Chapter 6Chapter 6

Business Organization and FinanceBusiness Organization and Finance

Primary IndustriesPrimary Industries

Fish, fur and lumber in 16Fish, fur and lumber in 16thth-18-18thth centuries centuriesBritish and French controlled sale of our British and French controlled sale of our

good abroadgood abroadCanada a market for European Canada a market for European

manufactured goodsmanufactured goods Increased settlement led to iron, nickel, Increased settlement led to iron, nickel,

gold and other metal productiongold and other metal production Increased labour and capital led to Increased labour and capital led to

developing local manufacturingdeveloping local manufacturing

Secondary IndustriesSecondary Industries

Industrial revolution in Britain (1780) led to Industrial revolution in Britain (1780) led to fast steam-powered trains and shipsfast steam-powered trains and ships

Manufacturing and distribution increased Manufacturing and distribution increased in mid 1800sin mid 1800s

Post 1867 saw protective taxes called Post 1867 saw protective taxes called tariffs to develop local industriestariffs to develop local industries

Transcontinental railway, coal-powered Transcontinental railway, coal-powered steam generators and hydroelectricity steam generators and hydroelectricity provide cheap power provide cheap power

Service IndustriesService Industries

Surplus of production workers led to Surplus of production workers led to warehousing and transportation serviceswarehousing and transportation services

Primary and secondary industries Primary and secondary industries continued to develop through mid 20continued to develop through mid 20thth centurycentury

Canada still dependent on foreign market Canada still dependent on foreign market for foodstuff, raw materials and some for foodstuff, raw materials and some manufactured goodsmanufactured goods

Service industry develop in supportService industry develop in support

High Tech IndustriesHigh Tech Industries

Canada a major exporterCanada a major exporter of fiber opticsof fiber opticsnuclear power generationnuclear power generationsatellite technologysatellite technology telecommunicationstelecommunications

Sole ProprietorshipSole Proprietorship

One owner firmOne owner firmAdvantageAdvantage

Control over decision-makingControl over decision-makingDisadvantagesDisadvantages

Unlimited liability (business debts are Unlimited liability (business debts are personal debts)personal debts)

Harder to raise capitalHarder to raise capitalNo one to rely onNo one to rely onProgressive tax systemProgressive tax system

PartnershipsPartnerships

Two or more ownersTwo or more ownersMay be “limited” which reduces liabiltyMay be “limited” which reduces liabiltyAdvantagesAdvantages

Pooling of talent and capitalPooling of talent and capitalFew legal obstaclesFew legal obstaclesSharing of riskSharing of risk

DisadvantagesDisadvantagesJoint liabilityJoint liabilityDisagreementsDisagreements

CorporationCorporation Recognized as a legal entityRecognized as a legal entity Raise capital through sale of sharesRaise capital through sale of shares Articles of incorporationArticles of incorporation AdvantagesAdvantages

Profits distributed through dividendsProfits distributed through dividends Limited liabilityLimited liability Easier to raise capitalEasier to raise capital

DisadvantagesDisadvantages Cost to startCost to start Regulations (articles, board, annual meetings)Regulations (articles, board, annual meetings) Management decisions may conflict with ownersManagement decisions may conflict with owners

Co-operativeCo-operative Member owned and operatedMember owned and operated My have limited liabilityMy have limited liability E.g., credit unions, food storesE.g., credit unions, food stores AdvantagesAdvantages

Lower prices for membersLower prices for members One vote means continued existence in the event of deathOne vote means continued existence in the event of death Profits paid, called patronage refundsProfits paid, called patronage refunds

DisadvantagesDisadvantages conflicting ideasconflicting ideas Unpaid officers not most talentedUnpaid officers not most talented Only raise capital through existing membersOnly raise capital through existing members Only do business with membersOnly do business with members

Government EnterpriseGovernment Enterprise

Government-run firmsGovernment-run firmsCrown corporation run like public or Crown corporation run like public or

private corporations but gov’t major private corporations but gov’t major shareholdershareholder

Often seen in public utilities, liquor, Often seen in public utilities, liquor, housing and transithousing and transit

