Starting a new business

Starting a new business carries with it the greatest degree of risk. It may be possible to begin on a very small scale without risking too much capital. You will also have greater freedom of action. You will not be limited by decisions other people have taken in the past if you buy an existing business. Starting a new business requires finance. There are just three ways in which a business acquires money:

ú from the money invested in the business by the owner or owners, including any profit which they decide to reinvest.

ú by borrowing money from private individuals or from another organisation.

ú by buying goods and services on credit, i.e. having the use of the goods and services before they are paid for.

The basic principles of acquiring capital may be simple but the reality is far more complex. Each business will have its own particular requirements based upon such factors as:

ú the size of the business.

ú the stage of development it has reached. For example, two businesses with a similar number of employees and making a similar profit, may have totally different capital requirements. One business might be able to fund future investment from profits already made, but its future investment potential might be limited. The other business may need a large injection of capital if it is to take advantage of the market.

ú maintenance of control; that will mean loans to expand the capital rather than sharing the ownership with other people.

ú the organisations that make money available to businesses.

Let’s look at some basic definitions and the ways in which a very small business just starting up might find its capital in the first years of life.

1. The owner of the business invests money in it. This can come from savings or the sale of possessions. The important thing to remember is that it is the owner's money, to be spent as she/he wishes. If the money is lost, it is the owner's loss.

2. Money can be borrowed using possessions as a security. This statement means simply that if someone cannot repay the money then the person or organisation who lent that money can claim or sell that possession in order to recover the money they have lent. Mortgages are a specialised form of a loan on security. The security in this case is always property. All loans are usually made for a fixed period of time, for a fixed amount and at a fixed rate of interest.

3. Hire purchase and credit sales for equipment have a great deal in common. The difference lies in the ownership of the item. If a business buys a display refrigeration unit on hire purchase it does not own it until the last payment has been made. If it is a credit sale, it will own the refrigeration unit as soon as the initial payment has been made.

4. Trade credit is a system whereby a business receives the ownership of goods or services and does not have to pay for them immediately. The time involved can vary. In some businesses the goods or services bought in can be used and have brought in income before they have to be paid for.

Businesses can also lease equipment. If the equipment is needed for only a relatively short period of time then it is sensible to hire it. If the equipment is going to be used continuously then it is better to lease equipment.

2. Comprehension check.

Read the text again more carefully. Are the following statements true or false? Correct the false ones:

a) If you decide to buy an existing business it is sensible to start on a large scale without risking too much money.

b) The finance invested in the business, borrowings from natural persons or from another organization, purchasing commodities or credit are the possible ways through which a recently set up business obtains money.

c) There are four basic factors determining particular requirements of each business.

d) Money invested in a small business just starting up can be obtained from savings or the sale of possessions.

e) If a person fails to pay back the money then the lender can divest that possession.

f) Hire buying and credit sales facilities have many discrepancies.

g) Trade credit requires to pay promptly for the ownership of goods and services.

h) It is sensible to hire the equipment if it is going to be used continuously.

Pre-listening task

1. The words and word combinations in A are in the dialogue you will hear. Use your dictionary if necessary and match each of them with a definition in B.

A 1) loan 2) store 3) to plan 4) profitable 5) business 6) origin 7) customer 8) money 9) to pay back 10) estimate 11) interest 12) security 13) to borrow 14) property 15) to own

B a) to repay b) to posses c) an organization that buys or sells products or services for money d) what someone earns, saves, invests and uses to pay for things e) money provided by a bank to a customer for an agreed purpose f) assets g) something one intends to do and makes arrangements to achieve h) a statement telling a customer how much money you will charge if they employ you to do a particular piece of work i) property or goods that you agree to give to someone who has lent you money if you can not pay the money back j) the country, race or social situation that someone comes from k) shop l) to receive and use something that belongs to someone else and promise to give it back to them later m) how someone are charged for borrowing money n) client o) lucrative

Listening

T ¹. The conversation you are going to hear gives a tip on starting a new business.

