BSM 100 Exam Review PDF

BSM- 100 – Exam Review Week 3 – Market research and the Business Model Canvas Things Smart Entrepreneurs Never Say: "Everyone is our target market." ○ Why?: This is too broad and ineffective. A successful business needs to narrow down its target market to be...

BSM- 100 – Exam Review Week 3 – Market research and the Business Model Canvas Things Smart Entrepreneurs Never Say: "Everyone is our target market." ○ Why?: This is too broad and ineffective. A successful business needs to narrow down its target market to be effective in marketing and sales. Target Markets To identify a target market, consider a commonly used product: 1. Who is purchasing it?  2. How is the product advertised to them? Amazon’s Target Market Evolution Started with just books but now serves a much broader market. Amazon's Approach to Audience Segmentation: 1. Geographic Segmentation: International appeal but primarily focuses on digital over brick-and-mortar sales. Focus on developed areas, but smartphone use is crucial in rural areas. 2. Demographic Segmentation: People with internet access (necessary for online shopping). Age group 24-50 years: 45% of online buyers are in the 30-49 age group. Focus on a younger audience (tech-savvy, more likely to buy online). Amazon Segmentation 3. Psychographic Segmentation: Loyalty-based customers: ○ Customers who value customer care and express opinions (reviews). ○ Those who engage with recommended and suggested products. ○ Desire for control over their shopping experience. 4. Behavioral Segmentation (Usage + Benefits): Convenience is a major reason for online purchases. Customers interested in new categories. Low pricing and lucrative deals are key attractions. Key Takeaways: A target market must be specific and well-defined, not everyone. Amazon's market has evolved with a clear focus on digital, younger, tech-savvy consumers, offering convenience, good prices, and tailored recommendations. Business Model Canvas for Uber 6. Revenue Streams How does Uber charge for solving customer problems? ○ Uber charges approximately 25% of the fare. ○ Pricing is based on factors like time, route, and idle time. 7. Cost Structure What does Uber need to spend money on? ○ IT infrastructure and development: For the app and platform. ○ Marketing/PR: To acquire users and drivers. ○ Driver recruitment: To expand the network of drivers. 8. Key Metrics How does Uber measure its progress? ○ Apps installed: Tracks app adoption and user growth. ○ Trips booked: Indicates the volume of services being used. ○ Users referred: Measures customer engagement and word-of-mouth growth. 9. Unfair Advantage What makes Uber difficult to copy? ○ Low-price trips: Competitive pricing is hard to replicate consistently. ○ Push of a button: The simplicity and convenience of Uber's app makes it unique and user-friendly. Aligning Target Market & Product Problem/Solution Fit: Does the problem exist, and can Uber solve it? ○ Pain Reliever: Uber addresses the pain of unreliable or expensive transportation. Product/Market Fit: Uber targets a good market with a product that meets the needs of convenient, affordable transport. ○ Gain Creators: Uber offers convenience, low prices, and easy access to a ride. Key Takeaways Uber’s business model is built on a simple pricing strategy, focusing on convenience, low prices, and an easy-to-use app. Uber tracks key metrics like app installations, trips booked, and user referrals to measure progress. Its unfair advantage lies in its low-cost service and unique user experience that competitors struggle to replicate.  Week 4 – Understanding Business Environments Competitive Environment – Value is the Key! Value: The gap between benefit and price. Best value: Not always the cheapest product, but the one offering the best quality relative to its price. Technological Environment Business Technology: Tools used by businesses to gain a competitive advantage (e.g., first mover vs. second mover). Impact: ○ Dramatic changes in industries. ○ New industries emerge. ○ Change can come from outside the industry. ○ Productivity increases: More output with the same or fewer inputs (e.g., hours, capital). Winners: Companies that embrace and manage change effectively. Inventions with Impact (Can you identify 4 Canadian inventions?) 1. Disposable garbage bags 2. IMAX 3. Cat litter 4. Canola oil 5. Insulin 6. BlackBerry 7. Laptop 8. Viagra 9. Camcorder These inventions have had a major impact on human life, positively and negatively. Growth of Electronic Commerce (E-Commerce) E-commerce: Buying and selling of goods and services over the internet. Social Media Marketing Tools/Platforms: Social networking sites (e.g., Twitter, Facebook), blogs, podcasts, YouTube. Crowdsourcing: Using the collective expertise of people (open innovation) to solve business problems. Social Environment Visible Characteristics: ○ Diversity (gender, income, etc.) ○ Aging population. Invisible Characteristics: ○ Values, attitudes, customs, and beliefs. ○ Rising worker expectations. ○ Ethics and social responsibility becoming more important. The Global Environment Global Influence: ○ Increased global competition. ○ Free trade among nations. ○ Efficient distribution systems. ○ Globalization improving living standards in some countries. ○ Economic growth in some countries, stagnation in others. ○ External factors: Pandemics, terrorism, and calamities. ○ The ecological environment also affects global business. Summary: Competitive environment is about offering value through quality. Technology and innovation are key to business success. E-commerce and social media marketing are major drivers in modern business. The social and global environments shape business practices, influencing diversity, ethics, and global competition.  