principles of business

• Savings


  The part of an income that is not spent
• Investments


  The purchase of assets that will generate income over a period of time
• Reasons for saving


  • Have funds to meet future commitments (e.g. retirement)
  • Keep money safe
  • See funds grow due to interest
  • Protect against inflation
• Forms of savings


  • Personal savings (for individuals)
  • Retained profits (for businesses)
• Sou-sou


  A traditional form of saving in the Caribbean that originated in West Africa, based on a group of people jointly building up a shared pool of savings
• Advantages of sou-sou


  • Informal way of saving without a financial institution
  • Group pressure to save
  • Members can decide order of receiving funds
  • Group can decide contribution size and duration
  • Good for saving for special events
• Disadvantages of sou-sou


  • If members are unreliable, system may collapse
  • No interest paid, individual may have to wait long time to receive funds
• Types of deposit accounts

  • Deposit accounts
  • Savings accounts
  • Short-term fixed deposits
• Deposit account


  Account where money can be placed for safe-keeping, depositor can withdraw and make payments, typically no interest earned
• Savings account


  Account to store money not needed immediately, earn interest, may require monthly deposits
• Endowment policy


  Life insurance policy that pays a fixed sum on a fixed date or upon death of insured, term linked to asset purchase, may have "with profits" element
• Term deposit


  Deposit held at a financial institution for a particular length of time, investor gets investment plus interest at end of period
• Short-term fixed deposits


  Investments held for short periods (1 week to 12 months), higher interest rate than savings accounts, penalties for early withdrawal
• Advantages of short-term fixed deposits

  • Good for short-term saving
  • Clear interest amount upfront
  • Higher interest than savings accounts
• Investment


  Purchase of assets that will generate income over time, a risk-bearing activity
• Main forms of investment in organised markets


  • Stock market
  • Government securities (bonds, debentures)
  • Mutual funds
• Stock market


  Where stocks and shares in companies are bought and sold, with market makers bringing together buyers and sellers
• Ways investors can benefit from holding stocks/shares

  • Money is tied up as a form of saving
  • Receive regular dividends
  • Share price may increase
• Treasury bill


  Short-term loan to the government
• Government bond


  Longer-term borrowing by the government, sold at a discount and pay interest until maturity
• Debentures


  Forms of borrowing and lending not secured by collateral, can be issued by companies or governments
• Mutual fund


  Professionally organised investment company that pools money from investors and invests in stocks, shares, bills and bonds
• The key advantage of investing in a mutual fund is that the investment is spread over a range of companies rather than depending on the fortunes of a single company, and the investor's money is handled by experienced investors
• Disadvantages of investing in a mutual fund include the time it takes to research the best investment trusts, and the risk that a change in fund manager may change the fund's focus
• Businesses need finance for both short-term and long-term purposes
• Short-term financing (working capital)


  Finance required to make regular payments such as wages, supplies, utilities
• Long-term financing


  Finance required to purchase major assets such as land, buildings, machinery
• Types of short-term financing

  • Trade credit
  • Credit cards
  • Commercial bank loans
  • Promissory notes
  • Instalment credit
  • Indigenous credit (e.g. sou-sou)
  • Private money lenders
  • Advances from customers
  • Factoring
• Trade credit


  Suppliers provide goods "to the trade" on credit terms, with a period before payment is due
• Commercial bank loan


  Bank provides the loan and the borrower repays the capital over time with interest, typically over years rather than months
• Promissory note


  Signed document containing a written promise to pay a stated sum by a certain date
• Instalment credit


  Credit granted on condition it will be repaid at regular intervals, e.g. hire purchase
• Indigenous credit


  Credit systems common where people historically lacked access to formal bank lending, e.g. sou-sou
• Private money lenders


  Businesses can obtain funds from private lenders, but interest rates are typically very high
• Advances from customers


  Customers pay an initial deposit and instalments before work is completed, providing the business with cash flow
• Factoring


  A business gets cash by selling its outstanding invoices to a factoring company
• Friends and family


  Entrepreneurs need to have confidence in their business ideas and their own ability to run a business if they are going to raise funds from family and friends. Should the business fail, then the owner will potentially lose friends and damage the confidence of close relatives.
• Personal savings


  Some entrepreneurs use their personal savings to finance an enterprise. This is easier than pitching for loans and investment, but it is dependent on the owner having previously built up a pool of savings. Additional funds come from ongoing profits that are ploughed back into the business.
• Government grants


  A government grant is a financial award given by the central, local or municipal government, and it is usually not expected to be repaid. Government grants are sometimes available for business start-ups and businesses that contribute to nation building, for example by creating jobs or engaging with environmental initiatives.
• Loans


  A business owner can borrow from a bank or other form of financial institution. The bank provides the loan and the borrower repays the capital over time (with interest), usually in monthly instalments. Loans are typically taken out over a period of years rather than months. It is more difficult to secure a business loan from a bank at the start-up stage.