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1. International trade: Export and import.
There are clear benefits to being open to international trade: trade allows people to produce what they produce best and to consume the great variety of goods and services produced around the world. The key macroeconomics variables that describe an interaction in world markets are exports, imports, the trade balance, and exchange rates.
The main difference between domestic and international trade is the use of foreign currencies to pay for the goods and services crossing international borders.
When nations export (sell goods and services to other countries) more than they import (buy goods and services from other countries), they are said to have a favorable balance of trade. When they import more than they export, a unfavorable balance of trade exists. Nations try to maintain a favorable balance of trade, which assures them of the means to buy necessary imports. Some nations, such as Great Britain in the nineteenth century, based their entire economy on the concept of importing raw materials, processing them into manufactured goods, and then exporting the finished goods.
2. International trade: investments.
Whenever a country imports or exports goods and services, there is a resulting flow of funds: money returns to the exporting nation, and money flows out of the importing nation. Trade and investment is a two-way street, and with a minimum of trade barriers, international trade and investment usually makes everyone better off.
Investments can have a crucial impact on a nation’s balance of payments. When a investment is made, capital enters a country, enabling it to import manufactured materials to build a new manufacturing plant and to pay workers to build it. Once the plant is operative, it provides both jobs and taxes for the host country and, in time, produces new manufactured goods for export. in this way, investment acts as a catalyst in economic growth for the developing countries throughout the world.
In subsequent years, an investment should yield a profit. Dividends, sums of money paid to shareholders of a corporation out of earnings, can them be remitted to the investing country. From the perspective of the balance of payments, in the year the investment is made, the host country credits income to its balance of payments, and the investing country records a debit. This is reserved in the following years. The dividends then represent an expense for the host and income for the investing country.
3. Visible and invisible trade.
In addition to visible trade, which involves the import and export of goods and merchandise, there is also invisible trade, which involves the exchange of services between antions. Brazilian coffee is usually transported by ocean vessels because these ships are the cheapest method od transportation. Nations such as Greece and Norway have large maritime fleets, which can provide this transportation service.
The prudent exporter purchases insurance for his cargoes’ voyage. While at sea, a cargo is vulnerable to many dangers, the most obvious being that the ship may sink. In this event, the exporter who has purchased insurance is reimbursed. Otherwise, he may suffer a complete loss. Insurance is another service in which some nations specialize. Great Britain, because of the development of Lloyd’s of London, is a leading exporter of this service, earnings fees for insuring other nations’ foreign trade.
Some nations posses little in the way of exportable commodities, but they have a mild and sunny climate. Tourists spend money for hotel accommodation, makes, taxis, and so on, Tourism, therefore, is another form of invisible trade.
In the past twenty years, million of workers from the countries of southern Europe have gone to work in Germany, Switzerland, France, the Benelux nations, and Scandinavia. The commissions and salaries that are paid to these people represent another form of invisible trade. The workers send money home to support their families. These are called immigrant remittance. they are extremely important kind of invisible trade for some countries, both as imports and exports.
4. A nation’s balance of payments.
A balance of payments (BOP) is the all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. After calculation all of the entries in its balance of payments, a nation has either in its balance of payments, a nation has either a net inflow or a net outflow of money.
The nation’s reserves may be compared to an individual’s savings. For a nation, they are maintained in holdings of gold and official deposits in foreign currencies. A deficit in the balance of payments can be accommodated by drawings on (removing some of) the reserves, that is the previous savings. But if a nation’s balance of payments continues in deficit for some time, then the reserves will be insufficient to cover further withdrawals, and additional measures must be taken.
The most direct means of correcting a deficit in the balance of payments and having an immediate impact is by reducing imports. This can be accomplished by imposing tariffs (taxes), quotas (import restrictions), or both. If successful, the cost of imports rises in the local market, and the imported goods are comparatively more expensive to the consumer than locally made goods. When a quota is imposed, the quantity previously imported and paid for is reduced. In either case, the net effect is the reduction of the nation’s outflow of money. Other measures may limit invisible trade expenditures. For example, citizens may be prohibited from taking more than a specified amount of money with them when they travel abroad.
Capital for investments abroad can be restricted by requiring government approval for any new foreign investments. When the United States encountered serious balance of payments problems in the 1960s, the government restricted the loans that United States banks could extend abroad. This was a large item in its balance of payments because of the United States’ role in world finance. The government also restricted the amount that the United States’ corporations could invest overseas.
If these measures are insufficient, a country may devalue its currency. This immediately makes imports mor expensive and exports more competitive, since the importing country can now pay fo the first country’s imports with less of their currency than previously. In time, these advantages are eliminated. A nation must at all times combine devaluation with other effective measures to balance its economy, resulting in a reasonable level of employ meant and low rate of inflation.
Gold has been the traditional reserves. At one time, gold moved freely from country to country, but successive constraints have been imposed in the past years, Today, gold counts as only one form among many in the reserves of a country. A number of countries have an agreement with the Federal Reserve Bank of New York to hold their gold in safekeeping. This makes it possible for these countries to buy gold from one custodian vault to another at the Federal Reserve Bank of New York.