Some are “natural” monopoliesSome are “natural” monopoliesHotly debatedHotly debated

Non-profit and Charitable Non-profit and Charitable OrganizationsOrganizations

Government registeredGovernment registeredNot for profitNot for profit Income tax exemptIncome tax exempt

Big BusinessBig Business

Horizontal Integration: buying similar firmsHorizontal Integration: buying similar firmsSave on duplicate costsSave on duplicate costsMerge Research and DevelopmentMerge Research and DevelopmentSynergies from individual specialtiesSynergies from individual specialties

Vertical Integration: buying suppliersVertical Integration: buying suppliersEconomies of scale lowers costsEconomies of scale lowers costsGuarantee supplyGuarantee supply

Big Business IssuesBig Business Issues

Corporate alliance for mutual benefits, e.g., Corporate alliance for mutual benefits, e.g., Microsoft and NBCMicrosoft and NBC

Corporate concentration: few firms dominate an Corporate concentration: few firms dominate an industry, e.g., Rogers, Shaw, Cogeco in cableindustry, e.g., Rogers, Shaw, Cogeco in cable

Corporate Conglomerate: through strategic Corporate Conglomerate: through strategic ownership/control (50% + 1) of shares one ownership/control (50% + 1) of shares one company controls manycompany controls many

Multinational corporations (MNCs) move Multinational corporations (MNCs) move resources to and from many countries for self-resources to and from many countries for self-interestinterest

Raising CapitalRaising Capital Bonds – fixed amount owing with interestBonds – fixed amount owing with interest

Value varies inversely with prevailing interest ratesValue varies inversely with prevailing interest rates Can be tradedCan be traded

Bank LoansBank Loans Re-invest profits Re-invest profits Stocks – represents ownership in firmStocks – represents ownership in firm

Reflects all past performance and future expectations Reflects all past performance and future expectations of firmof firm

Common stock represents ownershipCommon stock represents ownership Preferred stock gives regular dividendsPreferred stock gives regular dividends Traded on major stock markets, e.g., TSXTraded on major stock markets, e.g., TSX

Investment TermsInvestment Terms

Bull Market – general increase in share Bull Market – general increase in share prices representing good economyprices representing good economy

Bear Market – decrease in share price Bear Market – decrease in share price Mutual Fund – pool of shares of many Mutual Fund – pool of shares of many

companies allowing less risk for investorcompanies allowing less risk for investorCommodities – trading of securities Commodities – trading of securities

representing raw or semi-processed goodsrepresenting raw or semi-processed goodsOptions – contracts for block of shares Options – contracts for block of shares

expiring at specific datesexpiring at specific dates

Size of Business FirmsSize of Business Firms

2.2 million firms in Canada2.2 million firms in CanadaSmall BusinessSmall Business

Fewer than 100 employeesFewer than 100 employeesFewer than 50 if serviceFewer than 50 if serviceLess than $1 000 000 in salesLess than $1 000 000 in sales

Medium if 100-500 employeesMedium if 100-500 employeesLarge if greater than 500 employeesLarge if greater than 500 employees

GDP and FirmsGDP and Firms

Source: Statistics Canada, Business Register, June 2005; National Income and Expenditure Accounts 2005; Estimates ofPopulation by Age and Sex for Canada, the Provinces and the Territories, June 2005.

Goods vs. Service FirmsGoods vs. Service Firms

Firm Size by Number of EmployeesFirm Size by Number of Employees

Start ups and ExitsStart ups and Exits

EarningsEarnings

Hours WorkedHours Worked

Business StatisticsBusiness Statistics

Small businesses contribute 25% of GDPSmall businesses contribute 25% of GDP15% of all workers self-employed15% of all workers self-employedSmall, Medium and Large business take Small, Medium and Large business take

turns leading in job creationturns leading in job creationBankruptcies averaged 11000 per year Bankruptcies averaged 11000 per year

since 1992since 1992Max of 14000 in 1996Max of 14000 in 1996Only 8100 in 2004Only 8100 in 2004