Week 5 – Entrepreneurship Demand: Definition: The relationship between the price of a good and the quantity buyers are willing and able to purchase. Demand Curve: A graph showing the quantity demanded at different price levels. Shifts in Demand Curve: Caused by changes in: ○ Income ○ Tastes ○ Expectations ○ Number of consumers ○ Expansion in demand: Rightward movement of the curve. ○ Contraction in demand: Leftward movement of the curve. Supply: Definition: The relationship between the price of a good and the quantity that sellers are willing and able to offer for sale. Supply Curve: A graph showing the quantity suppliers will offer at various prices. Shifts in Supply Curve: Caused by changes in: ○ New technology ○ Number of producers ○ Expectations ○ Input prices ○ Expansion in supply: Rightward movement of the curve. ○ Contraction in supply: Leftward movement of the curve. Netflix Case Study: How Netflix Coped with Falling Prices: ○ Increased volume of sales compensated for lower revenue per sale. ○ Minimal increase in costs (same distribution centers, employees). ○ Result: Greater revenues despite lower prices. Launching a New Venture: Reasons: 1. Greater financial success 2. Independence 3. Flexibility 4. Challenge 5. Survival/necessity Where are Canada’s Businesses? Ontario/Quebec Western Canada Maritimes Entrepreneurial Characteristics: Attitude is key in entrepreneurship. Traits of a successful entrepreneur: Vision, adaptability, perseverance. Entrepreneurial Risk-Taking: Entrepreneurs have lower risk perception (not higher risk-taking) than others. They focus on opportunity for gain rather than threats or loss. Networking is crucial. Suitable partners should be: ○ Trustworthy ○ Complementary to your skills ○ Share your vision and expectations. Finding a Suitable Entrepreneurial Partner: Avoid the self-similarity principle (don’t choose someone too similar to yourself). Avoid the proximity principle (don’t choose someone just because they’re close to you). Search for private information, skills, resources, and networks. Where to Find Entrepreneurs: Home-based businesses (micropreneurs) Web-based businesses (micropreneurs) In big companies (intrapreneurs) Myths about Entrepreneurs: 1. Fun, games, glory, and spending other people’s money: Entrepreneurship is often glamorized but is hard work. 2. No responsibilities: Entrepreneurs face significant responsibilities, from decision-making to financial management. 3. Requires brilliant flashes of insight, eccentric high-risk behavior, and large investment: Entrepreneurship doesn't always involve big risks or sudden breakthroughs; it's often about consistent effort and smart decision-making.  4. Is the way to a fortune: While entrepreneurship can be profitable, it’s not a guaranteed path to wealth. Opportunities for Small Business: 1. Market niches: Small businesses can target specific markets with specialized products or services. 2. Personal customer service: Small businesses can provide more personalized and responsive customer service than larger companies. 3. Lower overhead costs: Small businesses typically have lower fixed costs, enabling more flexibility. 4. Technology: Technology can help small businesses increase efficiency, reach broader markets, and reduce costs. Threats to Small Business: 1. High risk of failure: Many small businesses face failure due to various factors, such as mismanagement, lack of demand, or competition. 2. Lack of knowledge and experience: Entrepreneurs may lack the business knowledge and skills needed to succeed. 3. Too little money: Insufficient capital can hinder growth and limit the ability to navigate challenges. 4. Burdensome paperwork: Regulatory and administrative tasks can be overwhelming for small business owners. Role of Small Business in Canada: Job Creation: Small businesses are a significant source of employment. Contribution to National Income (GNP): They contribute substantially to the country’s gross national product. Exporters: Small businesses play an important role in Canada’s export market. Source of Innovation: They are often the starting point for new ideas, products, and services. Source of Large Companies: Many of Canada’s large companies began as small businesses. Entrepreneur Satisfaction: Owning a small business can bring a sense of personal fulfillment and achievement. Value for Customers: Small businesses provide unique value to customers through innovation and personalized service. Summary: Entrepreneurs are responsible for starting various ventures and contribute significantly to the economy.  Successful entrepreneurs tend to have traits like vision, drive, and a different attitude towards risk. Contrary to popular belief, entrepreneurship involves hard work, careful planning, and time. Small businesses play an important role in the Canadian economy, even though first ventures rarely succeed.  Week 7 – Marketing 1. Introduction to Marketing Market: A group of people with unmet needs who are willing and able to buy. Marketing: Finding a need and filling it by delivering value to customers, creating relationships, and aiming for long-term profitability. Creativity in Marketing: Businesses use creativity to stand out (e.g., Rebus puzzles, clever advertisements like Nike and Apple’s "Think Different"). 2. Evolution of Marketing Market Orientation Era: Focus on gathering and sharing customer and competitor info to create value and improve relationships. Customer Focus: ○ Value: Benefits > Price. ○ Customer Satisfaction: Meeting or exceeding expectations. ○ Customer Loyalty: Repeat purchases and word-of-mouth. ○ CRM (Customer Relationship Management): Acquiring, retaining, and growing customer relationships. 3. Social Media Marketing Use social media (e.g., Facebook, Twitter) to build relationships and influence purchasing decisions. 4. Technology & Marketing Impact: Information and communication technologies give consumers 24/7 access to information, raising expectations and offering new promotional opportunities. Challenges: Need to manage the constant flow of information and relationships. 5. Marketing Strategy Marketing Plan: Identify target audience and how to reach them. Segmentation: Divide the market into groups to better target customers. ○ B2C (Business-to-Consumer): Products for personal use (segmented by geography, demographics, psychographics, usage, benefits). ○ B2B (Business-to-Business): Products used in business operations (segmented by customer size/type, product use, service needs, buying situation). 