BA 101 OSU – Flashcards
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the prime mover of business
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Definition of risk
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-the more uncertain a outcome is there more risk there is -certainty nowise more valuable than uncertainty
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risks relationship to uncertainty
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high risk= high reward
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Risk and reward relationship
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How do i react to uncertainty? and the magnitude of gain or loss
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two factors that determine an individuals willingness to take a risk
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individuals or organizations who try to earn a profit by providing products that satisfy peoples needs
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Business definition
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it is the difference between what it costs to make and sell a product and what a customer pays for it. earning profits contribute to society by providing employment, which in turn provides money that is reinvested in the economy
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why is profit the primary goal of a business
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revenue - cost= profit
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R-C=P
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1.business ability to attract the demand 2.customers choose you, not your competitor 2.control your cost
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Three things a business must do to get Profit and not loss
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five motivation needs that people are motivated to achieve
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Maslow hierarchy is what
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self actualization esteem social safety physiological
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what needs are in mallows hierarchy
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any group or individual who can affect or is affected by a corporation
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what is a stakeholder
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a map of positions internal and external stakeholders with a company
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what is a stakeholder map
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capitalism socialism communism
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what are the different types of economic systems
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economic system that provides an opportunity for a business to succeed or fail on the basis of market demand
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what is a free enterprise
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right to: own property earn profits and use them as they wish decision making autonomy to choose to compete
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what are the needs for a free enterprise to exist
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equity- distribution of wealth externalities- the situation in which costs spill over onto someone not involved in producing or consuming the good
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two major criticism mad of Free enterprises
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taxation- what are our tax rates spending- how does the government spend our money may have a big impact on business deficit/debt
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what is fiscal policy
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increase and decrease the supply of money this impacts interest rates
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what is monetary policy
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demographics consumer taste or preference
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how does society affect business
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the characteristics of human population and population segments diversity two working parents single parent
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what is demographics
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primary health indicator production or output gdp employment
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what are different economic indicators
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consumer confidence -it will tell you where the economy is headed -are consumers and businesses able and willing to spend -gdp is related to profit so if gap is going down businesses aren't doing to good
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what is an example of leading economic indicator
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to move forward to the future ad compete with other nations -society- unleashes creative destruction and society -business- critical path to competitive advantage
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why is innovation important to society
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the idea that sustained long-term growth is brought about by innovation even while this innovation "destroys" or supplants established business and practices
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what is creative destruction
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netflix and redbox convenience Walmart and the barcode
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examples of creative destruction
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unleashed creative destruction and propels society forward -it is the engine of progress
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why is innovation important for business
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production differentiation cost advantage time to market
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path to competitive advantage (3 ways)
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your competition is innovating and the marketplace is evolving. you have to keep up or fade away
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competitive advantage necessary for survival
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social standpoint pushes society forward -business standpoint innovation can be a source of competitive advantage but a certain amount is necessary to stay relevant
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definition of innovation
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small improvements to existing products, processes and services
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what is incremental innovation
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involves major change, typically there are unknowns concerning both customer and technology
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what is radical innovation
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new way of doing things that disrupt or overturn the traditional business methods and practices
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what is disruptive technology
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downloadable music:Cd's tapes smartphones:pocket computers
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EX of disruptive technology
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where are you innovating on what you take to the market
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what is product/service innovation
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nike flyknit shoes (only had to sew together two piece of cloth rather than 70)
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EX of process innovation
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behind scenes, look at a part of business operations and either modify or add new processes
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what is process innovation
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patents, copyrights, trademarks
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intellectual property
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the inventory of creator is granted exclusively with the full force of law behind it
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why is intellectual property important to the innovation process
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-unleashing creative destruction which propels economic and human progress -society accepts short term monopolies created IP protection in order to enable continued social welfare through innovation
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economic incentive
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ambiguity- both terms of when infringement has occurred and if it has cause economic harm
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what are issues with economic incentive
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the distinction between fair use and infringement may be unclear and not easy defined. There is no specific number of words, lines, or note that make be taken without permission
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ambiguity, the use of fair doctrine
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threaten inventors with tangle of infringement suits -patent block competition within the patet scope so if a firm has enough patents it may be able to monopolize its market
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thickets of patents
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buy out patents small arm vines who have no intention os using patents for any kind of product they just simply go out and try to find instances of what they consider instances, than threaten the company with lawsuits. their whole business model is based around suing for patent infringement
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Patent trolls
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companies sue each other over technology
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patent wars
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"this is mine and i get to decide who gets to use it"
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closed off innovation
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assumes that firms can and should use external ideas as well as internal ideas "exchange ideas with other people"
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open innovation
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it is largely about finding new uses for old existing ideas and applying and combining existing ideas in a new way
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what is meant by the statement innovation is derivative
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-tolerance for risk and failure -commitment from top management -openness -empowerment and autonomy -disciplined
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characteristics of a strong innovation culture
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firms fail when their core product is undermined by a disruptive technology
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innovators dilemma
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the act of recognizing and connecting innovation with opportunity
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why entrepreneurs do it
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self directed -self confident -high energetic -tolerant of uncertainty -competitive -passionate -educated
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characteristics of successful entrepreneurs
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idea: a thought, conception or notion that exists in the mind as a product of mental activity Opportunity : a favorable set of circumstances that creates a need/desire for a new product, service or business idea
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difference of idea and opportunity
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is there a market? can i execute? does the math work?
