it would be dangerous to expect uniformity from 'outsider' systems...

Managing economic webs and partner networks

In order to capture the full value of their intellectual assets, companies have to concentrate their forces on those areas where they can create most value for customers and have to cooperate with partners to cover the other areas where they have decided not to act themselves. Because it is no longer rational to manage the complete economic chain by itself, the company has to give up control and rely on independent partners. Because management cannot give enough attention to businesses that do not belong to its own core activities, it would probably fail in a market environment that requires constant management attention and immediate action when changes occur. So it is better to free up management power in the shaper company and to use entrepreneurial power in the new partner company to fully leverage market dynamics for the complete economic chain or partner web by keeping these partner organizations independent or at least by owning only a minority share of equity.

Summary and Discussion

The data provided in the previous section provided a detailed look at the relationship between the locations of a firm and its financial service suppliers and how those relationships changed over the decade 1993-2003. The results of the analysis conducted in this study suggest several things about the role of geographic proximity in the provision of financial services to small businesses.

Definition Of Corporate Governance

In its simplicity, this definition is not particularly informative. The Organisation for Economic Cooperation and Development (OECD) expands the definition to cover issues of stakeholder management, objective setting and monitoring performance corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. The Combined Code 2003 describes one of the supporting principles of corporate governance under Section A.1 headed The Board as The board's role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The board set the company's strategic aims, ensure that the necessary financial resources are in place for the company to meet...

Technological regimes and technological revolutions

It is here that the separation between financial and production capital has its most fruitful consequences . . . Financial capital will back the new entrepreneurs and it will be more likely to do so, in spite of the high risk, the more exhausted the possibilities are for investing in the accustomed direction. be said for 'footloose capital', and the more so at times like the present. However, like Lazonick, she does not differentiate systematically among sectors. The financial capital that backs the new entrepreneurs is, in the present period, venture capital, and one can see the importance of its role in the new sectors which are the spearhead of the revolution, such as software and microelectronics. But of equal interest to the sectors that are created by the new paradigm are those, much more numerous, which are transformed by it. Some transformations (as with machine tools) have happened already others are in progress others are still to come. We discuss some of these changes in...

Suggested Areas for Additional Research

The central unanswered question in the literature is why does distance matter in banking As discussed in the literature review, there are several theoretical reasons to believe that distance should matter in banking, each of which relates to some aspect of transactions costs. Nevertheless, there has been very little empirical work that has attempted to determine the role of these transactions costs in order to ascertain why distances between financial institutions and their customers (particularly small businesses) remain predominantly local. In the current study, we have shown that financial services provided to small businesses tend to be provided by local suppliers, but we are unable in this analysis to determine the relative contributions of different types of transaction costs in leading to this outcome. Without such an analysis it is difficult, if not impossible, to determine what is driving the changes in distance observed in this and other papers, or to speculate about the...

Emotion in the Kingdom of Rationality

Financial ORGANISATIONS AND bureaucracies comprise a vast infrastructure offragile claims and promises between creditors and debtors. Default is never unthinkable past trust can shatter. Money is created out of promises between public and private debtors (governments, taxpayers and entrepreneurs, plus us borrowers) and creditors (private global financial institutions, and the public if bondholders and or savers). Money's vital role in economic activity may often be benign private creditors finance national debt for sound government activities, allowing more favourably priced credit to foster economic activity which a government can tax to repay its debt. But since the future is unpredictable, these fragile bonds of trust may collapse because 'ventures may fail, taxes cannot be collected, debts cannot be repaid' (Ingham 2004 132 3). Economic 'decline' can set in ('depression' is an emotional term disliked by today's economic and political leaders). All economic decisions are made in an...

Valuebased marketing the new marketing challenge

But, by encouraging user groups in this way means managers will have to develop new approaches. In contrast to the traditional corporate enterprise, the virtual community will require flexible and organic approaches and engagement by vendors, managers and knowledge workers. Seeding, feeding and weeding represent much richer metaphors for the evolution of community marketing than detailed blueprints and plans. This organic approach is driven in part by the need to be responsive to the emerging needs of community members but also by the necessity to run their own business and value creation model a jour, without being able to fully control the ''ecosystem of the community'' and of its sponsors. This requires from managers a set of new techniques and skills in working with prospects and customers - in this case with community members.

