Top Management Team and Financial Capital

Small businesses are increasingly important to both consumers and to the economy. Consumer demand for small business services is often a leading indicator of economic performance. In the United States, consumers frequently utilize small businesses to take advantage of new technologies or to complete minor repairs. Many of these businesses are considered pass-through entities, which effectively pass consumer through the financial aspects of a transaction to the business itself.

small business|small business

Top Management Team and Financial Capital

Small businesses are increasingly important to both consumers and to the economy. Consumer demand for small business services is often a leading indicator of economic performance. In the United States, consumers frequently utilize small businesses to take advantage of new technologies or to complete minor repairs. Many of these businesses are considered pass-through entities, which effectively pass consumer through the financial aspects of a transaction to the business itself.

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Consumer satisfaction ranks highest among the twelve “pillars” of organizational goals of most US companies. The success of small businesses is also dependent on a host of government policies that protect both the small business and the consumer. Examples of such policies include minimum wage laws, home ownership rights, workplace safety provisions, taxation of businesses, consumer protection, and food safety. One of the most important principles in small business financing is to protect the rights of small business owners to determine their own pricing and to choose vendors for their products and services.

A key factor in the success of small businesses is the ability to build credit. Because most small businesses are not formed with the expectation of quick profits, it takes time to build credit. In some cases, this process can be expedited by securing financing from friends or family. Two primary options for small business financing include personal savings, lines of credit, and business loans.

Small business owners can obtain financing in one of three ways: by raising equity from existing shareholders, by obtaining business loans, or by selling assets. Equity and loans are preferred over equity because they offer a steady flow of cash rather than gains and losses that are seen in the company’s income statement each quarter. Capital funds are more difficult to raise but offer the advantage of providing immediate funding when needed.

Bonding, a term referring to raising financial capital through a mortgage or equity account, is common for U.S. firms. Many firms use bonds to finance the acquisition of certain fixed assets. These are referred to as “fixed” financial capital. Fixed financial capital does not fluctuate based on the economy. A firm cannot increase its fixed capital size without taking a financial loss. Bonding usually occurs at the start of a company’s operation or when it is planning to build its business portfolio.

Most banks offer some type of financial capital program that helps entrepreneurs obtain needed funding for start-up and expansion projects. Business finance companies offer this type of service. However, some banks require startup capital or a letter of credit from a borrower. The better information that a bank can provide to a business before a loan is approved, the better the chances are of the business being able to earn profits. To get a better understanding of the requirements required for a bank loan, business finance companies can assist with these requirements in writing a business plan. To obtain a loan, a company also may need to present audited financial statements from past years.

A small business’s ability to earn profits also depends on how well the owners manage their financial capital. Poor management can cause a firm to lose money and keep losing money, even if it receives a loan from a bank. Ownership, motivation, the quality of the firm’s products or services, experience, and other imperfect information about the firm’s owners, its products or services, and its employees are all factors that affect management of financial capital.

The number of factors that affect firms often changes over time. New technology, new competitors, new economic conditions, seasonal trends, general trends, and other outside forces can affect investment decisions. Managing all these external factors can be complex and difficult. In contrast, studying the basic models of investment and marketing can help an investor make better decisions. By carefully analyzing the factors, investors can gain a better understanding of when to borrow and when to invest in a firm.

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