Finance and Finance and Banking Banking

Unit 7Unit 7

Prof. Dr. Srebren DizdarProf. Dr. Srebren Dizdar

Have you ever heard or Have you ever heard or been to Siena?been to Siena?

Siena within the Province of Siena within the Province of Siena and TuscanySiena and Tuscany,, ItalyItaly

What is in Siena?What is in Siena?

Banca Monte dei Paschi di Banca Monte dei Paschi di Siena S.p.A.Siena S.p.A. ( (MPSMPS))

Banca Monte dei Paschi di Siena Banca Monte dei Paschi di Siena S.p.A. (MPS)S.p.A. (MPS) is the oldest surviving is the oldest surviving bank in the world. Founded in bank in the world. Founded in 1472 1472 by by the Magistrate of the city state of the Magistrate of the city state of Siena, Siena, ItalyItaly, it has been operating ever since. , it has been operating ever since. Today it consists of approximately 3,000 Today it consists of approximately 3,000  branches, 33,000 employees and 4.5  branches, 33,000 employees and 4.5 million customers in Italy, as well as million customers in Italy, as well as branches and businesses abroad. branches and businesses abroad.

Banking in the modern Banking in the modern sensesense

Banking in the modern sense of the word can Banking in the modern sense of the word can be traced to medieval and early be traced to medieval and early Renaissance Renaissance ItalyItaly, to the rich cities in the north like , to the rich cities in the north like Florence, Florence, Venice Venice andand Genoa Genoa. .

The The Bardi Bardi andand PeruzziPeruzzi  families dominated  families dominated banking in 14banking in 14thth century Florence, establishing century Florence, establishing branches in many other parts ofbranches in many other parts of Europe. Europe. Perhaps the most famous Italian bank was Perhaps the most famous Italian bank was the the Medici Medici bankbank, set up by Giovanni Medici in , set up by Giovanni Medici in 13971397.. The earliest known state deposit  The earliest known state deposit bank, bank, Banco di San GiorgioBanco di San Giorgio (Bank of St. (Bank of St. George), was founded in 1407 atGeorge), was founded in 1407 at Genoa, Italy. Genoa, Italy.

Palazzo Medici-Ricardi in Palazzo Medici-Ricardi in FlorenceFlorence

Now Italy's Now Italy's seventh seventh largest bank, largest bank, Banca Monte Banca Monte dei Paschi di dei Paschi di SienaSiena has has 1,478 1,478 branches, branches, 603 of them 603 of them in Tuscany.in Tuscany.

Recent operationsRecent operations Between 1991 and 1996, its share rose to five Between 1991 and 1996, its share rose to five

percent of Italy's mutual funds market. percent of Italy's mutual funds market. Today Today it leads the Italian market for total sales of life it leads the Italian market for total sales of life insurance at bank branchesinsurance at bank branches. Tuscany's . Tuscany's leading bank, 95 percent of its customers are leading bank, 95 percent of its customers are small- and medium-sized companies.small- and medium-sized companies.

Earlier in 2011, it bought Earlier in 2011, it bought the Banca Agricola the Banca Agricola MantovanaMantovana, added a stake in a Parma savings , added a stake in a Parma savings bank and offered 500 million shares to the bank and offered 500 million shares to the public. The revenues will be used to improve public. The revenues will be used to improve the retail banking operations.the retail banking operations.

Origin of the term ‘bank’Origin of the term ‘bank’ The word The word bankbank was borrowed in Middle  was borrowed in Middle

English  from Middle French English  from Middle French banquebanque, , from Old Italian from Old Italian bancabanca, from Old High , from Old High German German banc, bankbanc, bank  - "  - "benchbench, , countercounter".".

Benches were used as desks or Benches were used as desks or exchange counters during exchange counters during the Renaissance by bankers from the Renaissance by bankers from FlorenceFlorence, who used to make their , who used to make their transactions atop desks covered by transactions atop desks covered by green tablecloths. green tablecloths.

Firenze

Firenze, Italia

Coat of arms

What is the oldest bank What is the oldest bank in Bosnia and in Bosnia and Herzegovina?Herzegovina? In 1883, the first modern bank with the In 1883, the first modern bank with the

Austrian capital was established in Austrian capital was established in Bosnia and Herzegovina. It was the Bosnia and Herzegovina. It was the branch of branch of Viennese Union BankViennese Union Bank. Two . Two more foreign assets bank operated more foreign assets bank operated during the period – the during the period – the Provincial Bank Provincial Bank of Bosnia and Herzegovinaof Bosnia and Herzegovina (Austrian (Austrian capital) and capital) and Bosnian Industrial and Bosnian Industrial and Trade BankTrade Bank (Hungarian capital). (Hungarian capital).

