1.1. Managers make three major decisions that determine the focus and performance of the business.
1. Capital budgeting: What productive assets should the business invest in?
Managers must develop a product/service that is attractive to their potential customers. The
product/service will exist only if the business invests in productive assets to produce the
product/service. Examples would include the following. Should a business invest in developing a
new service such as self-driving trucks? Should the business invest in an assembly line with workers
or one with robots? Should the company establish a call center in the US or in the Dominican
Republic? Should the business invest in viral marketing or print advertising? Non-profits and
governments also must invest in productive assets. A charity applying for a grant from the Bill and
Melinda Gates Foundation must specify the resources needed to protect pregnant women from the
Zika virus. Should Austin invest in a passenger rail system?
2. Capital structure: How should a business raise the capital needed to invest in productive assets
and finance its operations?
Should managers issue financial securities—debt and equity—to raise capital? Is there an
optimal mix of debt and equity? Instead of financial securities, should the business take out a bank
loan? new equity and use the proceeds to retire outstanding debt), and
3. Working capital management: The capital budgeting and capital structure decisions involve the
long-term focus of the business. Working capital management focuses instead on the ability to run
the business on a daily basis and maintain the business’ liquidity—its ability to ensure enough cash
comes in on a daily basis to satisfy its short claims. Examples would be how the business manages it
trade policy, its short-terms lines of credit, inventory levels, etc.
1.2. Proprietorships and partnerships have some disadvantages.
Unlimited liability: The owners’ wealth is exposed to losses in the business. If the assets of the
business are insufficient to meet the claims on the business, creditors will seize the personal assets of
the owners. This, as you can, imagine, limits the interest of outsiders to invest in the business.
Limited life: Formally the proprietor/partner is the business. They die, the business legally also
dies.
Difficulty in transferring ownership: A proprietor or partner desiring to exit the business must
find someone who would wish to buy them out. This transfer of ownership is a complex, expensive
and time-consuming process. It is also made difficult by the lack of an external market price that