6. B2C and B2B Differences B2C Target Market: ○ Focus on size, affordability, accessibility, and competition. Sales Process: Understanding customer needs and decision-making process. 4P Marketing Mix (B2C): Product, Price, Place, Promotion. 7. Case Studies EasyDaysies (Dragons' Den): Focus on why a deal was made and how the 4Ps applied. Marlow (Dragons' Den): Reasons behind investment hesitation and how 4Ps fit into the business. Key Takeaways: Marketing is about understanding customer needs, delivering value, and building relationships. The approach differs between B2C (personal consumption) and B2B (business use). Creativity, technology, and social media play big roles in modern marketing. Segmentation and targeting are essential for effective marketing strategies.  Week 8 – Marketing 2 1. The Product Life Cycle (PLC) Stages of the product life cycle (theoretical model): ○ Introduction – Product is new, sales are low. ○ Growth – Sales increase rapidly, profits grow. ○ Maturity – Sales stabilize, market becomes saturated. ○ Decline – Sales and profits decrease, product may be discontinued. Product Adoption Life Cycle: Customers adopt products at different rates based on their risk aversion. ○ Innovators (2.5%) – Risk-immune, first to try new products. ○ Early Adopters (13.5%) – Willing to take risks, often opinion leaders. ○ Early Majority (34%) – Pragmatic, adopt when product is proven. ○ Late Majority (34%) – Skeptical, adopt only when most others do. ○ Laggards (16%) – Risk-averse, last to adopt. 2. The 4 P’s of Marketing (Revisit) Product – What is being sold (features, design, quality, branding, packaging, services). Price – How much customers pay (pricing strategies). Place – Where and how the product is distributed (location, channels, logistics). Promotion – How the product is communicated to customers (advertising, PR, sales). 3. Product Product Definition: A product includes everything that delivers value, not just the physical item (features, design, packaging, branding, services). Branding: Easy to say, memorable, reflects benefits, and legally protected. ○ Example: Coca-Cola offers a variety of brands to cater to different customer segments. Product-Service Continuum: Products can range from tangible goods to services. Companies differentiate themselves based on the services they offer with the product. 4. Price Pricing Strategies: ○ Cost-based pricing: Set price based on desired profit margin. ○ Value pricing: Set price based on perceived value to customers.  ○ Competition-based pricing: Set price based on competitor pricing. ○ Skimming pricing: High initial price to recover R&D costs, often used for new products. ○ Penetration pricing: Low price to gain market share. ○ Everyday Low Pricing (EDLP): Stable low prices (e.g., Walmart). ○ High-low pricing: Some products priced low, others high (e.g., Sobeys). Netflix Example: Subscription model with monthly payments, free trials, and pricing competitive with competitors like Blockbuster. 5. Place Place: Focuses on how the product is delivered to the customer (location, distribution channels, logistics). ○ Netflix Example: Initially sold DVDs by mail, now a global online streaming service with distribution centers. 6. Promotion Promotion Mix: The tools used to communicate the product’s value (advertising, public relations, personal selling, direct marketing). ○ Advertising: Includes product advertising, comparison ads, endorsements, etc. Aimed at informing, persuading, or reminding customers. ○ Push Strategy: Persuade wholesalers and retailers to stock the product (e.g., offering discounts). ○ Pull Strategy: Use promotions to encourage consumers to demand the product (e.g., consumer advertising). Public Relations: Activities aimed at influencing public attitudes (e.g., media relations, publicity). ○ Word-of-mouth and Viral Marketing: Encourage customers to share experiences, generating exponential growth in marketing impact. ○ Content Marketing: Distribute relevant content (blogs, social media, etc.) to position the brand as a market leader. Netflix Example: Uses various promotional tools like advertising, PR, and word-of-mouth to attract customers. Key Takeaways: The Product Life Cycle (PLC) helps businesses understand where their product is in its life and adapt strategies accordingly. The 4 P’s of marketing (Product, Price, Place, Promotion) are foundational concepts to create and communicate value to customers. Price strategies like skimming or penetration pricing are important for market entry and competition.  The Promotion Mix includes various tools such as advertising, PR, and word-of-mouth to build brand awareness and drive sales.  Week 9 – Financial Management of Business 1. The Fundamental Accounting Equation Equation: Assets = Liabilities + Owners' Equity ○ This equation must always balance. ○ Example: If you have $50,000 in cash and no debts, the equation would be: $50,000 (Assets) = $0 (Liabilities) + $50,000 (Owners' Equity) 2. Financial Statements Balance Sheet = Statement of Financial Position Income Statement = Statement of Revenues and Expenses Statement of Cash Flows = Statement of Cash Receipts and Disbursements 3. Assets Definition: Assets are things of value owned by the business. 1. Examples: Equipment, buildings, land, furniture, motor vehicles, patents, etc. Categories of Assets: 1. Current Assets: Can be converted into cash within one year (e.g., cash, accounts receivable, inventory). 2. Capital Assets (Fixed Assets): Long-term, permanent assets like land and buildings used to produce goods. 3. Intangible Assets: Long-term assets with no physical form but valuable, like patents, trademarks, and copyrights. 