Many turbulent changes Many turbulent changes in banking systemin banking system

At the end of the Austro-Hungarian rule in At the end of the Austro-Hungarian rule in 1918 in Bosnia and Herzegovina there 1918 in Bosnia and Herzegovina there have been have been 37 banks37 banks, dominantly with the , dominantly with the private capital.private capital.

The banking system in the country The banking system in the country underwent many turbulent changes in the underwent many turbulent changes in the past – from capitalist to state-controlled past – from capitalist to state-controlled (socialist/communist) – to capitalist again (socialist/communist) – to capitalist again in 1990s.in 1990s.

The longest bank in operation The longest bank in operation in Bosnia and Herzegovina?in Bosnia and Herzegovina?

How many banks operate How many banks operate today in our country?today in our country?

55 1010 1515 2525 3535 4545 5050

Bank list - Federation of Bosnia Bank list - Federation of Bosnia and Herzegovinaand Herzegovina

ABS Banka SarajevoABS Banka Sarajevo Privredna Banka Privredna Banka Sarajevo Sarajevo

Bosna Bank Bosna Bank International International Sarajevo Sarajevo

FIMA Banka FIMA Banka Sarajevo Sarajevo

Hypo Hypo Alpe-Hypo Hypo Alpe-Adria-Bank Adria-Bank MostarMostar

Investicijska Investicijska Banka Banka Federacije BiH  Federacije BiH 

Investiciono-Investiciono-Komercijalna BankKomercijalna Bankaa

ZenicaZenica

Komercijalno-Komercijalno-Investiciona Investiciona

Banka V.KladušaBanka V.Kladuša

NLB Tuzlanska NLB Tuzlanska

Banka, TuzlaBanka, Tuzla

List of banks ... List of banks ... continuedcontinuedPostbank BH Postbank BH

SarajevoSarajevo ProCredit Bank ProCredit Bank

SarajevoSarajevo Raiffeisen Raiffeisen

Bank BiHBank BiH Turkish Ziraat Turkish Ziraat Bank Bosnia Bank Bosnia SarajevoSarajevo

Intesa Intesa

Sanpaolo BankSanpaolo Bank UniCredit BankUniCredit Bank

Union Banka Union Banka

SarajevoSarajevo Vakufska Vakufska Banka Banka

SarajevoSarajevo Volksbank BHVolksbank BH

Bank list - Republic of SrpskaBank list - Republic of Srpska

Balkan Investment Balkan Investment

Bank Banja LukaBank Banja Luka Bobar Banka Bobar Banka

BijeljinaBijeljina EEFC Bank, Banja EEFC Bank, Banja

LukaLuka Hypo Alpe-Adria-Hypo Alpe-Adria-

Bank Banja LukaBank Banja Luka Komercijalna Komercijalna

Banka Banja LukaBanka Banja Luka NLB Razvojna NLB Razvojna

bankabanka Nova Banjalučka Nova Banjalučka

Banka Banja LukaBanka Banja Luka Nova Banka Nova Banka

BijeljinaBijeljina Pavlović Pavlović

International BankInternational Bank Volksbank Banja Volksbank Banja

LukaLuka ++ Investment Bank of FBiH

++ Central Bank Central Bank of Bosnia and of Bosnia and HerzegovinaHerzegovina

The actual number is:The actual number is:

How many of them are branches of How many of them are branches of foreign banks?foreign banks?

Any bank with a sole ‘B&H’ capital? Any bank with a sole ‘B&H’ capital? Although most of them happen to be Although most of them happen to be

multinational, the majority of active multinational, the majority of active banking capital is in the hands of banking capital is in the hands of banks from ... What country?banks from ... What country?

What is the most popular What is the most popular bank in Bosnia and bank in Bosnia and Herzegovina?Herzegovina?

??

What is the most What is the most successful bank in B&H?successful bank in B&H?

What is the most successful What is the most successful bank in B&H?bank in B&H?

According to official According to official data and statistics,data and statistics, Raiffeisen Bank BiHRaiffeisen Bank BiH. .

