Page 433 - Business Principles and Management

Chapter
16 Financing a Business

16.1 Types of Business Capital

16.2 Raising Capital Through Stock Sales

16.3 Short- and Long-Term Debt Financing

RE ALITY CHECK

Show Me the Money!

he Video Shoppe opened for business in a popular mall a few years ago.
Eva Diaz, its owner, used her entire savings to launch “The Shoppe,” as
Tshe called it. After losing money the first year, she nearly closed down.
But through hard work and creative marketing, Eva has made The Shoppe
quite successful. Furthermore, she has left all the profits in the business
except for a modest amount of cash for personal living expenses.
Today, Caleb Wegman, her accountant and friend, was in the back
room balancing the books. As Caleb finished his work, Eva excitedly
asked, “Can I open another shop with my current earnings? There’s a
new shopping center opening near the college and I think my type of
business would be very successful there.”
Caleb’s shocked response came quickly. “No. Your earnings are good,
but your balance sheet needs more muscle. I would encourage you to go
slow and build the financial strength of this store before you consider
opening in another location.”
“But, Caleb, my business sense tells me I could open another store and
apply what I have learned starting this location to make profits quickly.
Don’t tell me no. Tell me how. And let’s not think of opening one shop.
My idea is to have a chain of shops within the next three or four years.”
Caleb, somewhat startled by Eva’s bold plan, was momentarily speechless.
“But have you thought about how you would finance that type of growth?”
he asked.
“I was hoping that, working together, we could come up with some
ideas,” Eva replied. “For starters, I have an aunt who might be able to lend
me some money. Maybe my brother would like to invest in the business.”
“Your family might help some,” Caleb interrupted, “but your plans would
require ‘big’ dollars. Right now I have to go see my next client. Between now
and when I return next week, if you still believe it is a good idea to plan for
that amount of quick growth, think about whether you are willing to look
for investors with the type of money you will need. You are making a big
decision that will really affect your future as a business owner.”
After Caleb left, Eva sat wondering how she could raise the money to
expand her business. “Strike now while the market is hot,” was the thought
420 that stayed in her mind as three customers walked in.