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what questions are asked in the opportunity screen
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a precise statement of the rationale for the business and a step by step explanation of how it will achieve its goals "who is my audience and how is it going to be used"
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what is a business plan
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market analysis competitive analysis operations plan funding request financials risk
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what are the major sections of a business plan
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bootstrapping friends and family venture capitalist angel investors crowd funding
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five sources of funding for start-ups
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angel investors venture capital
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what start up decisions correlate with success?
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a approach that builds companies and launches products quicker. "build measure learn feedback loop"
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what is lean startup
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a new creative approach to business social engagements and social engagements and social services. they do not enlarge wealth of owners and shareholders they operate to improve social equality and to improve living conditions of people in the community
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what is social entrepreneurship
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charity is dependent on handouts, so they started a business so they could fund themselves
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(In tom's video) why did he choose to start a business instead of a charity
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when your passionate about something you become very good at it and usually you make money when your good at something. and you'll be happy
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why is passion important for entrepreneurs?
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the purchaser of the franshise
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franchisee
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the company that sells a franchise
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Franshisor
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complexity resources specialization regulatory burden
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differences between small and big business
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independence cost focus flexibility
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advantages of running small business
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high stress undercapitalization managerial inexperience or incompetence
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disadvantages of small business
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small business administration -a government agency that offers managerial and financial assistance to small business
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what is SBA
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99.93% of america is considered small business
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how many businesses are "small businesses" in america
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sole proprietorship partnership c-corp s-corp llc
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different organizational types
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easy to form and sustain not a lot of requirements pass through entity
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advantages of sole prop
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unlimited liability you cannot bring any outside equity
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disadvantages of sole prop
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easy to maintain but need articles of partnership pass through entity mediocre future you can bring in partners
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advantages of partnership
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one partner has to have unlimited liability life length of partners
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disadvantages of partnership
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unlimited number of shareholders can generate massive amounts of capital limited liability
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Advantages of C-corp
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double taxed
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disadvantages of c-corp
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ease of c-corp limited liability best taxation, taxed like a partnership do not pay sell employment tax can have multiple owners (75) easier to sell stock
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advantages of s-corp
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easier to setup limited liability pass through entity bring in additional owners
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LLC advantages
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liability of a firms owners for no more capital than they have invested in the business
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limited liability
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in a world of unlimited liability very few people are willing to take risks associated with funding a business -limited liability decreases risk and thus increases access to funding/capital for business
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why limited liability is important?
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when two companies combine to make and sell similar products to the same customer merge
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merger
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when one company purchases another generally by buying most of its stock
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acquisition
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when a firm makes and sells similar products to the same customer merge
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horizontal merger
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when companies operating at different but related levels of an industry merge
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vertical merger
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a more acceptable firm that is willing to acquire the threatened company
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white knight
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a group of investors borrows money from banks and another institution to acquire a company, using assets if the purchased company to guarantee repayment of the loan
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leveraged buyout
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the firm allows stockholders to buy more shares of stock prices lower than the current market value
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poison pil
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an offer to purchase some or all of shareholders shares in a corporation. the price offered is usually at a premium to the market
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tender offer
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an even that nay occur when a corporations stockholders develop opposition to some aspect of the corporate governance, often focusing on directorial and management positions
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proxy fight
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assets=liabilites+owners equity
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accounting equation
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debts the firms owe to others
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liabilities
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cash, inventory , land, equipment, building, any tangible and intangible things
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assets
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contains all the money that has ever been contributed to the company that never has to be paid back
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owners equity
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generally accepted accounting principles= the common set of accounting principles, standard and the procedures that companies use to compile their financial statements. a combination of authoritative standards and simple the common accepted ways of recording and reporting accounting information
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GAAP
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Financial accounting standards board= a statement that requires all publicly traded companies in the US to classify their assets based on the certainty with which fair values can be calculated
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FASB
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focused on external users, accounting info and analyses prepared for people outside the organization
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financial accounting
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focused on internally, accounting used to provide info and analyses to managers within the organization to assist them in decision making
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management accounting
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reports revenue when earned and expenses when incurred
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accrual accounting
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revenue is recorded when cash is received and expenses are record when cash is paid out
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cash accounting
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the idea that revenue should be offset against expenses on the basis of their cause and effect relationship
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matching concept
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a formal record of financial activities of a business, person, or other entity. relevant financial info is presented in a structure manner in a for easy to understand
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financial statements
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income statement balance sheet cash flow statement
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major accounts (financial statements)
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financial performance during an accounting period -shows a companies revenue and cost PNL statements
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income statement