The bank was founded on 7The bank was founded on 7thth November 1992 and started its November 1992 and started its operations as operations as Market banka dd Market banka dd Sarajevo, a stock corporation of Sarajevo, a stock corporation of private shareholders owning the private shareholders owning the vast majority of shares (more vast majority of shares (more than 90 per cent).  than 90 per cent). 

On 21On 21st st July 2000, Raiffeisen Zentralbank July 2000, Raiffeisen Zentralbank Österreich AG acquired the majority of Österreich AG acquired the majority of the bank’s shares (89.71 per cent). the bank’s shares (89.71 per cent).

This transaction was followed by an This transaction was followed by an integration of the bank, now operating integration of the bank, now operating as Raiffeisen as Raiffeisen BANKBANK dd Bosna i  dd Bosna i Hercegovina, into the Hercegovina, into the RZB Group RZB Group covering 15 countries throughout covering 15 countries throughout Central and Eastern Europe. Central and Eastern Europe.

What is a bank?What is a bank?

A bank is a A bank is a financial intermediaryfinancial intermediary and appears in and appears in several related basic forms:several related basic forms:

a a central bankcentral bank issues issues money on behalf of a money on behalf of a government, and government, and regulates the regulates the money money supply.supply.

a  commercial bank accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses on the world's open financial markets. a savings bank, also known as a building society in Britain, is only allowed to borrow and save from members of a financial cooperative.

Banking and FinanceBanking and Finance The The banking sectorbanking sector consists of all consists of all

resident corporations engaged in resident corporations engaged in financial intermediation in any given financial intermediation in any given economyeconomy..

Financial intermediationFinancial intermediation is a productive is a productive activity in which these corporations raise activity in which these corporations raise funds by incurring liabilities on their own funds by incurring liabilities on their own accounts for the purposes of channeling accounts for the purposes of channeling these funds to other institutional units by these funds to other institutional units by way of lending – resource allocation from way of lending – resource allocation from saves to investorssaves to investors..

Some banking termsSome banking terms

Bond Bond – a document which can be bought – a document which can be bought and sold and which is produced by a and sold and which is produced by a government or organisation, promising that government or organisation, promising that it will pay back money it has borrowed, it will pay back money it has borrowed, usually with interest-usually with interest-

EquityEquity or or equitiesequities – the capital that a – the capital that a company has from shares rather than from company has from shares rather than from loans; loans; trading equitiestrading equities means trading in means trading in companies’ shares on the stock market, companies’ shares on the stock market, rather than trading on other markets.rather than trading on other markets.

More banking termsMore banking terms

Securities Securities – a financial investment such as – a financial investment such as a bond or share, or the related certificate to a bond or share, or the related certificate to show who owns it.show who owns it.

ShareShare – one of the parts into which the – one of the parts into which the ownership of a company is divided.ownership of a company is divided.

Letter of creditLetter of credit – used to guarantee – used to guarantee payment and delivery of goods, whereby payment and delivery of goods, whereby the importer’s bank guarantees payment to the importer’s bank guarantees payment to the exporter’s bank once it receives the the exporter’s bank once it receives the realted shipping documents.realted shipping documents.

ATM = Automated Teller ATM = Automated Teller Machine or cash point (BE)Machine or cash point (BE)

A A bank tellerbank teller is an employee  is an employee of a bank who deals directly of a bank who deals directly with most customerswith most customers

ChannelsChannelsBanks offer many different channels to Banks offer many different channels to

access their banking and other services:access their banking and other services:

ATMATM is a machine that dispenses cash is a machine that dispenses cash and sometimes takes deposits without and sometimes takes deposits without the need for a humanthe need for a human bank teller bank teller. Some . Some ATMs provide additional services.ATMs provide additional services.

A A branchbranch is a retail locationis a retail location Call centreCall centre MailMail:: most banks accept check deposits most banks accept check deposits

via mail and use mail to communicate via mail and use mail to communicate to their customers, e.g. by sending out to their customers, e.g. by sending out statementsstatements..

New technologiesNew technologies

Mobile bankingMobile banking is a  is a method of using one's method of using one's mobile phone to conduct mobile phone to conduct banking transactionsbanking transactions

Online banking Online banking is a term is a term used for performing used for performing transactions, payments transactions, payments etc. over the Internetetc. over the Internet

Contemporary attitudes Contemporary attitudes in bankingin banking

Relationship ManagersRelationship Managers mostly for mostly for private banking or business banking, private banking or business banking, often visiting customers at their often visiting customers at their homes or businesseshomes or businesses

Telephone bankingTelephone banking is a service which is a service which allows its customers to perform allows its customers to perform transactions over the telephone transactions over the telephone without speaking to a humanwithout speaking to a human being. being.

