Focus Question:  What are the basic ways that firms finance operations (retained earnings, stock issues, and borrowing), and what are the advantages and disadvantages of each?

Cross-Link: Laws and Regulations to Promote Competition Among Firms

Financing a company can be an expensive task. In order to do so firms rely on the following three basic methods:

Click here for a brief video introduction to these three methods.

1) Retained Earnings

Funds that companies keep in order to invest into the company in order to expand and improve profitability. It can be the case that a companies net earnings is less than their retained earnings, creating a deficit for the companies.

• The formula to calculate retained earnings is:
•  

Retained Earnings (RE) = Beginning RE + Net Income - Dividends, also known as the "retention ratio" or "retained surplus."

This is a fine way to finance a firm, but not if you need the capital to start a company.

Click for a ink to a video that explains a companies retained earnings. 

Click here for a video with a further explanation of retained earnings.

Click here for a video explaining the earnings for the top 500 companies in America.

 Coffee Shop - An interactive online game where you run and operate your own coffee shop.  

2) Stock Issues

The sale of shares of the company to the public. It is a good way for a company to get investments needed to run a business. However, there are times when a company may want to buy back shares. 

• Click here for a link on why this might be the case.

For more on stock issues, click here.

Click here for a simulated stock exchange game, to better understand how selling and trading stocks work.

3) Borrowing

A common way that businesses gain capital to finance their operations. Borrowing can come in the form of loans and investments. Loans are typically issued by banks and come with interest, while investments are made by individuals or groups who believe that your business will be successful and that they can make a profit off of their investment. Borrowing is a common way to start a business, but is also utilized to sustain operations, as well.

To learn more, see Borrowing Money from the United States Small Business Administration.

Click here for entrepreneur Mark Cuban's take on obtaining a loan to start a business. For more on the issue, read this article.

If you are interested in learning more about starting a small business and want more in depth perspective on financing operations, check out Start Run & Grow: A Successful Small Business

Click here for an article that discusses the benefits and downsides of equity financing and debt financing.

Fortune's Most Powerful Women of 2019

Data on Women's Rights To Equal Financial Opportunities

• Data from March 2017 in large part summarizes that women are less likely than men to report that they have appropriate access to the financing needed to start a business.
• Female entrepreneurs are on average more likely to self-finance a project.
• This link provides an extremely useful graph that demonstrates these points. The small paragraphs which navigate the data on the graph make this article even more useful.

Historical Timeline of the FDIC and National Banking in the U.S.

Quiz Question

Which of the following best describes a consequence of the finance method of “borrowing “.

A.) A consequence is there are times when a company may want to buy back their shares.

B.) One main advantage is that a business owner does not give up any control of the business as they do with equity financing.

C.)The main advantage is that there is no obligation to repay the money acquired through it.

D.) If a company's net earnings is less than their retained earnings, it can create a deficit for the company.

The correct answer is B. One main advantage is that a business owner does not give up any control of the business as they do with equity financing.