5. Documents needed in international trade and incoterms.
An import/export transaction usually requires a lot of complicated documentation.
Many different arrangements have to be made and this can be difficult when one firm is dealing with another firm on the other side of the world.
Firstly, there should be a shipping agent and/or a freight forwarder (forwarding agent) who takes responsibility for the documentation and arranges for the goods to be shipped by air, sea, rail or road. Moreover, these services may also be carried out by the supplier's own export department, if they have the expertise.
Also there are airlines, shipping lines, railway or road haulage firms to transport the goods.
Both the importer's and exporter's banks will be involved in arranging payments if a letter of credit or a bill of exchange is used. We should also consider that the goods can be examined, import and export licenses can be checked and charge duty and/or VAT can be charged by customs officers.
The manufacturer may have to issue a chamber of commerce's Certificate of Origin if this required by the importer's country.
Many import or export deals are arranged through an exporter's agent or distributor abroad - in this aces the importer buys from a company in hi own country and this company imports the goods. Alternatively, the deal may be arranged through an importer's buying agent or a buying house acting for the importer, or through an export house based in the exporter's country. In this situation, the exporter sells directly to a company in his own country, who will then export the goods.
Prices for exports may be quoted in the buyer's currency, the seller's currency or in a third "hard" currency (e.g. US dollars, euros an yens). The price quoted always indicates the terms of delivery, which conform to the international standard Incoterms. The terms of delivery that are most common depend on the kind of goods being trade and the countries between which the trade is taking place.
Methods of payment may be on a cash with order basis (or cash deposit with order), on open account (as in most domestic trade, where the buyer pays the supplier soon after receiving the goods), by irrevocable letter of credit or by bill of exchange. Exporters and importers often prefer the security of payment by confirmed irrevocable letter of credit when dealing with unknown firms in distant countries.
Trade between countries within a free trade area and within the European Union is simpler, and many firms pay for goods by cheque and use their own transport to deliver goods across frontiers. No special customs documentation is required for trade between firms in different parts of the EU, but VAT rates vary from country to country.
Companies exporting or importing goods use standard arrangements called Incoterms - short for International Commercial Terms, established by the international Chamber of Commerce (ICC) - that state the responsibilities of the buyer and the seller. They determine whether the buyer or the seller will pay additional costs - the costs on top of the costs of the goods. These include transportation or shipment, documentation - preparing all the necessary documents, customs clearance - completing import document and paying any import duties or taxes and transport insurance.
There are 13 different Incoterms that can be divided into 4 different groups: an E Term (Departure), the F Term (Free, Main Carriage Unpaid), the C Term (Main carriage Paid) and the D term (Delivered/Arrival). Each group of terms adds more responsibilities to the seller and gives fewer to the buyer.
The E term is EXW or Ex Works. This means that the buyer collects the goods at the seller's own premises - place of business - and arranges insurance against loss or damage to the goods in transit.
In the second group, the F terms, the seller delivers the goods to a carrier appointed by the buyer and located in the seller's country. The buyer arranges insurance.
FCA or Free Carrier means that the goods are delivered to a named place where the carriers can load them onto a truck, train or aeroplane.
FAS - Free Alongside Ship means that seller delivers the goods to the quay next to the ship in the post.
FOB - Free on board means that the seller pay for loading the goods onto the ships.
In the third group the C terms, the seller arranges and pays for the carriage or transportation of the goods, but not for the payment of customs duties and taxes. Transportation of goods is also known as freight.
In CFR - Cost and Freight (used for ocean freight) and CPT - Carriage to paid (used for air and land freight) the buyer is responsible for insurance.
In the terms CIF - Cost, Insurance and Freight (used for ocean freight) and CIP - Carriage and Insurance Paid To ... (used for air freight and land freight), the seller arranges and pays for insurance.
In the group D, the seller pays all the costs involved in transporting the goods to the country of destination, including insurance.
In DAF - Delivered at Frontier, the importer is responsible for preparing the documentation and getting the goods through customs.
If the goods are delivered by ship to a port, the two parties can choose who pays for unloading the goods onto the quay. The two possibilities are:
DES - Delivered Ex Ship - the buyer pays for the goods from the ship.
DEQ - Delivered EX Quay - the seller pays for unloading the goods from the ship to the quay, and for the payment of customs duties and taxes.
If the goods go through customs and are delivered to the buyer, there are 2 possibilities:
DDU Delivered Duty Unpaid - the buyer pays any import taxes
DDP - Delivered Duty Paid - the seller pays any import taxes.