Video Video bankingbanking

Video bankingVideo banking is a term used for performing is a term used for performing banking transactions or professional banking banking transactions or professional banking consultations via a remote video and audio consultations via a remote video and audio connection. connection.

Video banking can be performed via purpose Video banking can be performed via purpose built banking built banking transaction machines transaction machines (similar (similar to an Automated teller machine), or via to an Automated teller machine), or via a videoconference enabled bank branch.a videoconference enabled bank branch.

British (BE) and American British (BE) and American (AE) terms for banking and (AE) terms for banking and finance servicesfinance services

Beware – it is not the Beware – it is not the same!!!same!!!

British EnglishBritish English American EnglishAmerican Englishchequecheque checkcheck

current accountcurrent account checking accountchecking account

shareshare stockstock

shareholdershareholder stockholderstockholder

stockstock inventoryinventory

BBrriittiisshh English English AAmmeerriiccaann English English

Buildings society (or Buildings society (or buildings bankbuildings bank

Savings and Loans Savings and Loans Association (SLA)Association (SLA)

merchant bankmerchant bank Investment bankInvestment bank

Unit trustUnit trust Mutual fund or Mutual Mutual fund or Mutual savings bank (MSB)savings bank (MSB)

creditorscreditors Accounts payableAccounts payable

debtorsdebtors Accounts receivableAccounts receivable

Banking SectorBanking Sector Central BankCentral Bank:: HighestHighest monetary monetary

authority authority in the country thatin the country that issues  issues money on behalf of a government, and money on behalf of a government, and regulates theregulates the money supply. money supply.

Depository corporationsDepository corporations

1.1.Commercial banks,Commercial banks,

2.2.Merchant banks, Merchant banks,

3.3.Savings, Savings,

4.4.Credit union, Credit union,

5.5.Rural Rural

6.6.Development banks, etc.Development banks, etc.

They are all engaged in allocation of They are all engaged in allocation of savings to investment opportunities in savings to investment opportunities in the interest of profit making.the interest of profit making.

Keeping in touch with business Keeping in touch with business news and informationnews and information

Financial SectorFinancial Sector includes: includes:

Banking sector andBanking sector and other other financial institutions: financial institutions:

1.1. security markets,security markets,

2.2. brokers, brokers,

3.3. insurance, insurance,

4.4. pension funds, etc.pension funds, etc.

Central Banks’ objectives Central Banks’ objectives are:are: Formulate and implement policies to Formulate and implement policies to

ensure monetary stability; and ensure monetary stability; and Undertake actions to ensure Undertake actions to ensure

financial sector soundnessfinancial sector soundness All of these All of these are are geared to creating geared to creating

the enabling environment for the enabling environment for financial intermediation.financial intermediation.

Commercial and savings Commercial and savings banksbanks A A commercialcommercial bank bank  (or(or  business business

bankbank) ) is a type of financial is a type of financial institution and intermediary. It is institution and intermediary. It is a bank that provides transactional, a bank that provides transactional, savings, and money market savings, and money market accounts and that accepts time accounts and that accepts time deposits.deposits.

AA  savings banksavings bank, also known as a, also known as a building societybuilding society in Britain is only in Britain is only allowed to borrow and save from allowed to borrow and save from members of a financial members of a financial cooperative. cooperative.

Cashflow vs. profitabilityCashflow vs. profitability All business activity All business activity

carries a risk, and carries a risk, and any company can any company can fall. Cashflow is not fall. Cashflow is not the same thing as the same thing as profitabilty, and profitabilty, and a a common cause of common cause of failure is rapid failure is rapid growthgrowth, causing , causing costs to rise steeply costs to rise steeply ahead of income.ahead of income.

The causes of failure are The causes of failure are complexcomplex Once stable market goes into Once stable market goes into

decline, reducing income and decline, reducing income and cashflow.cashflow.

Operations problems Operations problems create large, create large, unforeseen costs that unforeseen costs that eat up profits. eat up profits. Investors begin to Investors begin to lose confidence, the lose confidence, the share price falls, share price falls, credit ratings are credit ratings are reduced, and it reduced, and it becomes more becomes more difficult to borrow. difficult to borrow.