4. Liquidity Liquidity: How quickly an asset can be converted into cash. ○ Example: Accounts receivable are considered liquid because they are expected to be turned into cash soon. 5. Liabilities Definition: Liabilities are what the business owes to others (debts). ○ Types of Liabilities: Current Liabilities: Debts due within one year (e.g., accounts payable). Long-Term Liabilities: Debts due in more than one year (e.g., long-term loans). Key Takeaways:  The accounting equation (Assets = Liabilities + Owners’ Equity) must always balance. Assets are valuable resources owned by the business and can be current (quickly converted to cash), capital/fixed (long-term assets like buildings), or intangible (like patents). Liabilities are debts owed by the business, classified into current (due within a year) and long-term (due after more than a year). Understanding liquidity helps assess how quickly assets can be turned into cash. 1. Cost of Goods Sold (COGS) Definition: The cost of goods sold (or cost of goods manufactured) refers to the direct costs associated with the production or purchase of merchandise or raw materials used to create products for resale. ○ Example: If you're a retailer, it’s the cost of buying goods from suppliers. If you're a manufacturer, it's the cost of raw materials and labor used to create products. 2. Gross Profit (Gross Margin) Calculation: Gross Profit = Net Sales - Cost of Goods Sold Definition: Gross profit is the amount earned after subtracting the cost of making or buying products from the revenue generated from selling them. ○ Purpose: It shows how much profit a company made from its core business activities (before other expenses). 3. Operating Expenses Definition: Operating expenses are costs associated with running the business, excluding the cost of goods sold. ○ Examples: Rent, salaries, utilities, insurance, office supplies, and amortization of equipment. ○ Purpose: These are ongoing costs required to keep the business operating. 4. Net Profit or Loss Definition: Net profit (or net loss) is determined after subtracting all expenses (operating expenses and COGS) from total revenue. ○ Formula: Net Profit/Loss = Gross Profit - Operating Expenses - Taxes Purpose: This is the final profit or loss the company makes after all costs are deducted. 5. The Cash Flow Statement  Purpose: The cash flow statement shows the actual cash coming into and going out of the business, focusing on three key activities: 1. Operations: Cash transactions related to day-to-day business activities (e.g., sales revenue, payments to suppliers). 2. Investing: Cash used for or received from investments in long-term assets (e.g., buying/selling property, equipment). 3. Financing: Cash flow from raising funds or paying off debt (e.g., issuing stock, repaying loans). 6. Importance of Cash Flow Definition: Cash flow is the difference between cash coming into the business (receipts) and cash going out (disbursements). Why It Matters: Proper cash flow management is critical. Poor cash flow can lead to financial problems even if the business is profitable on paper. ○ Common Mistake: New businesses often focus too much on product development and not enough on managing cash flow. 7. Need for Operating Funds Key Areas Requiring Funds: ○ Day-to-day operations: Covering routine expenses like salaries, utilities, etc. ○ Credit operations: Managing payments from customers and to suppliers. ○ Inventory: Buying and storing products for sale or production. ○ Capital Expenditures: Investing in long-term assets like equipment, property, or technology. Key Takeaways: Gross Profit: Subtract COGS from sales revenue to determine how much profit you’ve made on your core business activities. Operating Expenses: These are the ongoing costs to keep the business running. Net Profit: Subtract all costs (COGS + operating expenses) from sales to find your net profit or loss. Cash Flow: Focus on the movement of cash in and out of the business to avoid liquidity problems. Operating Funds: Essential to ensure the business can handle daily operations, pay debts, maintain inventory, and make necessary capital investments. 1. Obtaining Short-term Financing Source:  ○ Commercial Finance Companies (Non-Banks): If a business can't get a bank loan, it may turn to commercial finance companies. These are non-deposit institutions that lend money, usually in exchange for tangible assets as collateral. 2. The 4 Cs of Credit To assess creditworthiness, financial managers look at four key factors: Character: The borrower’s trustworthiness and reputation. Capacity: The borrower’s ability to repay the loan. Capital: The borrower’s financial stability and assets. Conditions: The economic and market conditions that might affect the borrower’s ability to repay. 3. Factoring Accounts Receivable Definition: Factoring is when a company sells its accounts receivable (money owed by customers) to a third party at a discount in exchange for immediate cash. ○ Disadvantage: It can be an expensive way to raise short-term funds because of the discount. 4. Commercial Paper Definition: Large corporations may sell commercial paper, which is an unsecured short-term debt (promissory note) to raise funds quickly. ○ Features: Minimum amount: $100,000 Maturity: Must be paid back within 365 days. Advantage: Usually offers lower interest rates than bank loans. 5. Obtaining Long-term Financing Key Questions Financial Managers Ask: 1. What are the company’s long-term goals? 2. What funds are needed to achieve those goals? 3. What sources of long-term financing are available, and which ones fit the business’s needs? 6. Debt Financing Definition: Debt financing involves borrowing money that must be repaid, often with interest. ○ Sources: 1. Loans from lending institutions.  2. Issuing Bonds to investors. 7. Term-Loan Agreement Definition: A term-loan agreement is a promissory note where the borrower agrees to repay the loan in fixed installments (e.g., monthly or yearly). ○ Advantage: Interest paid on the loan is tax-deductible. 