United States Export Import Bank

Ex-Im Bank provides working capital guarantees (pre-export financing), export credit insurance (post-export financing) and loan guarantees and direct loans (buyer financing). No transaction is too large or too small. On average, 85 of its transactions directly benefit US small businesses.

Has the Cadbury Report resolved the problems of corporate governance

Critics could argue with some justification that it is futile to rely on non-executive directors to monitor executive directors. Executive and non-executive directors are perceived to be playing musical chairs at each other's boards, with little time or facility for any detailed role. For example, a minister of the Crown who acted as non-executive director for a company in the defence industry has gone on record saying that he was unaware of major business decisions made by the company. This only adds force to the view that they are engaged only for their contacts and not for any major corporate governance role. Even executive directors question whether it is feasible for part-time directors to make any valid comment on the work of the full-time professional directors, and successful entrepreneurs have been known to see them simply as a waste of money. However, there is clearly important progress being made by the ASB in developing voluntary 'best practice' statements such as Interim...

No Pay Before Its Time

That the company can hang onto its money as long as possible while continuing to maintain proper relationships with suppliers. Large and small businesses need efficient and effective methods to control their cash outflows. One of the most efficient methods is to centralize the payment of accounts payable and then to schedule payments company-wide paying as late as terms allow. As with accounts receivable, the company can also play the accounts payable float. Float factors used to delay check clearing in the payables system include internal systems, mail, customer systems, and bank clearance float. A schematic depicting the float factors in a typical centralized disbursements system is shown in Exhibit 2.10.

Rent Seeking And Corruption

Why are institutions so important In Chapter 2 we showed how GDP is a measure of the value added that a society produces. We also saw how total income in society is equal to the value added produced. However, while society can only earn income by producing value added, the same is not true at the individual level. An individual can either earn income by making value added (what we will call being an entrepreneur) or through taking the value added someone else has produced, in which case they are a rent seeker. A classic example here might be the difference between a merchant (entrepreneur) and a pirate (rent seeker). 1. The rent-seeking sector absorbs labor that would otherwise go into entrepreneurial activities. 2. By earning income from the value added that entrepreneurs create, rent seekers act as a tax and decrease the supply of entrepreneurs. 3. If the rewards to rent seeking are high, the most talented people become rent seekers and the quality of entrepreneurs suffers. One...

The Premodern Corporation

Corporations were understood to be vital to American economic development, in part because they provided entrepreneurs with a means to secure needed financing but also because they offered choices to investors and thus a value-based system for allocating private capital. Investors outside the control group, of course, had no influence on corporate policies or conduct. They were only interested in securing profitable returns by backing new industries early, or by free-riding on the coattails of the great industrialists. In the nineteenth century, the investors were largely wealthy individuals (some of them industrialists in their own right) looking to risk their savings in dynamic new ventures. Large numbers of these investors were European, as were many of the engineers, managers, and other professionals and the thousands of low-cost laborers who migrated to America during this period. The business environment at the time was totally opportunistic and laissez-faire the rough rules of...

Juggling the Books to Conceal Embezzlement and Fraud

Fraud and illegal practices occur in large corporations and in one-owner manager-controlled small businesses and in every size business in between. Some types of fraud are more common in small businesses, including sales skimming (not recording all sales revenue, to deflate the taxable income of the business and its owner) and the recording of personal expenses through the business (to make these expenses deductible for income tax). Some kinds of fraud are committed mainly by large businesses, including paying bribes to public officials and entering into illegal conspiracies to fix prices or divide the market. The purchasing managers in any size business can be tempted to accept kickbacks and under-the-table payoffs from vendors and suppliers.

Capital structures venture capital private equity

So for SMEs, the pecking order theory has to apply. Such companies cannot determine their gearing ratio (the comparison of debt to equity) as how much capital they have is determined by how much capital they can get their hands on. Once the owners of a business have found out how much debt they can have, they have to make a decision - do I aim to grow the company and settle for equity dilution, or do I retain total control of the business and accept limited growth Many small business owners opt for the latter and this is given as one of the main reasons why businesses fail to achieve their growth potential in the United Kingdom. Even where equity dilution is accepted, it can be difficult for small businesses to attract equity capital. What happens is that as businesses grow they need capital investment on top of higher levels of working capital and cannot offer sufficient security to meet their escalating needs. In addition, the SME will not have grown big enough to attract capital on...

