What is the benefit of reinvesting cash flow in a business? Fredy Piller
Estimating Cash Flows • • • •
An income statement is a report that shows a business’s sales, expenses, net income, and cash flow for a period of time.
Depreciation is a noncash charge for the general wear and tear on capital goods.
A company’s cash flow is a comprehensive measure of its profits because it represents the total amount of after-tax income generated by the company operations.
Reinvesting cash flow into a business allows the business to produce new or additional products, which may generate additional sales and even larger cash flow.
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What must happen in a business for cash flow to increase?
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Net Income: The funds left over after all of the firms expenses, including taxes are subtracted from its sales.
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Depreciation: a non cash charge the firm takes for the general wear and tear on goods.
• Sales/Profit needs to increase
Depreciation •
Name any capital goods needed in a clothing manufacturing business.
• Ex:machines that make patterns, cut the material, and sew the garments. • These machines gradually deteriorate, or depreciate, with use.
What is the benefit of reinvesting cash flow in a business?
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Reinvesting cash flow allows the business owner to allocate resources to those parts of the business that would do best in helping the business expand.
Merger: •
A combination of two or more businesses to form a single firm.
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Two Types:
• Horizontal: Combination of firms producing the same kind of product.
• Vertical: Combination of firms involved in different steps of manufacturing marketing, or sales.
2 types of mergers •
Look at Figure 8.4 pg 224
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What do you think are the benefits of each type of merger?
• For horizontal mergers, the business may take over competitors. • For vertical mergers, the business may take over companies that they
formerly had to pay for needed services but now they get these services for less money because they own the companies that provide them
Mergers/Conglomerates/Multinationals •
Reasons for merging include faster growth, synergy, economies of scale, diversification, elimination of rivals, or changing or losing a corporate identity that is associated with errors or problems.
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Conglomerates: are firms that have at least four businesses that make unrelated products, none of which is responsible for a majority of sales.
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Multinational corporations: can move resources, goods, services, and financial capital across national borders.
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What types of issues do you think must be decided before two separate companies decide to merge into one company?
• Allocation of responsibilities, division of profits, shared [or not] decision making
With a Partner •
Create a chart identifying the advantages and disadvantages of multinationals.
• Advantages: resources, goods, services, and financial capital are moved across
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national borders; new technologies and new jobs are transferred where needed; tax revenues produced for host country; lower-cost production and higher-quality output; raises standard of living for many in host country. Disadvantages: pay low wages to workers; export scarce natural resources from host country; interfere with local businesses; may demand concessions; may alter traditional ways of life in host country; working conditions may be unhealthy and dangerous; may utilize child labor; may harm environment with lax pollution laws.
Entrepreneurs • What are the different ways business can find start-up funds? • • • •
Start-up incubators are places within states and universities where potential entrepreneurs can get training in accounting, engineering, and managerial skills, as well as potential financing. Venture capitalists lend investment funds to new or unproven businesses in exchange for a share of ownership (equity). Angel investors are people who lend start-up money informally and are typically more interested in helping the individual survive than in getting a substantial return on their investment. Crowdfunding, or crowdsourcing, involves using social networking to appeal to potential investors.
Thank You