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Chapter Introduction
Section 1: Investing in the Free-Enterprise System
Section 2: Types of Financing for Business Operations
Section 3: The Production Process
Visual Summary
Chapter Intro 1
The profit motive acts as an incentive for people to produce and sell goods and services.
Chapter Intro 2
Imagine that you want to start your own business. What type of good or service would you produce? In this chapter, read to learn how companies obtain the financing needed to open for business, and how they try to work efficiently to make profits.
Section 1-Main Idea
Section Preview
In this section, you will learn about the factors companies evaluate when deciding whether to obtain financing for expansion.
Section 1-Key Terms
• financing
• cost-benefit analysis
• revenues
• profits
Content Vocabulary
A. A
B. B
C. C
Section 1-Polling Question
Can you think of some hurdles that would cross your path when starting a business?
A. Many
B. Some
C. None
A B C
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Section 1
Before You Pursue Financing
Businesses should expand if the benefits of doing so exceed the costs.
Section 1
Before You Pursue Financing (cont.)
• Our free-enterprise system relies on businesses obtaining the necessary financing to grow and expand.
• Should you expand your business if the financing is available?
Section 1
Before You Pursue Financing (cont.)
• Businesses make a standard cost-benefit analysis in deciding their action.
View: Cost-Benefit Analysis
Section 1
Before You Pursue Financing (cont.)
• Developing a cost-benefit analysis involves five steps:
– Estimate the costs of expansion.
– Calculate expected revenues.
– Calculate expected profits.
– Calculate how much it will cost you to borrow funds to finance your proposed business expansion.
Section 1
Before You Pursue Financing (cont.)
– If expected profits more than cover the cost of financing the expansion, then the expansion may be warranted.
A. A
B. B
C. C
D. D
Section 1
A B C D
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Which of the following do you think would be the most effective way to finance a new business?
A. Using your own personal savings.
B. Asking friends or family to loan funds.
C. Using a bank loan.
D. Selling more shares of stock.
Section 1
Why People are Willing to Finance Investment
Savings should be invested where they will get the highest expected rates of return in the form of interest and profits.
Section 1
Why People are Willing to Finance Investment (cont.)
• Savers unintentionally finance business growth when they deposit funds in a savings account or CD.
• Their reward is the interest earned.
View: Financing Business Expansion
Section 1
• For those who intentionally finance an investment, the reward is the interest on a corporate bond that they purchase, or dividends from the stock that they buy.
Why People are Willing to Finance Investment (cont.)
Section 1
• There are several methods of financing business expansion:
– Offering stock and selling bonds
– Borrowing from banks, finance companies, or other institutions
– Using the Internet
Why People are Willing to Finance Investment (cont.)
A. A
B. B
C. C
D. D
Section 1
A B C D
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Who has the final say regarding lending a business funds to expand?
A. The stockholders
B. The lending institution
C. The board of trustees
D. The business itself
Section 2-Main Idea
Section Preview
In this section, you will learn about the three types of financing available to businesses: short-term, intermediate-term, and long-term.
Section 2-Key Terms
• debt financing
• short-term financing
• intermediate-term financing
• long-term financing
Content Vocabulary
A. A
B. B
C. C
Section 2-Polling Question
Do you know much information about the financing options available to businesses?
A. A lot of information
B. Some information
C. No information
A B C
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Section 2
Three Kinds of Financing
When a business needs to borrow, it can use a variety of short-term, intermediate-term, or long-term financing.
Section 2
Three Kinds of Financing (cont.)
• Raising finances for a business through borrowing is called debt financing.
• There are three categories of debt financing:
– Short-term
– Intermediate-term
– Long-termView: Short-Term Financing
View: Intermediate-Term Financing
View: Long-Term Financing
A. A
B. B
C. C
Section 2
If a company wants to expand its business by buying more land, buildings or equipment, which type of financing would be used?
A. Short-term
B. Intermediate-term
C. Long-term
A B C
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Section 2
Choosing the Right Financing
Decisions regarding financing depend on the level of interest rates, the financial condition of the company, the overall economic climate, and the opinions of the stockholders.
Section 2
Choosing the Right Financing (cont.)
• The length of a loan that a company takes out or a corporation’s decision regarding whether to sell bonds or issue stock depends on four factors:
– Interest rates—if rates are high, a business may wait to take out a loan.
• Issuing bonds is also affected by a high rate.
Section 2
– Financial condition of the company—if sales and profit are stable or are expected to increase, a company can take on more debt if its current debt is not to large.
– Overall economic climate—if economic growth in the overall market appears to be slow, investors may prefer the fixed rate of return of bonds or preferred stock to the unknown return of common stock.