6. Trade restrictions: tariffs, subsidies, quotas and cartels, How trade restrictions affect international trade.
Many nations impose limits on trade. There are four main types of trade restrictions: tariffs, subsidies, quotas and cartels. The tariff is a tax placed on imported goods. Tariffs are of two kinds - revenue and protective. A revenue tariff raises money for the government. For this reason, revenue tariffs are generally low so that consumers will continue to purchase the taxed goods. However, protective tariff taxes an imported goods so that the price becomes as high as, or higher than the similar domestic manufactured product. Protective tariffs make imported products more expensive and encourage people to buy goods produced in their own country. (example: if the cost of producing a pair of shoes is 20$ in the United States and 10$ in Italy, Italian shoes are cheaper. Americans then would buy Italian shoes to save money. To encourage domestic shoe purchase, the federal government could levy a tariff of 15$ pair on imported Italian shoes)
A subsidy can be thought of as a tariff in reverse. Instead of taxing the foreign product, the government gives a subsidy to the industry that is suffering from foreign competition. (In the shoe example, the government would grant a subsidy to the nation's shoe industry. Shoe manufacturers could then meet some of their production costs through the subsidy and charge less foreign producers for their products.
A nation also can limit the amount of goods that can be imported into the country. It's called a quota. (example: a quota on shoes might limit shoe imports to 100 million pairs a year. If American buy 500 million pairs of shoes each year, most of the market will go to American producers). Usually, quotas are imposed when tariffs and subsidies have failed to protect domestic industries from foreign competition.
Sometimes a group of companies or country band together to restrict competition. It's called a cartel. the members of the cartel agree to limit the supply and control the price of a particular good. Members meet regularly to decide how much to sell and how much to charge for their product.
but it's best for nation to use tariffs, because they provide domestic job protection and aid industrial development. Also tariffs are important to the national defense.
Sometimes tariffs and subsidies are applied on a regional rather than a national basis. (Example:in the late 1950s six Western European nations - Belgium, France, Italy Luxembourg, the Netherlands and West Germany - formed the European Economic Community EEC, usually called the Common Market. Later Denmark, GB, Greece and Ireland also joined. The EEC established common tariffs against products from non-EEC nations. At the same time the countries eliminated tariffs among themselves).
Specialization and trade result in interdependence. Many nations do not want to depend on other countries for products necessary to national defense, such as oil and steel.
Trade restrictions limit world trade, reducing the total number of goods and services produced. Trade restrictions also raise prices.
That's why there is an international organization as GATT (General agreement on Tariffs and Trade), which members met periodically in an effort to lower tariffs and settle trade disputes. The GATT also restricted member countries from banning or limiting imports from the other participants. In 1995 the World Trade Organization became the successor to it.
7. The world trade organization. European financial sector.
Thе World Trade Organization came into being in 1995. The WTO is the successor to the General Agreement on Tariffs and Trade (GATT) established in the wake of the Second World War. So the multilateral trading system that was originally set up under GATT is already 50 years old. The past 50 years have seen an exceptional growth in world trade. Merchandise exports grew on average by 6% annually. GATT and the WTO have helped to create a strong and prosperous trading system contributing to unprecedented growth. The system was developed through a series of trade negotiations, or rounds, held under GATT. The first rounds dealt mainly with tariff reductions but later negotiations included other areas such as anti-dumping and non-tariff measures. The agreement was reached on telecommunications services, with 69 governments agreeing to wide-ranging liberalization measures that went beyond those agreed in the Uruguay Round. In the same year 40 governments successfully concluded negotiations for tariff-free trade in information technology products, and 70 members concluded a financial services deal covering more than 95% of trade in banking, insurance, securities and financial information.
The organization:
The WTO’s overriding objective is to help trade flow smoothly, freely, fairly, and predictably. It does by:
Administering trade agreements
Acting as a forum for trade negotiations
Settling trade disputes
Assisting developing countries in trade policy issues, through technical assistance and training programmes.
Cooperating with other international organizations
The WTO has more than 130 members, accounting for 90% of world trade. Over 30 others are negotiating membership. Decisions are made by the entire membership and typically by consensus. A majority vote is also possible but it has never been used in the WTO, and was extremely rare under the WTO predecessor, GATT. The WTO’s agreements have been ratifies in all member’s parliaments. The WTO’s top level decision-making body is the Ministerial Conference which meets at least once every two years. Below this is the General council (normally ambassadors and heads of delegation in several Geneva, but sometimes officials sent from member’s capitals) which meets several times a year in Geneva head-quarters. The General council also meets as the Trade Policy Review Body and the Dispute Settlement Body. At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council report to the General Council. Numerous specialized committees, working groups and working parties deal with the individual agreements and other arese such as the environment, development, membership applications, regional trade agreements, relationship between trade and investment, the interaction between trade and competition policy and transparency in government procurement.
8. Forex.
The Foreign Exchange Markets, where people buy and sell foreign currency, also referred to as the "Forex" or "FX" market, is the largest financial market in the world, 30 times larger than the combined volume of all US equity markets.
Currencies are traded in pairs, for example Euro/US Dollar or US Dollar/Japanese Yen.
Foreign money held by a government to support its own currency. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign into their domestic currency. The other 95% is trading for profit, or speculation.
For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors". Today, more than 85% of all daily transactions involves trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
Forex trading begins each day in Sydney, and moves around the blobe as the business day begin in each financial center, first to Tokyo, London, and New York,. It's a 24-hour market, and investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
The Forex market is considered an over the counter (OTC) or interbank market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.