Raising cash?Raising cash? Profitable parts of the company may Profitable parts of the company may

be sold to raise cash. However, this be sold to raise cash. However, this works in the short term, but long-term works in the short term, but long-term revenue declines. That is why they revenue declines. That is why they need to borrow fresh assets from need to borrow fresh assets from banks.banks.

Corporate restructuringCorporate restructuring

Sometimes the senior Sometimes the senior management team is management team is changed, which is changed, which is known as known as corporate corporate restructuringrestructuring, in the , in the hope that the new hope that the new managers will make a managers will make a difference. difference.

Some studies of Some studies of US companies that US companies that change their top change their top management in management in response to crises response to crises show that one show that one third make a full third make a full recovery.recovery.

The French drug maker The French drug maker Sanofi-AventisSanofi-Aventis continued continued to reorganize and slash to reorganize and slash jobs in anticipation of jobs in anticipation of its acquisition of its acquisition of Genzyme. The company Genzyme. The company disclosed that it would disclosed that it would shed another 700 jobs shed another 700 jobs from its European from its European operations. operations. 

Good Luck and Good Job Hunting!!!!!!!!!!

The job cuts came amid the company’s reorganization of its units in Austria, Germany, Switzerland, Portugal Spain, Holland, the Czech Republic and the United Kingdom (basically the entire EU).  The goal was to consolidate and reorganize the 30 European subsidiaries into only 10.

Declarations of insolvency Declarations of insolvency and bankruptcyand bankruptcy

As a last resort declarations of As a last resort declarations of insolvency and bankruptcy can create insolvency and bankruptcy can create a breathing space, and compel a breathing space, and compel lenders and investors to come to lenders and investors to come to terms with problems and bear some of terms with problems and bear some of the losses.the losses.

Not every insolvent company is Not every insolvent company is written off. Many recover and return to written off. Many recover and return to successful trading.successful trading.

BankruptcyBankruptcy The word bankruptcy is formed from The word bankruptcy is formed from

the ancient Latin the ancient Latin bancusbancus  (a bench or (a bench or table), and table), and ruptusruptus (broken).  (broken).

A “bank" originally referred to a A “bank" originally referred to a bench, which the first bankers had in bench, which the first bankers had in the public places, in markets, fairs, the public places, in markets, fairs, etc. on which they tolled their etc. on which they tolled their money, wrote their bills of exchange, money, wrote their bills of exchange, etc.etc.

Hence, when a banker failed, he broke Hence, when a banker failed, he broke his bank, to advertise to the public his bank, to advertise to the public that the person to whom the bank that the person to whom the bank belonged was no longer in a condition belonged was no longer in a condition to continue his business. to continue his business.

Notice of closure Notice of closure attached to the attached to the door of a computer door of a computer store the day after store the day after its parent company its parent company declared declared "bankruptcy" in the "bankruptcy" in the United Kingdom.United Kingdom.

InsolvencyInsolvency

Insolvency Insolvency exposes deeper exposes deeper problems. Then problems. Then the only choice the only choice is liquidation, is liquidation, with assets with assets sold at auction sold at auction and staff made and staff made redundant.redundant.

Insolvency in EuropeInsolvency in Europe During 2004, the number of During 2004, the number of

insolvencies reached all time insolvencies reached all time highs in many European highs in many European countries. countries. InIn FranceFrance, company , company insolvencies rose by more insolvencies rose by more than 4%, inthan 4%, in AustriaAustria by more  by more than 10%, and inthan 10%, and in GreeceGreece by  by more than 20%.more than 20%.

The increase in the number of The increase in the number of insolvencies, however, does not insolvencies, however, does not indicate the total financial impact of indicate the total financial impact of insolvencies in each country because insolvencies in each country because there is no indication of the size of there is no indication of the size of each case. each case.

An increase in the number of An increase in the number of bankruptcy cases does not bankruptcy cases does not also also necessarily entail an increase in bad necessarily entail an increase in bad debt write-off rates for the economy debt write-off rates for the economy as a whole.as a whole.

Size of global banking Size of global banking industryindustry

Assets of the largest 1,000 banks in the Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 world grew by 6.8% in the 2008/2009 financial year to a record $96.4 trillion financial year to a record $96.4 trillion while while profits declined by 85% to $115bnprofits declined by 85% to $115bn..

Growth in assets in adverse market Growth in assets in adverse market conditions was largely a result of conditions was largely a result of recapitalisation.recapitalisation.