Bank And Market Centered Governance

Despite the difficulty of classifying financial systems into bank- and market centered, economists at least since Gerschenkron (1962) have engaged in a lively debate as to which one is superior, focusing on the hypothesis that bank-centered systems are particularly suitable for developing economies.This is not a place to review this debate. Rather, our concern is that the interest in monopoly bank lending distracts attention from the important role that stock markets play in external finance. Equity financing is essential for the expansion of new firms whose main asset are the growth opportunities. In principle, firms could utilize private equity financing, but it has many of the same problems of excessive investor power suppressing entrepreneurial initiative as does monopoly banking (see, e.g., Myers, 1977 Burkart et al., 1997). Public equity financing, for which a developed stock market is needed, has other advantages over private equity financing. It allows the buyers of equity to...

Potential Courses of Action for the Banks Involved

Ultimately, these liability issues are certainly a primary reason for involvement of external consultants, but they should not be the only reason. The main goal is to utilize experts with appropriate references who help ensure the survival of the embattled company. In this context, close and trust-based cooperation of all stakeholders is indispensable. Executives or entrepreneurs who view consultants, and the restructuring concept that will be mutually developed, merely as a compulsory exercise, do not meet the standards of recapitalization worthiness.

Potential Courses of Action for the Company in Crisis

Risk-oriented funds that come with a willingness to become involved with crisis companies if a positive continuation prognosis has been made, and if the shareholders, as well as the banks, are ready to make appropriate sacrifices, have increasingly established themselves on the German market. In the eyes of entrepreneurs or the proprietor family, this approach is, however, more or less the same as giving up their own business, which is why this option is only considered in cases of extreme emergency.

The Business Environment And Strategy

The Austrian economist Joseph Schumpeter was the first to identify and study the dynamic relationship between industry structure and competition. Schumpeter saw innovation, a 'perennial gale of creative destruction' (cited in Grant, 1998 p. 71), as being fundamental to competition and the principal driver of the evolution of industry. A typically healthy economy as defined by Schumpeter is one that is continually disrupted by innovations in technology, and not one in equilibrium as described in classical economics, where the focus is on the optimization of resources within a stable environment. The role of the entrepreneur or innovator in the The length of Schumpeter's long waves has also been decreasing. Governments and organizations began to search systematically for new technologies during the third wave in the early part of the twentieth century, which has increased the speed of industrial structural change. The overall implications are that many of today's organizations, even the...

The Prerequisites for a Persuasive Restructuring Concept

In this regard the personality of the entrepreneur might be both a company's strong point, and its weakest point simultaneously. It is he or she who drives the company, and who surrounds himself or herself with other executives that fit his or her style and implement his or her or ideas. This could very well be the root cause of the enterprise's adaptation problems when market conditions change and the dominating entrepreneur does not recognize this fact in a timely manner. In these person-oriented structures potential successors are in jeopardy of failure. Consequently, the entrepreneur and the corporate executives play a key role in the restructuring process.

Economic Determinants Of Control Concentration And Evolution

Remain among the major shareholders in subsequent years. Morck, Shleifer, and Vishny (1988) argue that the founder of a firm may provide essential leadership skills, especially in younger firms, and should therefore retain control. Founder commitment at the time of the IPO is included in the model as a proxy for the private benefits (which may be nonpecuniary) that the founder extracts from controlling the firm (Johnson et al., 2000). Given that large shareholders are more likely to extract private benefits13 in German firms, we expect higher control concentration in Germany (Proposition 3). Zingales (1995) and Mello and Parsons (1998) show that the optimal path of selling control to maximize the proceeds consists of two stages. First, the initial shareholders should take the firm public and sell some cash flow rights to a large number of investors in order to retain control.14 Second, they should sell control to a new controlling shareholder at a premium. Morck, Strangeland, and...