Choosing the Right Financing (cont.)
View: Factors Affecting Financing Decisions
Section 2
– Opinions of the company’s owners—the owners of common stock do have the right to vote in company elections and may give or deny approval.
Choosing the Right Financing (cont.)
A. A
B. B
C. C
D. D
Section 2
A B C D
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How do financial managers determine if a company should expand?
A. By the number of stocks sold
B. By the number of bondsissued
C. By asking the owners of the company
D. By using cost-benefit analysis
Section 3-Main Idea
Section Preview
In this section, you will learn about the process that companies go through to produce goods and services that satisfy consumer needs and wants.
Section 3-Key Terms
• production
• consumer goods
• mechanization
• assembly line
• division of labor
• automation
• robotics
Content Vocabulary
A. A
B. B
C. C
Section 3-Polling Question
Do you know how businesses satisfy consumer needs and wants?
A. Yes
B. Somewhat
C. Not at all
A B C
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Section 3
Steps in Production Operations
The production process involves the coordination of many steps, such as planning, purchasing of inputs, quality control, and inventory control.
Section 3
Steps in Production Operations (cont.)
• Inventory that businesses carry is a result of the production process.
• Consumer goods are goods produced for individuals and sold directly to the public to be used as they are.
Section 3
• The production process involves:
• Location factors: nearness to markets, raw materials, labor supply, and transportation facilities.
• Production factors: setting start and end times for each step, and monitoring labor, machinery, and materials.
Steps in Production Operations (cont.)
– Planning—choosing a location and scheduling production.
Section 3
– Purchasing—deciding what to buy, (raw materials, machinery) from whom, and at what price.
– Quality control—overseeing the grade or freshness of goods, their strength or workability, their construction or design, safety, adherence to various standards, and other factors.
Steps in Production Operations (cont.)
Section 3
– Inventory control—making sure that the company doesn’t run out of a specific item, and that finished goods are on hand for sale.
– Design
Steps in Production Operations (cont.)
A. A
B. B
C. C
D. D
Section 3
A B C D
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Making sure that a car seat is safe for children would fall under which stage of the process?
A. Planning
B. Purchasing
C. Quality control
D. Inventory control
Section 3
Technology and Production
Productivity can be increased by utilizing technology and dividing labor.
Section 3
Technology and Production (cont.)
• Technology is the use of science to develop new products and new methods for producing and distributing goods and services.
• In the 1700s, the Industrial Revolution came about through mechanization.
• One outgrowth of mechanization is the assembly line.
Section 3
Technology and Production (cont.)
• Assembly-line production is possible due to interchangeable parts made in standard sizes and the division of labor.
• Automation and robotics are other technological advancements improving efficiency in everyday American society.
A. A
B. B
C. C
Section 3
Do you feel that mass production of a product is beneficial to society?
A. Definitely
B. Somewhat
C. Not at all
A B C
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VS 1
Before undertaking expansion, a business should conduct a cost-benefit analysis and expand only if the benefits of doing so outweigh the costs.
VS 2
When a business needs to borrow funds to expand, it can choose between short-, intermediate-, and long-term financing depending upon the kind of expansion it wants to do.
VS 3
Once a business obtains funds to expand, it must consider the steps in setting up the production process.
Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
DFS Trans 1
DFS Trans 2
DFS Trans 3
Vocab1
financing: obtaining funds or money capital for business expansion
Vocab2
cost-benefit analysis: a financial process in which a business estimates the cost of any action and compares it with the estimated benefits of that action
Vocab3
revenues: total income from sales of output
Vocab4
profits: the amount earned after a business subtracts its costs from its revenues
Vocab5
debt financing: raising funds for a business through borrowing
Vocab6
short-term financing: funds borrowed by a business for any period of time less than a year
Vocab7
intermediate-term financing: funds borrowed by a business for 1 to 10 years
Vocab8
long-term financing: funds borrowed by a business for a period of more than 10 years or funds raised by issuing stock
Vocab9
production: process of changing resources into goods that satisfy the needs and wants of individuals and businesses
Vocab10
consumer goods: goods produced for individuals and sold directly to the public to be used as they are
Vocab11
mechanization: combined labor of people and machines
Vocab12
assembly line: production system in which the good being produced moves on a conveyor belt past workers who perform individual tasks in assembling it
Vocab13
division of labor: the breaking down of a job into small tasks performed by different workers
Vocab14
automation: production process in which machines do the work and people oversee them
Vocab15
robotics: sophisticated, computer-controlled machinery that operates an assembly line
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