9. Countertrade
Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for accounting purposes.
Countertrade also occurs when countries lack sufficient hard currency, or when other types of market trade are impossible.
For example Coburn Tool corporation, an American manufacturer of large and small machine tools and parts, gears, valves, and bearings, was a major supplier to industries and companies world-wide. Because of the ride of the U.S. dollar on exchange market and serious financial crises in many of the countries in which Coburn did business, sales, particularly to Latin America, began to decline.
A major market for Coburn’s products had until recently been Brazil. For instance, in 1980 sales to thet country’s industries were $640000, but by 1983 sales had declined to just $183000.
This serious problem seemed to have little solution because of Brazil’s chronic credit problems and lack of foreign exchange.
In the fall 1984, however, a unique proposition was received at Coburn’s head office from a Brazilian commodities broker, Companhia Internacional de Comercio (CIC). CIC’s offer was essentially this: in exchange for US $400000 in assorted gears, Coburn would receive the equivalent in Brazizilan shoes, which it could sell in the American market. Well, that’s is a good example of countertrade, when because of the lack of currency, one company offered other to exchange gears for shoes.
Role of countertrade in the world market.
In any real economy, bartering occurs all the time, even if it is not the main means to acquire goods and services. The volume of countertrade is growing. In 1972, it was estimated that countertrade was used by business and governments in 15 countries; in 1979, 27 countries; by the start of 1990s, around 100 countries. A large part of countertrade has involved sales of military equipment (weaponry, vehicles and installations).
More than 80 countries nowadays regularly use or require countertrade exchanges. Officials of the General Agreement on Tariffs and Trade (GATT) organization claimed that countertrade accounts for around 5% of the world trade. The British Department of Trade and Industry has suggested 15%, while some scholars even believe it to be closer to 30%.
10. Types of businesses.
The basic economic institution in different economics systems is the business, Businesses determine much of how the economy operates. Businesses produce goods and services, and they come in every shape and size. Although the vast majority of the world’s companies are small, in many countries the economy is dominated by large firms. Large business differ from small ones in a wide variety of ways. In many countries there are nationalized companies belonging to the state, as well as private companies. A private company might be a small firm with just one owner or a very large firm with thousands of shareholders “ownig” he firm.
Main types of business in nowadays economic world are sole proprietorships, partnerships, public and private limited companies (corporations in the USA), and cooperatives.
Starting a business requires more than natural resources, labor, and capital. An entrepreneur must organize these resources. Many entrepreneurs start their own business as sole proprietorships. A sole proprietorship is a one –owner business. The advantages of sole proprietorships (they are easy to organize, decisions can be made quickly, owners receive all profits, etc.) explain why so many people start business and try to run them alone. However, a sole proprietor sometimes encounters difficult problems in starting a business. One person has limited resources to start and operate a business. The owner has only personal savings and funds that can be borrowed. Because capital is lacking, most sole proprietors begin small and fail. Even those that succeed often stay small.
A sole proprietorship also must deal with the problem of unlimited liability. According to the law, the owner and the business are one and the same. If the business fails, the owner must pay the debts. The personal property of the owner, such as a home or a car, can be taken to pay the debts of the business. No limit is placed on the amount the owner can lose. High profits can make an owner wealthy, but high losses can ruin an individual.
To increase their chances of success entrepreneurs often choose partnership is an association of two or more people in order to run a business. Partners generally contribute equal capital, have equal authority in management, and share profits or losses. In many countries, lawyers, doctors and accountants are not allowed to form companies, but only partnerships with unlimited liability for debts – which should make them act responsibly. A partnership has many of the characteristics of the sole proprietorship. Partnerships are easy to organize, decisions can be made quickly, profits are shared with only a few people, and the owners are responsible for success or failure of the business.
Like proprietorships, partnerships are not free of problems. Liability is still unlimited. Like sole proprietors, partners are responsible for the debts of the business, Liability then can actually be greater in a partnership than in a sole proprietorship, since each partner is responsible for all the business debts. Partnerships also have limits life. If one partner dies, the business must be dissolved.
Consequently, the majority of businesses are limited companies (US - corporations), in which investors are only liable for the amount of capital that have invested. If a limited company goes bankrupt, its; assets do not cover the debts, they remain unpaid (i.e. creditors do not get their money back).
Often one person does not have enough money to start a business. Combining the resources of a number of people and forming a corporation is a way to raise the large amount of money needed. A corporation is a business, that although owned by one or more investors, legally has the rights and duties of an individual. Corporations have the right to buy, sell, and own property. Corporations may make legal contracts, hire and fire workers, set prices, and be sued, fined and taxed. A business must obtain a charter of incorporation from the state legislature to be legally recognized as a corporation.