Business Growth Through Risk Taking

Nearly all operational tasks and processes are now viewed through the prism of risk (Hunt 2001). Indeed the term risk has become shorthand for any corporate activity. It is thought not possible to create a business that doesn't take risks (Boulton et al. 2000). The end result of successful strategic direction setting must be capacity to take a greater risk, for this is the only way to improve entrepreneurial performance. However, to extend this capacity, businesses

Microsoft Net My Services

The initial focus of this product was as a user-centric, single sign-on mechanism, linking Passport to Windows Active Directory consisting of services like My Wallet, My Location, My Profile, with the Passport user ID as the unique identifier. Microsoft intend to open it up so that it can be allocated to groups and even small businesses, evolving into an authentication system with its own set of management tools. Microsoft's Passport V3, which will support the Kerberos encryption

Tax Management In Action 31 continued

Much of the impetus for the growth in LLCs versus corporations is the tax advantage of this flow-through entity. However, in strategic tax management, minimizing tax is but one objective in the firm's strategic plan. Even if a firm (or a client) is not an entrepreneur, an understanding of the tax treatments of noncorporate entities is critical. As discussed in Chapters 8 and 13, many corporate restructurings and international ventures use noncorporate entities. Thus, a basic understanding of flow-through tax treatments is necessary. One other important background concept should also be mentioned the U.S. check-the-box regulations. Under these rules, management can simply check a box on a noncorporate entity's tax return to pick whether it is to be treated as a tax-free flow-through entity or as a taxable corporation. Whether the entrepreneur or manager of a newly formed subsidiary business should choose flow-through or corporate treatment is the subject of much of this chapter. For...

Agreements with Financial Partners

The company will have a good chance of coming to an agreement with its financial partners if the key stakeholders attest that the restructuring concept has a high likelihood of succeeding, and if they do not want to lose the company as a future customer. This is ultimately the rational formula of success that must be considered by the executive management and or the entrepreneur. These processes happen outside of the direct sphere of influence of the affected company in crisis. Without substantial financial resources of its own - which have been consumed in most cases - entrepreneurs and shareholders are left with just the one opportunity to make their earnest restructuring concept credible as they strive for continuation and a means of financing the business. In some cases, entrepreneurs also attempt to replace financial partners by submitting a joint offer with a new partner along with the expectation that the departing partner will waive entitlements. This strategy does, however,...

The Cash Squeeze Dont Get Caught in the Middle

Keep this thought in mind despite all the headlines around bank lending practices, venture capital investing, public offerings of stock, etc., the largest single source of operating capital for most businesses is the money they borrow from their creditors, that is, accounts payable. Almost every entrepreneur has a few stories about the struggles he or she went through to squeeze more working capital out of his or her balance sheet.This usually means increasing available cash by delaying payment to creditors, while at the same time trying to make sure their customers don't do the same thing to them.

The economic environment for enterprises in a new economy

Corporations are reorganizing, essentially shifting from centralized hierarchies to more entrepreneurial, decentralized structures and finally to flexible networks. And a veritable revolution has transformed the world of finance, bringing a hyperefficient use of capital. In addition, the end of the Cold War spurred increasing integration of what is becoming a truly global economy as well as the emergence of many new democracies, all of which has formed a more efficient market economy.

Shielding Your Assets S and C Corporations

Before incorporating, a company must also divvy up ownership in the form of stock. Most small businesses don't trade their stock on an open exchange. Instead, they sell it privately among friends and investors. Only relatively small businesses can avoid taxation as a corporation. After a corporation has more than 100 shareholders, it loses its status as an S corporation. In addition, only U.S. residents can hold S corporation stock. Nonresident aliens (that is, citizens of another country) and nonhuman entities (such as other corporations or partnerships) don't qualify as owners. Some tax-exempt organizations, however including pension plans, profit-sharing plans, and stock bonus plans can be shareholders in an S corporation.

Warning Signs Yellow And Red Flags From Litigation Research

As is outlined in Chapter 16, not all court cases are perceived equally. This is true both because of factors relating to hedge fund investing itself, as well as factors relating to the court cases (and frequently due to a combination of the two). An institution considering investing in a hedge fund has a lot of choices. Although the 9,000+ hedge fund number that is bandied about clearly is not representative of the number of funds in which an institution would invest (the number is probably closer to 3,000, based mostly on asset size), and even though many quality hedge funds are periodically or even permanently closed to new investors, institutional hedge fund investors still have far more choices of places to put their money than, say, a venture capitalist. (This is certainly not meant to excuse venture capitalists from due diligence.) Given this, an institutional investor looking at a hedge fund might very well be, and often is, far more likely to have a negative reaction to a...