EU and Asian banksEU and Asian banks

EU banks held the largest share of the total, EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the 56% in 2008/2009, down from 61% in the previous year.previous year.

Asian banks' share increased from 12% to Asian banks' share increased from 12% to 14% during the year, while the share of US 14% during the year, while the share of US banks increased from 11% to 13%. Fee banks increased from 11% to 13%. Fee revenue generated by global investment revenue generated by global investment banking totalled $66.3bn in 2009, up 12% on banking totalled $66.3bn in 2009, up 12% on the previous year. the previous year.

Finance sectorFinance sector

FinanceFinance FinanceFinance  is primarily concerned with the is primarily concerned with the

way of  funds management. The general way of  funds management. The general areas of finance areareas of finance are  business business financefinance, , personal financepersonal finance, , andand  public public financefinance..

Finance includes  saving money and often Finance includes  saving money and often includes lending money. The field of includes lending money. The field of finance deals with the concepts of finance deals with the concepts of time, time, money, riskmoney, risk and how they are interrelated.  and how they are interrelated. It also deals with how money is spent and It also deals with how money is spent and budgeted.budgeted.

Main area of finance Main area of finance industryindustry

Finance is used by individuals (Finance is used by individuals (personal personal financefinance), by governments (), by governments (public financepublic finance), by ), by businesses (businesses (corporate financecorporate finance) and by a wide ) and by a wide variety of other organizations, including schools variety of other organizations, including schools and non-profit organizations. In general, the and non-profit organizations. In general, the goals of each of the above activities are goals of each of the above activities are achieved through the use of appropriate achieved through the use of appropriate financial instruments and methodologies, with financial instruments and methodologies, with consideration to their institutional setting.consideration to their institutional setting.

Finance is one of the most important aspects Finance is one of the most important aspects of of business managementbusiness management and includes decisions and includes decisions related to the use and acquisition of funds for related to the use and acquisition of funds for the enterprise.the enterprise.

Financial servicesFinancial services An entity whose income exceeds its An entity whose income exceeds its

expenditure can lend or invest the expenditure can lend or invest the excess income. excess income.

On the other hand, an entity whose On the other hand, an entity whose income is less than its expenditure income is less than its expenditure can raise capital by borrowing or can raise capital by borrowing or selling equity claims, decreasing its selling equity claims, decreasing its expenses, or increasing its income. expenses, or increasing its income.

Lender & borrowerLender & borrower

The The lenderlender can find a can find a borrowerborrower, , a financial intermediary such as a bank, a financial intermediary such as a bank, or buy notes or bonds in the bond or buy notes or bonds in the bond market. market.

The lender receives interest, the The lender receives interest, the borrower pays a higher interest than the borrower pays a higher interest than the lender receives, and the financial lender receives, and the financial intermediary earns the difference for intermediary earns the difference for arranging the loanarranging the loan..

InsuranceInsurance is the undertaking of one is the undertaking of one party to indemnify another, in exchange party to indemnify another, in exchange for a premium, against a certain for a premium, against a certain eventuality.eventuality.

Uninsured risks:Uninsured risks:1.1. Bad debtBad debt2.2. Changes in fashionChanges in fashion3.3. Time lapses between ordering and Time lapses between ordering and

deliverydelivery4.4. New machinery or technologyNew machinery or technology5.5. Different prices at different placesDifferent prices at different places

Advantages of credit Advantages of credit tradetrade1.1. Usually results in more customers than Usually results in more customers than

cash trade.cash trade.

2.2. Can charge more for goods to cover the Can charge more for goods to cover the risk of bad debt.risk of bad debt.

3.3. Gain goodwill and loyalty of customers.Gain goodwill and loyalty of customers.

4.4. People can buy goods and pay for them People can buy goods and pay for them at a later date.at a later date.

5.5. Farmers can buy seeds and implements, Farmers can buy seeds and implements, and pay for them only after the harvest.and pay for them only after the harvest.

More advantagesMore advantages

6.6. Stimulates agricultural and industrial Stimulates agricultural and industrial production and commerce.production and commerce.

7.7. Can be used as a promotional tool.Can be used as a promotional tool.

8.8. Increase the sales.Increase the sales.

9.9. Modest rates to be filled.Modest rates to be filled.

10.10. Can be a marketing toolCan be a marketing tool

What problems lie What problems lie ahead?ahead?