Corporations have some advantages over sole proprietorships and partnerships. First, a corporation has limited liability. Thus if the corporation goes bankrupt or is sued, the stockholders lose only the value of their stock. The stockholders, who are the corporations owners, cannot be held personally responsible for any money the corporation owes. Second, corporations have the ability to raise very large amounts of money. They use this money to change models, replace obsolete equipment, and build new factories. Corporations can raise money by selling bonds, as well as stocks. Third, a corporation has an unlimited life. That is the corporation continues to function despite death, transfer, or changes in ownership, management, or labor. The work of sole proprietor or partners can end abruptly in such circumstances. This stability attracts small investors. The fourth advantage of corporation is the ease of ownership transfer. Selling a small business may be difficult; selling shares of stock is relatively easy. The investor also has an advantage. The ability to get out of one business, by selling stock, and into another quickly, by buying stock, is quite useful to small investors.
Corporations have disadvantages as well as advantages. First, complex forms must be filed with the state or federal government. Second, a corporation's profits are subject to double taxation. Third in corporations with many owners or stockholders the individual share of profits in the form of dividends is comparatively small. Fourth, a corporation's owners do not directly control the business. Most individual stockholders take little interest in management decisions. In contrast, sole proprietors or partners manage their own business.
A cooperative may also be defined as a business owned and controlled equally by the people who use its services or by the people who work there.
11. Private company: the structure of the authorized capital, Risk of a takeover. (Harper&Grant ltd. overcomes the risk of a take-over and ensures the favorable redistribution of the share capital).
The death of Ambrose Harper, one of the two men who founded the company Harper & Grant ltd., causes a crisis in the firm. H&G is a private company. It was started originally by Hector Grant's father and the late Ambrose Harper together. A private company can be formed by two or more people. They sign Memorandum of Association, stating the number of shares they agree to take, and their signature is followed by the signatures of anyone else, often members of the family, who will also take shares in the company. In a private company there cannot be more than fifty members, or shareholders. The authorized capital of H&G Ltd was originally P5000, but the company has grown, and each 1 share is now worth about P100. Each share carries a vote at a shareholder's meeting.
Wenthworths, a large and successful firm who manufacture mattresses for beds, own 10% of H&G shares. Mr. Wentworth senior was a personal friend of Ambrose Harper. His firm now has an opportunity of buying some of the shares formerly belonging to Harper. Hector Grant wants to stop Wentworth getting as many shares as he owns himself for fear of upsetting the voting power at shareholder's meetings. If Wentworth owned fifty-one per cent of the shares they would have a controlling interest, and would be in a very good position to take over H&G completely. This being done, it will become a fully owned subsidiary.
Hector Grant does not want Alfred Wentworth to own too many of the shares. Having raised a loan, he buys enough of the shares to outvote Wentworth. It is a personal loan. It is also a short-term loan. Obtaining a loan he does not only have to pay back the money he borrowed, he also has to pay interest on it: in this case 9 per cent, this is the rate of interest. The bank manager asked Hector Grant for security. He wanted to hold the deeds of the Grant's house. But a building society lent him money long ago to buy the property, and every year he repays a proportion of the loan to them, plus interest. By now, a lot of this loan has been paid back to the building society. Probably for this reason the bank agreed to a second mortgage. If Grant could not pay back the loan within the time limit his house would have to be sold and the first mortgage paid up. Then the remainder would go to the holder of the second mortgage, in this case, the bank. Very few banks will give an unsecured loan, one without any security or guarantee they will get their money back.
Hector Grant and Peter Wiles' mother has 20% of the capital each. Ambrose Harper - 50 %, 10% in the hands of Wentworth.
12. Auditing the accounts of a limited company.
Every year the accounts of a limited company must be approved by auditors, acting on behalf of the shareholders. Their duty is to ensure that the directors are reporting correctly on the state of affairs of the company. They do not judge whether the directors are managing the company efficiently or not. That is something the shareholders must judge for themselves.
Until recently, the accounts of Harper&Grant have been audited by Hector Grant’s son-in-law, who is in private practice as an accountant. A new firm of auditors has now been appointed.
They check the highlights, making up the Profit Statement, the Balance Sheet, the Directors’ Report.
The Profit Statement (Trading & Profit & Loss Account) shows how the profit for the year is arrived at.
Net Sales of Income – cost of materials, work, overhead charges = trading surplus – depreciation on plant & buildings – auditors’ fee – administration & selling costs = net profit (or loss)
The Balance Sheet is a summarized statement, showing the amounts of funds employed in the business (usually consist of the issued share capital, reserves & retained earnings) & the sources from which they derived.
The totals on the two sides of the Balance Sheet must agree. The total dividend to be paid for the year is a current liability.
13. The work in the Account Department. Debtors.
Collecting bad debts is one of the most difficult affairs in the work of the Accounts Department. Retail business is usually done on a cash basis, & wholesale business is done on credit, given for 30 days. Any company prefer to receive long credit from its suppliers.
For each sale an invoice is sent to the customer. It’s the list of the goods delivered & amount owed. At the end of the month each customer is sent an account, showing the total amount due.
Sometimes debtors cannot repay a credit, for example, in case of bankrupt of the company or dishonesty the people, running it.