8. Debt Financing by Issuing Bonds Definition: A bond is a form of long-term debt issued by a corporation or government. ○ Key Features: The company must make regular interest payments to bondholders. The company must repay the principal (the amount borrowed) at the maturity date (the date the bond comes due). Key Takeaways: Short-term financing options include commercial finance companies, factoring, and commercial paper. The 4 Cs of Credit are used to assess a borrower’s creditworthiness: Character, Capacity, Capital, Conditions. Factoring is a quick but expensive way to raise short-term cash by selling receivables. Commercial paper allows large firms to raise funds with lower interest rates than banks charge. Long-term financing involves borrowing for extended periods, either through loans or bonds, with specific repayment terms. Term-loan agreements allow for structured repayments with tax-deductible interest. Bonds are used to raise large sums of money, requiring regular interest payments and principal repayment at maturity. Short-Term Financing 1. Commercial Finance Companies ○ What they are: Non-bank institutions that provide short-term loans. ○ How they work: Offer loans to businesses in exchange for tangible assets (e.g., property, equipment) as collateral. 2. The 4 Cs of Credit Financial managers assess creditworthiness using the 4 Cs: ○ Character: The borrower's reputation and trustworthiness.  ○ Capacity: The ability of the borrower to repay the loan. ○ Capital: The financial stability and assets the borrower has. ○ Conditions: The economic environment and market conditions affecting the loan. 3. Factoring Accounts Receivable ○What it is: Selling a company’s accounts receivable (money owed by customers) to a third party at a discount. ○ Disadvantage: It's an expensive way to raise short-term funds. 4. Commercial Paper ○ What it is: A large corporation can raise short-term funds by selling unsecured promissory notes (commercial paper). ○ Key points: Minimum amount: $100,000 Maturity: Must be repaid within 365 days. Advantage: Offers lower interest rates than bank loans. Long-Term Financing 1. Key Questions for Long-Term Financing Financial managers must consider these questions when seeking long-term funds: ○ What are the company’s long-term goals and objectives? ○ What funds are needed to achieve these goals? ○ What are the best sources of long-term capital to support these needs? 2. Debt Financing ○ What it is: Borrowing money that must be repaid, typically with interest. ○ Sources: Loans from banks or lending institutions. Bonds issued to investors. 3. Term-Loan Agreement ○ What it is: A loan agreement where the borrower agrees to repay in fixed installments (e.g., monthly or yearly). ○ Advantage: Interest payments on the loan are tax-deductible. 4. Debt Financing through Bonds ○ What it is: A corporation or government issues bonds to raise long-term funds. ○ Key Features: The issuer must make regular interest payments to bondholders. The principal (amount borrowed) must be repaid on the maturity date. Summary: Key Concepts Short-term financing: Options include commercial finance companies, factoring, and commercial paper. 4 Cs of Credit: Used to assess the creditworthiness of borrowers: Character, Capacity, Capital, and Conditions. Long-term financing: Involves borrowing funds through loans or bonds. ○ Bonds require regular interest payments and principal repayment at maturity. ○ Term-loan agreements allow for structured repayment with tax-deductible interest. Equity Financing 1. What is Equity Financing? ○ Definition: Selling ownership in the firm in exchange for capital. This can be done by: Issuing stock (shares) to the public. Using retained earnings (profits the company keeps and reinvests). Selling ownership to venture capitalists. 2. Stock Issuance ○ Board Decision: The board of directors decides how many shares of stock to offer. ○ Initial Public Offering (IPO): The first time a company sells stock to the public. 3. Types of Stock ○ Stock Certificate: Document proving ownership of shares, listing the company, number of shares, and type of stock. ○ Common Stock: Basic form of ownership. Common shareholders have voting rights. ○ Preferred Stock: Shareholders get priority for dividends and a claim on assets if the company goes out of business. Differences Between Debt and Equity Financing 1. Debt Financing ○ Leverage: Using borrowed funds to increase the firm's potential return. ○ Risk: Increases financial risk because the loan must be repaid, but it can increase profits if used well. 2. Equity Financing  ○ No Repayment: Equity has no maturity date. The company doesn’t have to repay equity investors, but dividends may be paid. ○ Ownership: Selling equity gives investors ownership and possibly voting rights. Venture Capital and Retained Earnings 1. Venture Capital ○ For Startups: New businesses with limited assets often turn to venture capital (VC) for funding. ○ Venture Capitalists: Firms that invest in high-risk, high-potential companies, often providing funds for new businesses or businesses entering expansion stages. 2. Retained Earnings ○ Internal Financing: Profits that the company reinvests instead of distributing as dividends. Often a primary source of capital for small businesses. Debt vs. Equity Financing – Key Differences Aspect Debt Financing Equity Financing Management No influence unless agreed Shareholders have voting rights. Influence upon. Repayment Must repay principal by a No repayment required (equity is maturity date. permanent). Yearly Obligations Must pay interest (contractual). Dividends are optional (not legally required). Tax Benefits Interest is tax-deductible. Dividends are paid from after-tax income (not deductible). Summary: Key Points Equity Financing: Involves selling ownership (via stock) or reinvesting retained earnings. It provides funding without the obligation to repay. Venture Capital: Funding from investors for high-risk, high-potential startups. Debt Financing: Borrowing money with a legal obligation to repay, which can increase financial risk but also potential return. Accounting – The Numbers Balance Sheet Also Known As: Statement of Financial Position Purpose: Shows the company’s financial position at a specific point in time. ○ What it shows: Assets: What the company owns (things of value). Liabilities: What the company owes (debts). Shareholders’ Equity: What’s left for the owners (after liabilities). Balance Sheet Components: Assets (Things the company owns): ○ Current Assets: Items expected to be converted to cash within a year (e.g., accounts receivable). ○ Fixed Assets: Long-term assets used in business operations (e.g., equipment, machinery). ○ Total Assets = Current Assets + Fixed Assets. Liabilities (What the company owes): ○ Current Liabilities: Debts due within a year. ○ Long-Term Liabilities: Debts due after one year. ○ Total Liabilities = Current Liabilities + Long-Term Liabilities. Owners' Equity (Shareholders’ claims): ○ Shareholders’ Equity = Capital invested by owners + Retained earnings. ○ Total Liabilities & Equity: The sum of liabilities and equity must equal total assets (Balance Sheet must balance). Statement of Cash Flows Also Known As: Statement of Changes in Financial Position Purpose: Shows how cash flows (in and out) change over time, reconciling the Balance Sheet from one year to the next. Categories of Cash Flows: 1. Operations: Cash from producing and selling goods/services. 2. Investing: Cash from buying or selling assets (e.g., equipment, property).  3. Financing: Cash from new financing (e.g., issuing shares, taking loans) or repaying debts, including: ○ Debt repayment: Paying off principal and interest. ○ Dividends: Payments to shareholders. New Venture Financing Need for Operating Funds: Startups need funds to: ○ Manage daily business operations. ○ Control credit and collections. ○ Acquire inventory. ○ Make capital expenditures (e.g., buy equipment). Debt Financing: Secured Debt: Traditional loans where assets are used as collateral. Unsecured Debt: Loans without collateral, higher risk for lenders. Debt is harder for startups to secure due to high risk (lack of proven cash flows). Equity Financing (Selling shares): Selling ownership in the company (shares) to raise funds. ○ New shares dilute existing shareholders’ ownership. ○ Common in startups or when debt financing is unavailable. Additional Notes: Accrued Expenses: Expenses incurred but not yet paid, listed as liabilities. Provision for Doubtful Debts: Subtracted from accounts receivable to show the true value of assets. Love Money Source: Funds from friends, family, or personal networks. Types: Grants, forgivable loans, credit guarantees. Challenges: ○ Bureaucratic application and reporting process. ○ Social returns like job creation and economic development. Government Programs Example: SmartStart Seed Fund. Purpose: Provide financial support and resources to early-stage businesses, often with conditions or requirements attached. Incubators/Accelerators What They Provide: ○ Capital: Funds to start or scale the business. ○ Resources: Mentorship, space, networks, talent, customers, services, credibility. ○ Focus: Support for high-potential startups, often in the early stages. Crowdfunding What It Is: Raising funds from a large group of people, typically through online platforms. Features: ○ Product Purchase: Backers pre-buy products or services rather than making an investment. ○ Raise Amount: Usually under $100K in total, with individual contributions often below $1K. Top Reasons for Investing Investor Motivations: ○ Supporting and mentoring entrepreneurs. ○ Staying connected to industry trends. ○ Earning a return on investment. Investment Practices Common Trends: ○ Investors often act alone, but increasingly join formal Angel groups for collaboration and shared knowledge. ○ Co-investing in syndicates, following a lead investor. Angel Financing Amount: Typically $250K to $10M. Returns: 30–60%. Focus: Companies with extraordinary growth potential. Investment Horizon: 3–5 years. Venture Capital Focus: Investing in high-growth, high-risk companies. Investment Process: 1. Elevator Pitch: Break through indifference, spark interest. 2. Business Plan: A solid plan, strong team, and good opportunity are crucial. 3. Pitch Presentation: Trust, team chemistry, ability to sell the vision. 4. Due Diligence: Verify assumptions, ensure transparency, check for inconsistencies. 5. Negotiating: Optimize risk and return, focus on a clean exit strategy. Whistleblowers Definition: Employees who report illegal or unethical behavior. Legislation in Canada: ○ Bill C-11: Protects public-sector whistleblowers. ○ Private-sector whistleblowers have no protection. Six Steps to Improve Ethics 1. Top Management Support: Leaders set the tone. 2. Expectations from the Top: Ethical behavior must be led from the top. 3. Training: Ethics should be part of employee training. 4. Ethics Office: Set up a dedicated office for ethics. 5. External Stakeholders: Keep stakeholders informed about ethics. 6. Enforcement: Ethical standards must be enforced. Corporate Ethical Standards: Sarbanes-Oxley Act (SOX) Cause: Enacted after major corporate scandals (e.g., Enron, Tyco). Purpose: Strengthen corporate governance and prevent misconduct.  Applies to: All publicly traded U.S. companies and foreign companies listed in the U.S. Canadian Connection: Canadian companies doing business in the U.S. must comply with SOX. Corporate Social Responsibility (CSR) Definition: Businesses’ concern for society’s welfare. ○ Includes safe products, environmental care, ethical labor practices, etc. Debate: ○ Critics: CSR distracts from the goal of winning in the marketplace. ○ Defenders: Businesses owe their success to the society they serve. Corporate Philanthropy & Initiatives Corporate Philanthropy: Charitable donations by businesses. Strategic Philanthropy: Long-term commitments to a cause (e.g., Canadian Tire Foundation). Corporate Social Initiatives: More connected to a company's core business (e.g., UPS/FedEx providing disaster relief). Responsibility to Employees Upward Mobility: Employees need a chance for career advancement and a better future. Human Resource Management: The key factor influencing a company’s effectiveness and performance. Respect: When a company treats employees with respect, employees tend to return that respect, positively impacting the company’s bottom line. Responsibility to Society Wealth Creation: Businesses have a responsibility to create wealth, which benefits employees, suppliers, shareholders, and other stakeholders. Role of Non-Profits: Non-profit organizations (NPOs) also contribute to societal welfare. Responsibility to the Environment Environmental Criticism: Businesses are often criticized for causing environmental damage.  