Listen to it and answer the questions:

a) Where did this conversation most likely take place?

b) Who are the participants of the conversation?

c) Give the main idea of the dialogue.

Pre-reading task

The words and word combinations in the box make a key vocabulary of the text you are going to read. Use your dictionary if necessary.

What is this text about?

ultimate clerical

secure price elasticity

to hinder attitude

labour force pressure group

obsolete to mount a campaign

labour costs impact

competitive to reassess

implications to modify

costing circumstances

production cost to take into account

Reading

1. Read text 4 and think of the suitable title.

TEXT 4

A business, like the people who run it and the society in which it exists, is constantly changing. The way in which it develops and its ultimate success or failure depend upon:

1 People The person who starts a business might be prepared to work long hours to make it a success. As it becomes more secure she/he might prefer more leisure time to increased profits. The way in which the business develops can be helped or hindered by the available skills in the labour force.

2 Technology Changes in technology can make a product or a production method obsolete, that is old-fashioned or out of date. New products will have to be found, new machinery bought and the labour force retrained.

3 The economy Ahigh level of unemployment in an economy can mean a reduction in labour costs. It can also mean less demand for the product and a more competitive market. This will have implications for the costing, pricing and marketing of a product. It can also lead to changes in production methods and will certainly affect profitability.

4 The government Governments make laws. A change in the laws governing health and safety in the workplace can lead to increased production costs. Other laws might increase the clerical work required of a business.
The government can also affect the general level of demand in an economy by the way in which it raises money and the way in which it spends it. If the government decides to increase the tax on a particular type of good then it is likely that the demand for that good will fall. The extent to which the demand falls will depend on its price elasticity.

5 Other organizations The attitudes and activities of trade unions, the activities of pressure groups can also affect the development of a business. A powerful and active trade union can influence working practices and raise the labour costs of a business. A political pressure group might mount a campaign to stop people buying certain types of goods.

6 The market The markets in which a business operates will also affect its development.

The impact of these forces will vary from business to business and will depend, amongst other things, upon the size of the business, the quality of its management, the finance available to it and the way in which it has developed in the past. Whatever the effect on a business the business plan must be constantly reassessed and modified to take changing circumstances into account.

2. Comprehension check.

Here are some answers about factors affecting the development of a new business. Write the questions.

a) What?

The way in which a new business moves forward or fails depends upon six factors.

b) Why?

To make a new business a success.

c) In what case?

The available skills in the labour force.

d) What?

New product will have to be found, new machinery bought and the labour force retrained.

e) What?

A high level of unemployment in the economy means a reduction in labour costs, less demand for the product and a more competitive market.

f) In which ways?

By the ways in which the government raises money and spends it.

g) Who?

A powerful and active trade unions.

h) Why?

To take changing circumstances in which a business exists into account.

Discussion

Work in pairs.

Using the key vocabulary from the Pre-reading task, discuss what you have learned about factors affecting the development of a new business.

Give your ideas and motives for starting your own business.

Unit 3

What is financial management?

Vocabulary

1. Do you know the meaning of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

1. finance 2. application 3. to be responsible for 4. assets 5. management 6. charitable 7. retail 8. sufficient 9. to collect 10. supplier 11. to supervise 12. to focus on 13. treasurer 14. controller	15. to charge with 16. liaison 17. to oversee 18. to obtain 19. accounting 20. auditing 21. to report to 22. to aim at 23. capital budgeting 24. to gain 25. equity 26. working capital 27. to ensure
а) бути відповідальним за б) роздрібний в) дивитися, спостерігати за г) збирати д) скарбник е) з’єднувальна ланка є) фінанси ж) наглядати, спостерігати за з) бухгалтерський облік и) доповідати, звітувати і) бухгалтер-аналітик, контролер ї) благодійний й) активи к) покладати відповідальність на л) достатній	м) одержувати, здобувати н) акціонерний капітал, власний капітал, звичайна акція о) застосування, використання п) одержувати, здобувати (прибуток) р) проведення ревізії, аудит с) забезпечувати, гарантувати т) розрахунок прибутковості капіталовкладень у) постачальник ф) оборотний капітал х) домагатися, прагнути ц) зосереджувати увагу на ч) управління, керівництво; адміністрація

Pre-reading task

Work in small groups.