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reports the financial position/health at a point in time -a snapshot of assets and claims to assets -split into three; assets, equity, and liability
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balance sheet
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inflows and outflows of cash during an accounting period -shows the cash position of money -shows how much cash went in an out of the company three parts; cash from operations, cash from investing, cash from financing
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statement of cash flows
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provide services to organizations for a fee-reffered to as certified public accountant
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public accounting
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accountants who are employed either by a business or government agencies
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private accounting
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measure the speed with which a company can turn assets into cash to meet short term debt obligations
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liquidity ratios
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current assets/current liabilities
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current ratios
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current assets-inventory/current liabilities the higher the ratio the more liquid a company is and the more easily they can meet short term debt obligations
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quick ratio
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creditors, particularly creditors who require payment in a short period of time such as vendors extending trade credit to customers or potential customers
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who uses liquidity ratios
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they measure the amount of income/profit earned with the resources used to generate it
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profitability ratios
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gross profit/sales measures profitability on the costs of goods sold, the higher the number the more efficient a company is producing its goods
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gross margin
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net income/total assets illustratws how well management is employing the companies total assets to make profit
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return on assets
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net income/ sales overall profitability of the company, the higher the better
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profit margin
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net income/owners equity the higher the ration percentage, the more efficient management is in utilizing its equity base to generate a return for its investory
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return on equity
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investors and to a lesser extent creditors. for investors profit provide a good gauge income. creditors are concerned about profit as well, since cash to pay them ultimately comes from profits, but profit ratios typically are secondary
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who uses profitability ratios
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provides information on how much debt an organization has relative to other sources of capital, such as equity and income, measures both quantity of debt and quality
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debt/leverage ratios
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total liabilities/total assets measure the quantity of debt or leverage, the higher the ratio the more leveraged a company is
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debt to total assets
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operating income/interest expense sometimes referred to as the interest coverage ratio. measures quality of debt management. the higher the ratio the better a company is managing its leverage
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times interest earned
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total non current liabilities/equity measure the quantity of debt or leverage, the higher the ration the more leveraged a company is
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debt to equity
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creditors, investors and government officials
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who uses debt/leverage ratios
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measure how well a fir uses its assets to generate each 1$ of sales or cash
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asset utilization ratios
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how quickly am i converting receivables into cash? how quickly am i converting inventory into sales? how productive am i with my assets in generating sales?
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what do asset utilization ratios answer
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sales/total assets the higher the number the more quickly the company is turning receivables to cash, the higher the better
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receivables turnover
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sales/total assets the higher the better, it means your more efficient at managing their assets
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total asset turnover
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sales/total inventory the higher the number th quicker the company is turning inventory into sales/revenue
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inventory turnover
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investors and to a lesser extent creditors
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who uses asset utilization ratios
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how fast a company can turn its assets into cash to meet short term debt
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liquidity
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their judgements impact the company anyhow they look on their financial performance
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role of judgement in accouting
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the function of business that acquires funds for the firm and manages those funds within the firm, acquire and use funds Maximize owner wealth putting accountings words into action
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what finance
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a dollar today is worth more than a dollar tomorrow -the possible interest that money can earn will make it more valuable than when its in the future
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what s the time value of money
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maximizing wealth of shareholders
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what is financial value
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it comes from profit and cash flow(longterm) value can be driven from expectation of future cash flows (shortterm)
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where does financial value come from
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through dividends and realized capital gains
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how is financial value converted into a return
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inventory payroll rent and utilities accounts receivable
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what liabilities do i need to fund in the short term
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they need to keep enough but not more than enough on hand to meet these obligations
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what short term obligations do businesses have
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collect revenue trade credit line of credit commercial paper short term loans factor
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how do companies fund these short term obligations
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cash is reality, profit can be misleading a function of judgment- and it can be manipulated
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cash management and its importance
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through profits and cash flow management
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how do companies improve cash flow
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turn receivables stretch payables minimize inventory project, project
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TMS&P
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debt owners equity
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two types of finance in the long-term
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the specific mixture of long term and equity that a company uses to finance its operations
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financial structure
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the degree to which a business is utilizing borrowed money a company with high debt is said to be " "
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what is leverage
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it can boost profits it can be particularly effective in an expanding economy. it can deliver value
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upside of leverage
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if you overindulge things can get nasty quick
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downside of leverage
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leverage is a fixed costs since it is debt
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how does leverage relate to cost behavior
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you are obligated to pay both the interest and the principal regardless of sales/profit/cash flow
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debt is a fixed cost
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costs that do not change with output
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fixed (cost behavior)
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costs that changes according to the output of the business
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variable (cost behavior)
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a mutual fund tha invests principally in stocks
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what is equity funding
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the process of analyzing the needs of the business and selecting the assets that will maximize its value
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what is capital budgeting