Anticipation Policy Changes

Strategic tax planning anticipates actions by competitors in markets in which the enterprise interacts, along with actions by governments. As discussed previously, the entities differ on this attribute. For C corporations, there seems to be no clear favorable or unfavorable tax policy trend by U.S., foreign, or state governments. Although recent U.S. tax legislation was favorable to S corporations, little action is planned for the future. Instead, most tax policy in the near term will probably be directed at LLCs, because they are replacing S corporations and limited partnerships. (How markets and competitors react to the entrepreneur's entity choice depends on the nature of the business and the industry it is in, which is beyond the scope of this book.)

The new economy favours economic value creation from intangibles

Number of companies from traditional industrial and service sectors will start to concentrate on their strengths and will try to outsource other activities. The latter require physical assets and ''commodity'' resources that specialist businesses have decided to build as their own business model. This development will lead to a general transformation process, in which today's physical assets-intensive enterprises will migrate to a much ''lighter'' highly flexible and intangible asset-based enterprise that is able to create more value for customers.

Adjusting Value Adding for Risk

The entrepreneur faces both short- and long-term risk. In the short run, cash flows can vary and losses may occur, especially in the early years of an enterprise. Long-run risks involve the potential for more serious losses, such as lawsuits or bankruptcy. Short-run losses can actually be aided by a tax system to the extent that they are deductible The taxes saved by the deduction reduce the real cost of the loss.

Niche Markets And Microcredit

ShoreBank Pacific's aim is to combine community development with ecosystem restoration. A major focus of this new entity is the support of business entrepreneurs' efforts to build green markets for their products. In addition, the bank has introduced ecodeposits, wherein ecodeposi-tors help finance protection of the forests in the U.S. Pacific northwest (Crane 1999).

Transaction Costs and Value Adding

Attorney, accountant, broker, and syndicator fees can vary substantially across new entity types. Typically the cheapest entity to form is a sole proprietorship, for which most jurisdictions require little legal documentation. The next cheapest is the general partnership, for which usually only an operating agreement must be kept. Limited partnerships must file articles of partnership, and corporations must file articles of incorporation with the government in the country where they are located. The attorney fees for drafting these depend on the number of owners and the number and complexity of legal arrangements that the entrepreneur desires. LLCs also must file documents with the government, which are more expensive to draft. If outside financing is sought (see Chapter 4 for more details), the transactions costs are typically higher for equity than debt, and increase proportionately with the number of investors and amount of the financing.

Loans from Stockholders

This is another special category of loan, most often seen on the balance sheets of privately owned companies operated by the owners. For some privately owned companies, this is how owners put money into the company when it needs it and take it back out again when it doesn't. All too frequently, however, business conditions may not improve soon, so loans from stockholders may stay on the balance sheet for years. In fact, banks and other outside lenders may actually require that such balances remain unpaid as long as the company has outside loans. Thus, these amounts can end up looking more like owners' equity than loans to the company, often a frustrating reality for entrepreneurs and small business owners, who had hoped to be repaid at some point.

Understanding the Taxes You

Some people feel lucky when they get a refund, but all a refund really indicates is that you overpaid in taxes during the year. You should have had this money in your own account all along. If you're consistently getting big refunds, you need to pay less tax throughout the year. (Fill out a simple tax form, the W-4, to determine how much you should be paying in taxes throughout the year. You can obtain a W-4 through your employer's payroll department. If you're self-employed, you can obtain Form 1040-ES by calling the IRS at 8OO-TAX-FORM 800-829-3676 or visiting its Web site at www.irs.gov. Also, the IRS Web site has a helpful withholding calculator at

Anecdote Small Business Failures

In New York City, two out of every five new restaurants close within one year. Nationwide, the best estimates suggest that about 90 of all restaurants close within two years. If successful, the average restaurant earns a return of about 10 per year. Owners seem to lose money on average. So, why open yet another restaurant I mentioned earlier (Page 13) that restauranteurs may just enjoy owning restaurants. But a more likely explanation is that restauranteurs are overly optimistic, and just do not realize how tough it is to profitably run a restaurant. More generally, a Small Business Administration study of small business failures from 1989 to 1992 found that 33 of businesses failed within 2 years, 50 within 4 years, and 66 within 6 years. Yet in a survey of about 3,000 entrepreneurs, 81 of entrepreneurs believed that their chances of success were at least 70 , and 33 believed that they had zero chance of failure

The evolution of organization structures

Growing globalization and emerging open international markets enabled companies to take advantage of these developments by integrating in a second stage their business processes across single group companies and national markets and by sharing knowledge on a global level, while stimulating entrepreneurship through decentralization at the same time. This also included optimization of the usage of tangible assets. Where it made sense, utilization of tangible assets was centralized (e.g. one computer centre per region). In other Changes experienced in the past and new corporate structures and processes that have been created represent an important foundation for ''old economy'' enterprises for their next organizational transition to a networked e-business enterprise. Traditional companies that have not yet taken the first step (moving to a true global organization structure) will not be able to take the second step properly and quickly. Changing from a functional international to a true...