Key Environmental Issues: ○ Pollution: Pesticides, waste disposal, auto exhaust, etc. ○ Natural Resources: Deforestation, clear-cut logging. ○ Conservation: Recycling, ozone depletion, endangered species, etc. Social Auditing Definition: A systematic evaluation of a company’s social responsibility efforts and progress. Types of Activities in Social Audits: ○ Community: Participation in fundraising, urban planning, etc. ○ Employee: Equal opportunity programs, job safety, flextime, etc. ○ Political: Taking positions on social issues like pollution control, nuclear safety. ○ Consumer: Ensuring product safety, truthful advertising, fair pricing, etc. ○ Support for Education: Higher education, arts, and non-profits. Triple Bottom Line (TBL) Definition: A framework measuring a company’s performance not just in economic terms, but also in environmental and social terms. TBL Components: 1. Economic: Profit generation. 2. Social: Impact on society and stakeholders. 3. Environmental: Impact on the planet. Purpose: To minimize harm and create value across all three dimensions—economic, social, and environmental. Sustainable Development Definition: Sustainable development integrates environmental, economic, and social factors into decision-making processes. Goal: To ensure development benefits both current and future generations. International Ethics and Social Responsibility Fair Trade: A social movement aimed at ensuring producers in developing countries are paid a fair price for their goods, promoting ethical consumption. Codes of Ethics Compliance-Based: Focus on rules and penalties to ensure ethical behavior by enforcing control and penalizing wrongdoers. Integrity-Based: Focus on defining core values and supporting ethical behavior with shared accountability across the organization.  Week 10 Lecture – Responsible Business Sustainable Development Definition: Sustainable development integrates environmental, economic, and social factors into decision-making processes. Goal: To ensure development benefits both current and future generations. International Ethics and Social Responsibility Fair Trade: A social movement aimed at ensuring producers in developing countries are paid a fair price for their goods, promoting ethical consumption. Codes of Ethics Compliance-Based: Focus on rules and penalties to ensure ethical behavior by enforcing control and penalizing wrongdoers. Integrity-Based: Focus on defining core values and supporting ethical behavior with shared accountability across the organization. Ethics: Doing the Right Thing Ethics is about doing the right thing, beyond just following the law. Ethical Breaches (Examples) Ontario Lottery & Gaming: Not stopping retailers from stealing jackpots. Volkswagen: $290.5 million settlement for emissions cheating. RIM: Stock option scandal. Federal Government Sponsorship: $100 million paid for Quebec separation referendum. SNC-Lavalin: $56 million in unauthorized payments related to Libya. Ethical Standards Ethics are the standards of moral behavior accepted by society as right vs. wrong. Golden Rule: "Do unto others as you would have them do unto you" (supported by major religions). Ethics in Daily Life  Ethical behavior starts with individual commitment. Academic dishonesty leads to dishonesty in the workplace. Ethical Checklist: 1. Is it legal? 2. Is it balanced? 3. How will it make me feel? Managing Ethics in Business Top management plays a key role in promoting ethical behavior. Ethics should be part of corporate culture. Corporate Ethical Standards Compliance-Based Codes: Focus on preventing unlawful behavior through control and penalties. Integrity-Based Codes: Focus on defining values, promoting ethical behavior, and shared accountability. Whistleblowers Whistleblowers report unethical or illegal behavior. Bill C-11 (Canada) protects public sector whistleblowers but not private sector. Six Steps to Improve Ethics: 1. Top management support. 2. Expectations start at the top. 3. Ethics in training. 4. Set up an ethics office. 5. Inform external stakeholders. 6. Enforce ethical standards. Corporate Ethical Standards: SOX Sarbanes-Oxley Act (SOX): After scandals (e.g., Enron), SOX improved corporate governance and misconduct prevention. Applies to publicly traded companies. Many Canadian companies must also comply if operating in the U.S. Corporate Social Responsibility (CSR) CSR is a business’s responsibility toward society. Includes safe products, minimizing pollution, and providing a safe work environment.  Critics argue businesses should focus only on profits, while defenders believe companies owe their existence to society. Types of Corporate Philanthropy 1. Strategic Philanthropy: Long-term commitments to one cause (e.g., Canadian Tire Foundation). 2. Corporate Social Initiatives: Directly related to a company's competencies (e.g., disaster relief by UPS, FedEx). Corporate Responsibility Approaches Strategic Approach: Focus on profits for shareholders. Pluralist Approach: Balance profit-making with moral responsibilities to employees, suppliers, and society. Responsibility to Customers 4 Basic Rights of Consumers: 1. Right to safety. 2. Right to be informed. 3. Right to choose. 