Disadvantages of credit Disadvantages of credit tradetrade

1.1. Risk of bad debt.Risk of bad debt.

2.2. High administration expenses.High administration expenses.

3.3. People can buy more than they can People can buy more than they can afford.afford.

4.4. More working capital needed.More working capital needed.

5.5. Risk of Bankruptcy.Risk of Bankruptcy.

Stocks and securitiesStocks and securities

Institutions such as stock exchange Institutions such as stock exchange provide a market for existing provide a market for existing securities, which include stocks and securities, which include stocks and bondsbonds

Personal financial Personal financial difficultiesdifficulties

Lack of cash, or Lack of cash, or fundsfunds

Big bills,Big bills, Overspending,Overspending, ‘‘Ironing’ credit Ironing’ credit

cards,cards, Living above Living above

your own your own financial means,financial means,

Corporate financial Corporate financial difficultiesdifficulties

Reasons?Reasons? Slow company response to change Slow company response to change

in industryin industry Major technological changesMajor technological changes Troubles with environment in the Troubles with environment in the

form of natural or man-caused form of natural or man-caused disastersdisasters

Upheavals in the structure of Upheavals in the structure of society leading to political unrest society leading to political unrest and destabilisation of governmentand destabilisation of government

More troubles ...More troubles ... Dramatic changes in corporate Dramatic changes in corporate

structurestructure Weak financial managersWeak financial managers Over diversificationOver diversification Corruption, bribery, scandals in Corruption, bribery, scandals in

business operationsbusiness operations Autocratic Chief Executive officer Autocratic Chief Executive officer

((CEOCEO), or Chairperson of the company ), or Chairperson of the company vs. passive Board of Directors membersvs. passive Board of Directors members

High administrative costs that include High administrative costs that include executive salariesexecutive salaries

Markets plumetting Markets plumetting down!down!

How to get out of How to get out of trouble?trouble?

Sound and profitable Sound and profitable businessbusiness

An investment is an acquisition of an An investment is an acquisition of an asset in the hope that it will maintain asset in the hope that it will maintain or increase its value. or increase its value.

In order to succeed in business one In order to succeed in business one has to decide has to decide whatwhat,,  how much how much and and whenwhen to invest.  to invest.

A road A road to to successsuccess

starts with the starts with the first step: first step: PLANNING!PLANNING!

To do this, a company must:To do this, a company must:

1.1. Identify relevant Identify relevant objectives and objectives and constraintsconstraints: institution or : institution or individual goals, time horizon, risk individual goals, time horizon, risk aversion and tax considerations;aversion and tax considerations;

2.2. Identify the appropriate strategy: Identify the appropriate strategy: active active vv. passive – . passive – hedging hedging strategystrategy

3.3. Measure the Measure the portfolio performanceportfolio performance

8 tips to getting preparing a 8 tips to getting preparing a business plan for an investorbusiness plan for an investor

1.1. Explain the concept and Explain the concept and competitive advantage competitive advantage 

2.2. The potential market for the The potential market for the conceptconcept

3.3. The business modelThe business model4.4. The marketing strategy The marketing strategy 5.5. The use of fundsThe use of funds6.6. Time frame to Time frame to

commercialization commercialization 7.7. Risks involved Risks involved 8.8. Who is involved with the projectWho is involved with the project

Ask yourself many more Ask yourself many more questionsquestions

1. Will the company be able to 1. Will the company be able to maintain high profit margins? maintain high profit margins? 

Low profit margins are dangerous to your Low profit margins are dangerous to your company's survival. If you only have a company's survival. If you only have a tenuous 2% net profit margin and prices tenuous 2% net profit margin and prices rise a few percent, you are in trouble. rise a few percent, you are in trouble. Higher profit margins allow room for error Higher profit margins allow room for error and changing cost structures.and changing cost structures.

WWho cares if your business generates ho cares if your business generates millions of dollars in revenue, but only can millions of dollars in revenue, but only can earn $10,000? It is what you keep that earn $10,000? It is what you keep that matters. matters. 

2. Good Revenue per 2. Good Revenue per sale.  sale. 

It is difficult to succeed if you are selling a It is difficult to succeed if you are selling a one-dollar product. To make a million one-dollar product. To make a million dollars means you must sell one million of dollars means you must sell one million of your product. That's a lot of sales. If you are your product. That's a lot of sales. If you are selling a $1,000 product then to make a selling a $1,000 product then to make a million dollars you only need a thousand million dollars you only need a thousand sales. sales.