Can you answer the following questions?

– What are the most important decisions a company has to make before starting or doing some business?

– What is corporate finance?

– Which managers does the Vice-President for Finance supervise?

– What is capital budgeting?

– What is capital structure?

– What is working capital?

Preface each answer with one of the following according to what is true for you:

As far as I remember … Unfortunately, I have no idea …

I would like to point out that … I am not absolutely certain, but I think …

Reading

1. Read text 5. How much of the information did your group already know?

TEXT 5

Financial activities and their management

Finance is the application of economic principles and concepts to business decision-making and problem solving. It is the function in a business responsible for acquiring funds for the firm, managing funds within the firm, and planning for the expenditure of funds on various assets.

Finances of a business enterprise need management. It is just the sphere of financial management. Financial management is the investment and financing decision making that goes on within all types of firms. The firm may be a business enterprise, such as manufacturing company, an accounting firm, an oil producer, a credit union, or a charitable organization. The small retail firm requires such decisions as where to get funds for its seasonal cash needs, selecting the appropriate level of inventory and cash on-hand, and deciding when best to expand. The large corporation needs to set its credit terms, decide where to get funds needed for expansion etc.

Any person or company starting or doing some business has three questions to answer, all connected to finance.

The first question is, “What long-term investments are necessary?” This means identifying the business to be done, and the buildings, machinery, and equipment needed to do it.

The second question is, “Where and how can the firm get long-term financing to pay for those investments?” Will the firm’s own money be sufficient? If not, will it try to interest others to invest in the business and share ownership, or will it borrow money?

The third question is, “How will the firm manage everyday financial activities?” These activities include collecting money from customer, paying suppliers, paying salaries and wages, administrative costs, etc.

The financial structure of a company is called corporate finance. The Financial Department in a company is responsible for its corporate finance.

It is known, that financial management is the responsibility of the Vice-President for Finance, who supervises the work of the Financial Department of a company.

High-level positions of a business that focus primarily on financial management typically include: Vice-President for Finance, Treasurer, Controller and Chief Financial officer. The Vice-President for Finance is charged with policy-making duties and acts as a liaison between financial manager and other management personnel. Often the Vice-President for Finance oversees the activities of the Controller and the Treasurer. The Treasurer is charged with obtaining capital for investments and investing cash in other assets of business. The Controller is charged with accounting and auditing functions and financial planning.

The Chief Financial officer is generally part of the top layer of management that reports to the Board of Directors.

All the financial activities are aimed at answering the three questions listed above. The answer to the first question is called capital budgeting. It is the process of planning and managing the firm’s long-term investments. To do that, the Financial Manager has to try to find opportunities for investments which are worth more to the firm than they cost to be acquired. That means that the amount of cash to be received as a result of an investment should be greater than its cost, i.e. greater than the amount of money spent to gain it.

The answer to the second question is found in capital structure. This structure is a mixture of long-term debt and the equity that a firm uses to finance its operations. Debt is a result of the firm borrowing money to finance its operations. Equity is the value of its property (also used as security for the financing) after deducting all the charges to which that property may be liable. The Financial Manager should decide on the suitable balance of debt and equity – what mixture of debt and equity is best for the firm. He or she should also find the least expensive sources of funding for the firm.

The working capital management is the answer to the third question. Working capital is the firm’s short-term assets - for instance, inventory. It also includes short-term liabilities, such as paying suppliers. Managing the working capital is necessary to ensure continuity of the firm’s operations without interruption. It requires a number of decisions, such as how much cash and inventory should be readily accessible at a moment’s notice, how to obtain short-term financing, etc.

Decisions made regarding any of these three basic questions of finance involve risks. That is why no firm can avoid some financial losses. But efficient financial management can bring those losses to a minimum, thus maximizing the profits.