4. Right to be heard. Businesses must offer value to customers; failure to do so can lead to business failure. Responsibility to Investors Ethical behavior adds value to shareholder wealth and the bottom line. Unethical behavior may give short-term gains, but leads to long-term failure. Insider Trading: Using confidential company info for personal gain or to benefit family/friends. Responsibility to Employees Create jobs: A company has a responsibility to provide employment for growth. Fair rewards: Hard work and talent should be fairly compensated. Upward mobility: Employees need a chance to improve their future. Human resource management affects company effectiveness and financial performance. Treating employees with respect improves their respect for the company, benefiting the bottom line. Responsibility to Society  Wealth creation: Businesses should create wealth distributed to employees, suppliers, shareholders, and other stakeholders. Non-profit organizations (NPOs) contribute to society’s welfare. Responsibility to the Environment Businesses face criticism for environmental harm: ○ Issues: pesticides, waste disposal, deforestation, auto exhaust, ozone depletion, species extinction, nuclear testing, etc. Social Auditing A social audit evaluates progress toward socially responsible actions. ○ Community activities: Fundraising, volunteering, urban planning. ○ Employee activities: Equal opportunities, job safety, flextime. ○ Political activities: Positions on issues like pollution, gun control, consumer protection. ○ Consumer activities: Product safety, truthful advertising, fair prices, consumer education. Triple Bottom Line (TBL) TBL measures performance based on economic, social, and environmental value. Aims to minimize harm and create value across all stakeholders. Sustainable Development Sustainable development integrates environmental, economic, and social factors into decision-making, benefiting current and future generations. International Ethics & Social Responsibility Fair Trade: A movement ensuring producers in developing countries are paid fairly for their goods. Codes of Ethics Compliance-Based: Focuses on increasing control and penalizing wrongdoers. Integrity-Based: Defines values, supports ethical behavior, and emphasizes shared accountability.  Week 11 – How to Start a Business Liability Liability = responsibility to pay debts. In business, it refers to paying debts and covering damages. Unlimited Liability In a sole proprietorship, the owner and business are one. The owner has unlimited liability—personal assets are at risk for any business debts or damages. Partnerships Partnership: Two or more owners. ○ Separate entity for accounting, but not a separate legal entity from owners. ○ Unlimited liability, limited life, and profits taxed. Types of Partnerships: 1. General Partnership: ○ All owners share management and liability for business debts. 2. Limited Partnership: ○ One or more general partners (who manage and have unlimited liability) and one or more limited partners (who invest but have limited liability). Roles in a Partnership: General Partner: Active in management, unlimited liability. Limited Partner: Invests money, no management responsibility, and limited liability. Advantages of Partnerships: More financial resources, shared management, longer survival, shared risk. No special taxes. Disadvantages of Partnerships: Unlimited liability, division of profits, disagreements, difficulty in termination, possibly higher taxes. Corporation:  Separate legal entity, limited liability, unlimited life, taxed on profits. Business Regulations Companies in Canada must follow federal and provincial business laws. This includes registration, reporting, and providing information. Articles of Incorporation Legal permission from the government to form a corporation. Corporate Expansion: Mergers & Acquisitions 1. Merger: Two companies form one new company. 2. Acquisition: One company buys the assets and obligations of another. Types of Mergers: 1. Vertical Merger: Two companies at different stages of the same supply chain. 2. Horizontal Merger: Two companies in the same industry expand their products or markets. 3. Conglomerate Merger: Two companies from unrelated industries combine. Why Mergers Often Fail: Overpaying for the acquired company. Overestimated cost savings and synergies. Management disagreements on integration. Cost-cutting harms the business, losing employees and customers. Leveraged Buyout (LBO) A group of employees, management, or investors borrow money to buy out stockholders in a company. Franchises Some entrepreneurs join existing, successful businesses through franchise agreements. Franchise Agreement: A franchisor sells the rights to use their business name and products to a franchisee. Franchise Advantages: Management & marketing support.  Nationally recognized name. Financial advice & lower failure rates. Franchise Disadvantages: High start-up costs. Shared profits. Strict management rules. Restrictions on selling and fraud risks. Franchise System: Franchise Agreement: Contract between franchisor and franchisee. Franchisor: Owner of the business idea and brand. Franchisee: Purchaser of the rights to use the brand and sell its products. Franchisor: Assigns territory: Grants specific areas for franchisee operations. Provides financial aid/advice: Offers help with money management and business advice. Offers merchandise/supplies: Sells products or materials to franchisees at competitive prices. Provides training/support: Assists with training and ongoing business support. Business expansion using OPM (Other People's Money): Expands by having franchisees invest in the business. Franchisee: Pays upfront costs: Pays initial fees to start the franchise. Makes monthly payments: Ongoing payments to the franchisor. Runs business by franchisor’s rules: Must follow the franchisor’s established procedures. Buys materials: Purchases supplies from the franchisor or approved suppliers. How to Avoid a Franchise Disaster: 1. Research officers & business experience: Check the background of the franchisor's leadership. 2. Check bankruptcy & litigation: Review any past bankruptcies or legal issues. 3. Estimate setup costs: Get an accurate estimate of the initial investment required. 4. Review contract & financial statements: Read the franchise agreement and check the last three financial statements. Franchising and E-Commerce:  Technology: Enables faster customer service. International access: Helps expand into global markets.