1. ENTREPRENEURIAL FINANCE Fifth Edition
Chapter 1
Financial and Economic Concepts

2. Buffett and Gates Buffett and Gates Section 5
Buffett and Gates Section 6
Buffett and Gates Section 7
Buffett and Gates Section 8

3. What is it?
Finance is essentially any transaction in which money or a money- like instrument is exchanged for other money or another money- like instrument.
Tasks
Cash management
Investing
Financing
Implementation of strategic plans

4. Cash Management Critical task for managers
Obviously need cash to operate
Cannot exist very long with poor cash management
What do we manage
Inflow of cash
From customers
From investors
Outflow of cash
To suppliers
To creditors
To owners

5. Investing Managers invest in two basic asset types
Invest in the securities of other companies
Strategies followed are identical to the strategies of individual investors
Invest in plant and equipment
Processes are very similar to individuals
Ultimate goal is to maximize the value of the firm

6. Financing
Where do managers get funds to enable the firm to grow and operate.
Sources of funds
Their own assets
Friends, family, other people
Banks and insurance companies
Bonds
Stocks
Profits of the firm
The size and type of the firm will determine which of these can be used.

7. Source: www.bizstats.com

8. Implementation of the strategic plan
The overall outcome of financial management is to provide the mechanism and tools to implement the plans of the company.
A secondary activity is providing data for understanding how the plan is functioning. Also, data for the creation of the plan is provided through the tools available from financial management.

9. Economic concepts
In the US, basic principle is that individuals can achieve their own objectives within a free enterprise system.
Market economy – individuals and institutions exchange goods and services freely
Real estate
Retail
Commodities
Financial instruments
Who gains when we perform transactions?
Both sides (buyers and sellers) believe they gain from a transaction.

10. Economic Concepts
Scarce resources – scarce because people want more than they have.
Types
Natural resources
Human resources
Capital resources
Economic
Financial
Entrepreneurial resources

11. Expected Annual Return (%)
Economic Concepts
Opportunity costs
The highest value that is surrendered when a decision to invest funds is made.
Table 1-1 Expected Financial Returns of Investment Opportunity
Investment Opportunity
Expected Annual Return (%)
Purchase stock 11
Purchase home 9
Purchase bonds 6
Place money in bank savings account 2
Purchase new car
-15

12. Income, Expenditures, and Taxes
Gross income is all of the money received from all sources during the year.
Wages
Tips
Interest earned on savings and bonds
Income from rental property
Profits to entrepreneurs

13. Taxes
Progressive taxes: larger percentage of tax paid as income increases.
Regressive taxes: larger percentage of tax paid as income decreases.
Proportional taxes: percentage of tax paid remains the same at all levels of income.

14. Example of Progressive Tax
Formula for tax percentage paid:
Income tax is progressive:

15. Example of Regressive Tax
Sales tax is regressive:
Income = $20,000; savings = 0; sales tax = 5%
Sales tax paid = $20,000 x 0.05 = 1,000
Income = $60,000; savings = $10,000; sales tax = 5%
Sales tax paid = $20,000 x 0.05 = $1,000

16. Example of Proportional Tax
Formula for tax percentage paid:
Medicare tax is 1.45%
Annual income $30,000
Medicare tax = $30,000 x = $435
Annual income $500,000
Medicare tax=$500,000 x = $7,250

17. Basic Income Calculations
Gross income - taxes = Disposable income
For most of us, disposable income is take-home pay.
Disposable income - Fixed expenses = Discretionary income
Fixed expenses are contractual obligations like rent, utilities, insurance, and car payments.
Discretionary income is that we can spend or save.
Does this include debt?? NO
Would the government want to find a way to increase disposable income? Why??
Would the government rather you spend or save your disposable income??

18. What do we learn?
We have a progressive tax system.
Fixed expenses decrease as a percentage of income, as income increases.
Discretionary income increases as wealth increases.

19. Economic Concepts Factors Affecting Interest Rates
The supply of money saved is primarily the total money that is placed in demand deposit (checking) accounts, savings accounts, and money market mutual funds.
law of supply relates to the price paid and the quantity of a resource that is provided at that price.
The demand for borrowed funds is all of the money that is demanded in our economy at a given price.
The law of demand states that as the price of an item de-creases, people will demand a larger quantity of that item,

20. As interest rates increase, all people would desire to save more money, but at a decreasing rate.

22. Economic Concepts Factors Affecting Interest Rates
The supply of money saved is primarily the total money that is placed in demand deposit (checking) accounts, savings accounts, and money market mutual funds.
law of supply relates to the price paid and the quantity of a resource that is provided at that price.
The demand for borrowed funds is all of the money that is demanded in our economy at a given price.
The law of demand states that as the price of an item de-creases, people will demand a larger quantity of that item,

26. Factors Affecting Interest Rates (continued)
In a totally free market supply and demand will determine interest rates. We do not have a totally free market.
Federal Reserve Policy
The Federal Reserve is the central bank of the United States.
Monetary policy is the government’s action to alter the supply of money.
Goals of monetary policy
Economic growth
Price stability
Full employment

28. Factors Affecting Interest Rates (continued)
Inflation is a primary concern for the FED.
A primary goal is to assure that inflation remains in check to create stability in prices.
How do they attempt to control inflation?
Open market operations
Discount rate
Reserve requirements

29. Factors Affecting Interest Rates (continued)
Risk
Systematic Risk: Risk associated with economic, political, and sociological changes that affect all participants on an equal basis.
Frequently referred to as market risk
This risk is not diversifiable
Unsystematic Risk: Risk unique to an individual, firm, or industry.
Frequently referred to as company specific risk
This risk is diversifiable