2. Comprehension check.

a) Return to the questions in Pre-reading task.

· Which of them did you answer correctly?

· If your answers were only correct in general, formulate more specific answers.

· Which of your answers were wrong?

· What are the correct answers to those questions?

b) Work in pairs. Using the key vocabulary of the text, explain what you understand about the following:

· investments should be worth more to the firm than they cost;

· debt and equity should be balanced when financing the firm’s operations;

· the working capital includes the firm’s short-term assets and liabilities.

c) Look at the suggested organizational chart of financial activity in a large firm, supervised by the Vice – President for Finance. Match managers (under A) with definitions of their responsibilities (under B).

a) treasurer

b) controller

c) cash manager

d) cost accounting manager

e) credit manager

f) financial accounting manager

g) data processing manager h) tax manager

1) regulates the flow of cash;

2) supervises the issues of tax payments;

3) manages credit issues;

4) is responsible for financial planning and planning capital expenditure;

5) processes all financial information concerning the firm

6) supervises cost accounting;

7) supervises financial accounting;

8) is in charge of controlling expenditure.

А В

Vocabulary

Use your dictionary to look up any new words.

1. Write the following words in the correct column.

financial task (2) include development application monitoring creating evaluating credit (2) investing excess cash (2) acquiring issuing additional spinning-off interpret report (2) improve data optimally effective finance (2) similarly need (2) understand like (3) remember critical expect survive essential (2) challenge (2) face (2) entire (2) function (2) greatly.

Nouns (23)	Verbs (17)	Adjectives (7)	Adverbs (3)
		financial

2. Combine a word in A with a word in B to form a suitable noun phrase

E.g. financial manager

A B

1) financial (3) 1) cash

2) business 2) management (2)

3) credit 3) accountant

4) excess 4) activity

5) cash 5) challenge

6) equity 6) business

7) top 7) manager

8) good 8) securities

9) small 9) statement

10) careful 10) life

11) essential 11) strength

12) entire 12) balance

13) accounting 13) policy

14) matters

Reading

1. Read text 6 and think of the suitable title.

TEXT 6

The financial manager’s task include the development, application, and monitoring of policies and decisions regarding such business activities as:

· Creating and evaluating credit policies for customers

· Investing excess cash balances

· Acquiring another company

· Issuing additional equity securities

· Spinning-off a subsidiary

A financial manager for a business is the doctor who interprets the report and makes recommendations to the patient regarding changes that would improve health. Financial managers use the data prepared by the accountants and make recommendations to top management regarding strategies for improving the financial strength of the firm.

A manager cannot be optimally effective at finance without understanding accounting. Similarly, a good accountant needs to understand finance. Accounting and finance, finance and accounting – the two go together like bread and butter.

As you may remember, financing a small business is a difficult but critical function if a firm expects to survive those important first five years. The simple reality is, the need for careful financial management is an essential ongoing challenge a business of any size must face throughout its entire life.

All financial managers functions depend greatly on the information provided by the accounting statements such as:

· Planning · Budgeting · Obtaining funds · Controlling funds (funds management)

· Collecting funds (credit management) · Auditing · Managing taxes · Advising top management on financial matters

2. Comprehension check.

Here are some answers about financial manager’s work. Write the questions.

a) What ___________________________________________________________?

The major task of financial manager is the development, application and monitoring of policies and decisions of a business.

b) Who ____________________________________________________________?

Accountants collect and choose data for financial managers.

c) Whom ___________________________________________________________?

Financial managers suggest the top management ways of improving the financial standing of the firm.

d) In what case ______________________________________________________?

Without understanding accounting a manager cannot be effective at finance.

e) What ____________________________________________________________?

Accounting statements.

Role – play

Work in pairs.

Imagine that you are a human resource manager who selects employees to fill vacancies of:

· a finance manager

· a treasurer

· a controller

Tell them about your company. Ask them about their education, business experience and professional qualification. Also have a talk with candidates about their official duties.

Writing a summary (an abstract) [1] of a text, a book, an academic paper etc.

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