Accounts not paid in time are called overdue accounts. In very difficult cases a firm employs a professional debt collector. No company wants to get a reputation for being a bad payer, because it will be difficult to get supplies on credit. There are special agencies, which provide information about the financial situation of any company, so the suppliers can judge a credit risk.
14. Insurance for a private company.
Every firm insures itself against loss or damage to its property. Blanked insurance means insurance which covers everything, a comprehensive police. The premium is a percentage of the total value of goods.
The underwriters employ adjusters, assessing the loss or damage. This sum usually less than the full insured value of the property.
Often companies & persons insures the goods or property against almost anything that could happen. But most insurance companies put in some exceptions, like war or Act of God.
First you take out a policy, then you put in a claim, & the insurance company, you hope, agrees to meet the claim.
15. Types of securities.
Security – a certificate attesting credit, the ownership of stocks and bonds, or the right to ownership connected with tradable derivatives.
In Britain stock is used to refer to all kinds of securities, including government bonds. The word equity or equities is also used to describe stocks and shares. The places where the stocks and shares of listed or quoted companies are bought and sold are called stock markets or stock exchanges.
Shares are certificates representing part ownership of the company. Ownership in a company is divided among stakeholders or shareholders. The original shareholders are the people who started the business, but now they have sold shares of the profits to outsiders. By selling these entitlements to share in the profits, the business has been able to raise new funds.
For public companies the shares or stocks can be resold on the stock exchange to anyone prepared to pay the going price. Even the largest company occasionally needs to issue additional new shares to raise money for especially large projects.
To buy into the company, a shareholder must purchase shares on the stock exchange. As reward for this initial outlay, shareholders earn return in two ways. First, the company makes regular dividend payments, paying out to shareholders that part of the profit that the company does not willing to re-invest into business. Second, the shareholders may take capital gains (or losses). (For example, if you buy company X shares for 600 euro each and then everyone decides its profits and dividends will be unexpectedly high, you may be able to resell the shares for 650 euro, making a capital gain of 50 eur per share on the transaction.
If the company suffers a loss or goes bankrupt then the shareholders can lose only the money they originally spent buying shares.
There are common or ordinary shares, and preference shares or preferred stock. Holders of preference shares receive a fixed dividend that must be paid before holders of ordinary shares receive a dividend. Holders of preference shares have more chance of getting some of their capital back in the case of bankruptcy, they are repaid before other shareholders, but after owners of bonds and other debts.
Security indicates either an ownership position in a corporation (a stock), or a creditor relationship with a corporation or a governmental body (a bond), or rights to ownership, such as hose, represented by option, subscription right or warrant. Thus, bonds guarantee to repay their face value after a certain number of years and pay a fixed rate of interest to the bond-holder in the meantime.
The price written on the share, the nominal value, is hardly ever the same as the price it is currently being traded on the stock exchange. The market price depends on supply and demand and can change every minute during trading hours. Trades in stocks quote bid (buying) and offer (selling) prices. The spread or difference between these prices is their profit.
Another type of securities is option – actually, it’s a contract giving the holder a right to buy a designated security (this is a call option) or sell it (this is a put option) at or within a certain period of time at a specified price. In a number of companies apart from salary an executive’s compensation package can include share options, the right to buy the company’s share at an advantageous price. It’s a kind of benefits or perks.
16. Mergers, takeovers & acquisitions
If shareholders decide on a company’s policy by voting, then whoever owns the majority of shares in a company can take decisions.
A threat that the company can be taken over keeps the management on their toes. By the way, takeover battles are often fought through the pages of the press.
An attempt to get control of a public limited company may be carried out by purchasing, to offering to purchase, the whole or part of the ordinary shares. And the price is usually well in excess of their quoted price.
Besides takeovers, there are M&As, mergers (two companies join together to form a new one) and acquisitions (one company buys another one). The latter happens when a company offers to buy all the shareholder’s shares at a certain price (higher than the market price) during a limited period of time. This is called a takeover bid.
If a company tries to buy as many shares as possible on the stock market, hoping to gain a majority is called a raid. The raid practice has been under attack in the press, and some bids have been nothing more than attempts to make a great deal of money at the expense of the shareholders. But, usually, this is only possible when the company’s assets have been undervalued by the directors who have allowed them to be shown in the balance sheet at a figure that is far below their true value.
If a company’s Board of Directors agrees to a takeover, and the shareholder’s agree to sell then it becomes a friendly takeover. On the contrary, attempts to acquire companies in the face of opposition from existing management are called hostile takeovers. The number of hostile takeovers relative to friendly takeovers is small: however, drama surrounds them, and they usually capture the interest of the press and the public.
Opponents of hostile takeovers, including the management of the target company, claim these takeovers are not in the long-run interests of the stakeholders. The opponents claim that the “raiders” will sell off assets to pay the acquisition and severely cut back on research and development expenditures to converse cash and to generate immediate increases in reported earnings.
Companies have various ways of defending themselves against a hostile bid. For instance, they can try to find another company that they preferred to be bought by.
Sometimes the companies choose issuing new shares at a big discount, which reduces the holding of the company attempting the takeover, and makes the takeover much more costly.