Guess which level of sales is an easier to Guess which level of sales is an easier to process and fulfill for a smaller company?  process and fulfill for a smaller company?  

3. A proprietary product.  3. A proprietary product. 

A proprietary product is one which A proprietary product is one which your company exclusively controls. your company exclusively controls. This means another company can't This means another company can't just begin producing and selling your just begin producing and selling your product. product.

PatentsPatents and and copyrights copyrights are two ways are two ways to secure a proprietary product.    to secure a proprietary product.   

4. Something that you 4. Something that you love to do.  love to do. 

It is difficult to do something well if you don't It is difficult to do something well if you don't feel passionate about it. feel passionate about it.

Choose to build a business in a field that you Choose to build a business in a field that you love, and you will find yourself enjoying it. This love, and you will find yourself enjoying it. This will help lead to success. Never just enter a will help lead to success. Never just enter a business because the financial numbers seem business because the financial numbers seem to indicate a great business. to indicate a great business.

To really make money demands growing a To really make money demands growing a business, and this will take years. business, and this will take years. Be sure it's Be sure it's something you want to dosomething you want to do. Something related . Something related to a life-long hobby or interest is ideal.   to a life-long hobby or interest is ideal.   

5. Will the business have 5. Will the business have good cash flow?  good cash flow? 

It is possible for a business to be It is possible for a business to be generating excellent sales and generating excellent sales and profits, and yet be losing cash. You profits, and yet be losing cash. You need cash to pay bills. A cash need cash to pay bills. A cash strapped business is a business strapped business is a business that will struggle to grow. that will struggle to grow. Do a cash Do a cash flow projection for your start-up flow projection for your start-up businessbusiness.  .  

6. What are the growth 6. What are the growth prospects for your prospects for your business?  business? 

Many Many entrepreneurs start entrepreneurs start a business and are a business and are happy when they happy when they see it making see it making money. They are money. They are often not as happy often not as happy when they realize when they realize that profits have that profits have reached the skyreached the sky..

Think how and until Think how and until when ...when ...

Think about how you will grow. If you start Think about how you will grow. If you start a restaurant, for example, your profits will a restaurant, for example, your profits will certainly level off. You will only have so certainly level off. You will only have so many customers eating at your restaurant many customers eating at your restaurant in any given year. in any given year.

To grow would require adding a second To grow would require adding a second restaurant. But you cannot run two restaurant. But you cannot run two restaurants as you do one restaurant. You restaurants as you do one restaurant. You can be on top of everything at one location, can be on top of everything at one location, but you must be away at least part of the but you must be away at least part of the time when you have two restaurants. And time when you have two restaurants. And what if you had ten? what if you had ten?

LLearn to delegateearn to delegate work and work and responsibility to othersresponsibility to others

As you grow you will As you grow you will need to learn to need to learn to delegatedelegate. You will need multiple locations. . You will need multiple locations. Compare this to a mail-order business. It Compare this to a mail-order business. It can be run from one location.can be run from one location.

Yet, sales are essentially potentially Yet, sales are essentially potentially unlimited with only small structural unlimited with only small structural changes to the business. Doing more of the changes to the business. Doing more of the same thing in the same way is easier than same thing in the same way is easier than changing the way you operate.  changing the way you operate.  

7. The business must be 7. The business must be something you are something you are psychologically suited to dopsychologically suited to do This is not the same as loving the area. Some This is not the same as loving the area. Some

people are more outgoing and social than people are more outgoing and social than others. Other people are more reserved. Each others. Other people are more reserved. Each is suited to building different types of is suited to building different types of businesses. businesses.

Needless to say, a business that demands Needless to say, a business that demands much personal selling and personal customer much personal selling and personal customer contact might not be ideal for the more contact might not be ideal for the more reserved person. Yet, such a person could reserved person. Yet, such a person could very successfully run a mail-order or Internet-very successfully run a mail-order or Internet-based company.based company.

How do you imagine How do you imagine yourself? Success or failure?yourself? Success or failure?

Learn to be on top, Learn to be on top, study to be the study to be the bestbest

It starts with It starts with ENG401 Mid-ENG401 Mid-term testterm test

April 02, 2012 April 02, 2012 16.30 & 18.0016.30 & 18.00

April 03, 2012 April 03, 2012 17.30 & 19.0017.30 & 19.00