Personal Finance Software

There are several software packages that allow individuals or small businesses to manage finances, such as paying bills either electronically or by check, and monitor investments. The packages are fairly sophisticated in that they provide for secure communications for electronic bill paying and other online banking services such as account reconciliation, as well as the importing of current stock-market quotes. The most widely used package is Quicken and, for small businesses, Quickbooks. Microsoft Money is also a comparable and popular package.

Case Study Amandas meeting her solicitor and his recommended financial adviser

Amanda was sat in her solicitor's office. Also present was the financial adviser from the firm of Accountants. The solicitor explained that many individuals and companies providing private equity had grown in financial stature in the 1980s and 1990s, and this had resulted in many private equity firms chasing larger deals. Accordingly, there had been fewer firms chasing smaller deals, but at least some of the slack had been taken up by successful entrepreneurs, turned business angels. It is to these business angels that he will turn to in order to get finance for Amanda's fledgling business.

From the functionallystructured international company to global corporation

The model that evolved was that of the global corporation based, on the one hand, on a matrix organization structure that provides controls and guidance globally across boundaries and business units and, on the other hand, on a culture that stimulates local entrepreneurship and gives front line managers a great degree of freedom. The pioneer company here was ABB, which created an organizational model for the global corporation that was later applied by many other companies.

Shareholder Value and the Stock Market Boom

Of capital as companies' prospects are assessed by people with every interest in exploiting all available information. So finance chases after those investment prospects which are likely to realize the greatest return. Managements with the greatest entrepreneurial skills in seeking out profitable opportunities from new technology or products will find it easy to raise funds to make those investments. The same financial markets keep the pressure on incumbent managements to minimize costs and rationalize wherever this is profitable. Poor profit results leave the firm vulnerable to takeover with control passing to more effective or aggressive management.

The managermanager relationship

Taiwan and mainland China, Soskice does not discuss. The role of Taiwan's state in its development can be described as 'governing the market', in the phrase of Wade (1990), but certainly in a much less intrusive manner than South. Korea's. Taiwan's industrialisation was driven by 'guerrilla capitalism' - by the highly entrepreneurial strategies of small and medium enterprises, which during the 1980s produced about two thirds of its total exports (Clark and Roy 1997 Hobday 1995a). These SMEs were hard for the government to coordinate and were disinclined to coordinate themselves in any formal way. It seems likely that, on Soskice's criteria, Taiwan would resemble Italy in being informally coordinated - highly successfully. Mainland China has been far less effectively coordinated than its economic successes would suggest Nolan (2001) shows that its industrial and technology policy largely failed, due to incoherence and bureaucratic rivalries one might argue that the country is simply...

The ABB management and enterprise culture

A lean head office with relatively few staff forced front line managers to be self-sufficient, to make their decisions themselves, and to act in their business and market in an entrepreneurial way. They concentrated on ways of creating opportunities and introducing innovations rather than finding ways to circumvent internal barriers or manipulate data to survive another corporate review. Barnevik made the small, local, and radically decentralized elements the new organization's core, and the big, global, and central reporting and control characteristics the overlays. His main objective was to create an environment that enables people to think and act in an entrepreneurial way within the boundaries of the company. The role of front line managers was not to be an effective part of a massive corporate machine, but to be entrepreneurial initiators with full responsibility and accountability for the development of a front line company. Such managers, because they headed a separate legal...

Anecdote Working Capital Management

Entrepreneurs usually fail for one of two reasons, and both are common The first is that the business is just not a good idea to begin with. There is not much you can do about this. The second is that the business is too good of an idea, and the entrepreneur is not equipped to handle the success. The growth in sales consumes so much cash for increases in working capital that the firm fails to pay back its own loans The cash is tied up in production, or in inventory, or in credit extended to customers (payment to be received), when instead it is needed to flow back to the bank. For growing firms, proper working capital management is an issue of first-order importance.

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