It is legal and it is worse when proxy fights occurs. Prosy is the authority to represent someone else, especially in voting. If you do something by proxy, you arrange for someone else to do it for you. This is the situation when a group of outsiders try to gain control of a company by persuading existing shareholders to vote into office a new team of directors.
17. Advantages and disadvantages of small businesses.
The basic economic institution in different economics systems is the business, Businesses determine much of how the economy operates. Businesses produce goods and services, and they come in every shape and size. Although the vast majority of the world’s companies are small, in many countries the economy is dominated by large firms. Large business differ from small ones in a wide variety of ways. In many countries there are nationalized companies belonging to the state, as well as private companies. A private company might be a small firm with just one owner or a very large firm with thousands of shareholders “ownig” he firm.
We can say that sole proprietorships and partnerships are small businesses.
Starting a business requires more than natural resources, labor, and capital. An entrepreneur must organize these resources. Many entrepreneurs start their own business as sole proprietorships. A sole proprietorship is a one –owner business. The advantages of sole proprietorships (they are easy to organize, decisions can be made quickly, owners receive all profits, etc.) explain why so many people start business and try to run them alone. However, a sole proprietor sometimes encounters difficult problems in starting a business. One person has limited resources to start and operate a business. The owner has only personal savings and funds that can be borrowed. Because capital is lacking, most sole proprietors begin small and fill. Even those that succeed often stay small.
A sole proprietorship also must deal with the problem of unlimited liability. According to the law, the owner and the business are one and the same. If the business fails, the owner must pay the debts. The personal property of the owner, such as a home or a car, can be taken to pay the debts of the business. No limit is placed on the amount the owner can lose. High profits can make an owner wealthy, but high losses can ruin an individual.
Still another problem occurs because of the limited life of the business. If the owner of a sole proprietorship dies, an entirely new enterprise must be started. Of all new proprietorships begun each year, 70 per cent fail within five years. To increase their chances of success entrepreneurs often choose partnership is an association of two or more people in order to run a business. Partners generally contribute equal capital, have equal authority in management, and share profits or losses. In many countries, lawyers, doctors and accountants are not allowed to form companies, but only partnerships with unlimited liability for debts – which should make them act responsibly. A partnership has many of the characteristics of the sole proprietorship. Partnerships are easy to organize, decisions can be made quickly, profits are shared with only a few people, and the owners are responsible for success or failure of the business.
Like proprietorships, partnerships are not free of problems. Liability is still unlimited. Like sole proprietors, partners are responsible for the debts of the business, Liability then can actually be greater in a partnership than in a sole proprietorship, since each partner is responsible for all the business debts. Partnerships also have limited life. If one partner dies, the business must be dissolved.
18. Advantages and disadvantages of corporations.
Within a free market system, new businesses find easy access to the economy and opportunities to succeed. Nevertheless, the level of competition can be so high that success is very difficult. A partnership is not legal entity separate from its owners; like sole traders, partners have unlimited liability: in the case of bankruptcy, a partner with a personal fortune can lose it all. Consequently, the majority of businesses are limited companies (US - corporations), in which investors are only liable for the amount of capital that have invested. If a limited company goes bankrupt, its; assets do not cover the debts, they remain unpaid (i.e. creditors do not get their money back).
Often one person does not have enough money to start a business. Combining the resources of a number of people and forming a corporation is a way to raise the large amount of money needed. A corporation is a business, that although owned by one or more investors, legally has the rights and duties of an individual. Corporations have the right to buy, sell, and own property. Corporations may make legal contracts, hire and fire workers, set prices, and be sued, fined and taxed. A business must obtain a charter of incorporation from the state legislature to be legally recognized as a corporation.
Corporations have some advantages over sole proprietorships and partnerships. First, a corporation has limited liability. Thus if the corporation goes bankrupt or is sued, the stockholders lose only the value of their stock. The stockholders, who are the corporations owners, cannot be held personally responsible for any money the corporation owes. Second, corporations have the ability to raise very large amounts of money. They use this money to change models, replace obsolete equipment, and build new factories. Corporations can raise money by selling bonds, as well as stocks. Third, a corporation has an unlimited life. That is the corporation continues to function despite death, transfer, or changes in ownership, management, or labor. the work of sole proprietor or partners can end abruptly in such circumstances. This stability attracts small investors. The fourth advantage of corporation is the ease of ownership transfer. Selling a small business may be difficult; selling shares of stock is relatively easy. The investor also has an advantage. The ability to get out of one business, by selling stock, and into another quickly, by buying stock, is quite useful to small investors.
Corporations have disadvantages as well as advantages. First, complex forms must be filed with the state or federal government. A charter must then be issued, investors found, share sold, and manufacturing or sales begun. The procedure for setting up a corporation is more difficult than that for setting up a sole proprietorship or a partnership. Also, to succeed a corporation must pay stockholders regular dividends and must keep detailed records to satisfy appropriate government agencies.
Second, a corporation's profits are subject to double taxation. A corporation must pay taxes on its profits before the profits are distributed to stockholders as dividends. The stockholders include this dividend money as personal income on their income tax forms. Stockholders pay taxes on this income. The government, then, has taxed the corporation's profits twice.
Third in corporations with many owners or stockholders the individual share of profits in the form of dividends is comparatively small. In a single proprietorship or partnership, profits are divided among fewer individual. Therefore, individual incomes are often greater.
Fourth, a corporation's owners do not directly control the business. Most individual stockholders take little interest in management decisions. In contrast, sole proprietors or partners manage their own business. The main concern go the owner-managers is the success of the business. Managers of large corporations, though, may not have invested their own money in the business. Career decisions may be different from, and more important than, decisions to improve the business. For this reason many corporations arrange for management to own shares of stock.
19. New product development.
New product development that coordinates efforts across national markets leads to better products and services, but companies develop products in different countries in markedly different ways.
Japanese companies, for example, tend to believe much more in getting new products to market and then gauging the reaction to them. the product itself may have been developed with reference to observations of present and potential customers rather than conventional market research. US companies on the other hand, tend to use more formal market research methods. And for German companies, product development schedules tend to be more important. Clearly, companies decide on different launch strategies for different categories of products. Toshiba launched the Digital Video Disc (DVD) in Japan in November 1996, in the US in March 1997 and in Europe in autumn 1997. However Intel launched its latest PC chips simultaneously in all countries.
The launch decision also includes marketing mix decisions. When Citibank introduced its credit card in the Asia-Pacific region, it launched it sequentially and tailored the product features for each country while maintaining its premium positioning. The promotional, pricing and distribution strategies also differed from country to country. The introduction of the Internet and Intranets has the potential to accelerate the process of mining all markets for relevant information and for features that can be included in new products. Numerous companies investigate the possibilities of melding product ideas arising from different countries.
Both Marks and Spencer, by selling underwear and pensions, and Virgin, with flights to New York and cans of cola, have seized opportunities for extending their brand names into new areas. But if you stretch a brand too far, the name becomes devalued, as some companies have found to their cost. Brand extension has become valuable in the past five years. During the recession, hard-pressed marketing directors in the food industry offered consumers more choice by adding new flavors, taking out fat or sugar, or moving from one tried and tested category, such as confectionary, to an allied one such as soft drinks. It was a low-risk strategy - it avoided the huge costs of new product development and offered variation on an existing purchase.
Instead of building its own new products, a company can buy another company and its established brands. In the past years we have seen a dramatic flurry of one big company gobbling up another (Nestle absorbed Rowntree Makintosh, Philip Morris obtained General Foods, Pfizer acquired Pharmacia Corporation, etc.) Such acquisitions can be tricky - the company must be certain that the acquired products blend with its current products and that the firm has the skills and resources needed to continue to run the acquired brands profitably.
In recent years, many companies have used "me-too" product strategies - introducing imitations of successful competing products. Thus Tandy, Sanyo, Compaq and many others produce IBM-compatible personal computers. These "clones" sometimes sell for les than half the price of yhr IBM models they emulate. Imitation is now fair play for products ranging from soft drinks to toiletries. Me-too products are often quicker and less expensive to develop. But the imitating company enters the market late and must battle a successful, firmly entrenched competitor.
Many companies turn to reviving oce-succesful brands that are now dead or dying. Reformulating, repositioning an old brand can cost much less than creating new brands. Thus Danone yogurt sales rocketed as a result of linking it to healthy living; Coca-Cola rejuvenated Fresca by adding NutraSweet and real fruit juices.
20. Decisions about the gearing the company.
The greater the proportion of long-term debt, the more exposed the company is in times of economic difficulty. This is connected with making decisions about the gearing of the company.
When a company is said to be "high geared", the level of borrowing is high when compared to its ordinary share capital. A lowly-geared company has borrowing which are relatively low. High gearing has the effect of increasing a company's profitability when the company's trading is expanding; if it slow down, then the high interest charges associated with gearing will increase the rate of slowdown. There will also be a drop in profits if working capital is raised without a corresponding rise in production or margins.
We can distinguish between permanent and temporary working capital. The former keeps the business flowing throughout the year, while the latter is needed from time to time to take account of seasoned, cyclical or unexpected fluctuations in the business. The temporary working capital is usually serviced from an overdraft facility.
Inventories (raw materials, work in progress and finished goods) are part and parcel of working capital. If inventories are not well managed there will be an enormous amount of excess working capital. It is the job of financial manager to minimize the stocks of raw materials, the level of the work in progress and the quantity of finished goods. His task is also to see that generous credit terms are negotiated with suppliers but minimal credit is offered to customers. It is often referred to as debtor side, because working capital is required to finance the gap between payment due to suppliers and payment owed by customers. A balance must be achieved between getting and giving good credit terms in order to attract customers and maintain positive relationships on the one hand, and minimizing cash outlay on the other hand.
Another thing is that adequate cash should be available for meeting the company's day-to day debts and there should always be a reserve on hand to meet contingencies. The expected cash flows that will result from potential investment projects should be measured carefully.
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