Financial Capital

Financial capital is the second of three forms of entrepreneurial capital. Capital is resources and financial capital is financial resources: money or access to money.

Money can be cash as in a suitcase full of fifty $100 bills. It can be the balance of your checking account. It can be stocks or bonds or investments that can be liquidated. It can be a house that you have just sold or which you can mortgage to get cash. It can be a car that you can sell.

It has to be something that you can either pay for something else with or which you can use as collateral for money that you can use to pay for something with. It could be a rich uncle who says you can have $100,000 for whatever you want just tell him and give him a few days to sell some non-performing stocks.

Financial capital is not the most important resource, but you need money. You need to have it so that you don't have to begin your business by borrowing. If you are thinking of a business that you can only start if you incure a huge amount of debt before you can start, I would recommend you think up another business you can start on no or very little money.

Plastic financing used to be big for entrepreneurs because banks weren't going to lend them money and most of them weren't eligible for angel investors or venture capital. But it's harder to bankrupt out of debt and credit card interest rates are through the roof so that's not as attractive as it used to be.

Shakespeare said "Neither a borrower nor a lender be." There's a lot of wisdom in this. But if you do have to borrow money, make sure you can pay it back. I wanted to join an expensive business club here in Philadelphia. I needed $4,000 up front and it would have been difficult for me to get it. But I was getting a pension from Wisconsin and I set the payments so that monthly payment would at least make the repayments. And I had some IRAs that I knew I could use to repay if the worst happened. My father-in-law gave the money and I repaid the loan about 2 months early. He was quite impressed.

If you borrow it from a family member, make sure you write out a schedule of repayments and if there's interest to be paid, make sure it's reasonable. And make sure you make your payments on time or maybe even pay off the loan early. That way they'll be happy to lend to you in the future.

Entrepreneurship is the life's blood of all my professional activities. It makes them go. And go read my mysteries, The Case of the Kearney Music School Murders and No Stop on Red, both available at Amazon.com. You can read the first one for free at wwww.kearneymusicschoolmurders.blogspot.com or buy it from Amazon.com more cheaply than you can print it out.

Forms of Entrepreneurial Capital

Here are the three forms of entrepreneurial capital you'll need to compete as an entrepreur:

1. Human Capital: your skills, talents, and abilities. Your ability to think, write, communicate, inspire, and listen, your personal health, your creativity, your leadership skills, trustworthiness, etc.

2. Social Capital: the number and types of people you know. The more people you know and the better your "crowd," the more social capital you have. How many people do you know? How much can you rely upon them to share with you information about opportunities in your market or to spread the word about your company.

3. Financial Capital: money or access to money. Do you have investments, savings accounts, checking accounts, CDs, money market accounts, etc. you could use to support the business and pay the lender back.

Ron Burt, Hobard W. Williams Professor of Sociology and Strategy at the University of Chicago's Booth School of Business, came up with this stuff. You can find his argument in Structural Holes; the Social Structure of Competition(Boston, MA: Harvard University Press, 1992, pp. 8-9) or read my blog posting for 7.15.2008.

You will need to assess your capital in each of these areas, then go on to look at what you will need to be fit as an entrepreneur.

My goal here is to promote skilled entrepreneurs. What do you think about this? If you have something substantive to add, post a comment.

This is some of the stuff that will go into my entrepreneurship course. The ideas in it supply the life's blood of my professional activities: teaching, writing, and real estate. For entrepreneurial real estate go to www.yourstopforrealestate.com/blog and for entrepreneurial writing to www.kearneymusicschoolmurders.blogspot/com.

Financial Capital

Financial capital is money or access to money. Wikipedia, the free, on-line encyclopedia, says:

Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, and investment banking.

The Wikipedia goes on to talk about different kinds of capital.

Basically, you have two sources of money: you, and someone else. I call money from other people, OPM (other people's money). If you can finance your venture with OPM while putting very little of your own money in there, that's the best thing. If you have money yourself or are about to get a big inheritance, that's from you. That's the best kind.

Business failure is most often attributed to undercapitalization. That's the most common noted reason, but it may not be the most important reason. It may be a proxy for any number of other things. The entrepreneur's health, for example. Maybe he or she had a bout with cancer and had to entrust his business to a subordinate who ran it into the ground. So this would be lack of human capital which led to the death of the company.

Generally we think of undercapitalization as not enough financial capital relative to the amount needed to fund the venture adequately. However, that lack of funds may simply mask a deeper problem. It could have not enough human or social capital.

What do you think about this? Post a comment.

Entrepreneurship informs all of my professional activities. For entrepreneurial real estate, go to www.yourstopforrealestate.com./blog and for entrepreneurial writing, go to www.kearneymusicschoolmurders.blogspot.com

Equity Partner

As Wikipedia, the free, on-line encyplodedia, says: "An equity partner is a partner in a partnership who is a part owner of the business, and is entitled to a proportion of the distributable profits of the partnership."

Many people come to me at SCORE and say they want to get money to start a business. Well, that's the last thing you should be looking at, but okay the best way to get the capital is to generate it internally. Start-us seldom have that luxury. They need capital from somewhere, and being undercapitalized is the most common reason for business failure. The best way to get capital is to have an equity partner. If you just borrow it, you have the money. If you have a person working in your business, you have help.

Wikipedia goes on to say: "The degree of control which each...partner exerts over the partnership depends upon the relevant partnership agreement."

You should read the whole Wikipedia article. And Post a comment. And read the whole Wikipedia article. It's a good one.

Entrepreneurship 2.0 is my entrepreneurship course. The ideas in it supply the life's blood of my professional activities: teaching, writing, and real estate. For entrepreneurial real estate go to www.yourstopforrealestate.com/blog and for entrepreneurial writing to www.kearneymusicschoolmurders.blogspot/com.

Leverage

From Wikipedia, the free, on-line encyclopedia:

Leverage (or gearing) is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity. Deleveraging is the action of reducing borrowings.

So if I borrow $500, sign on with a lead generation company for $20 a month, and sell a home from a lead I got from there which nets me a $7,500 commission, I've leveraged that $500 pretty effectively.

The problem enters in when you borrow too much and you don't get any result from it. Then, your stuck paying off the loan with nothing to show for it. That's why we have to evaluate clearly the investments we make and make only cost-effective ones.

What do you think? I'd like to know. Post a comment. And read the entire Wikipedia article.

Entrepreneurship informs all my professional activities. For entrepreneurial real estate, go to www.yourstopforrealestate.com/blog and for entrepreneurial writing www.kearneymusicschoolmurders.blogspot.com.

Secondary Market

Wikipedia, the free on-line encyclopedia, has:

The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. Alternatively, secondary market can refer to the market for any kind of used goods. The market that exists in a new security just after the new issue, is often referred to as the aftermarket. Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market makers provide bids and offers in the new stock. In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid (originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly; this is how stock exchanges originated, see History of the Stock Exchange).

Here's the problem we have now: Trust has gone out of the system and investors don't trust one another. Lack of trust slows business to a crawl and acts like a tax on revenue. If we can restore trust (or confidence) to the system we can begin to put Humpty Dumpty back up on the wall and things will get better.

Entrepreneurs don't have to be financial experts, or sophisticated investors, but they need to know the tools to talk about their own investments and to understand what is said in the media about what is going on in the financial markets.

If you;'re interested in this topic, read the full Wikipedia article. And post a comment. I'd love to hear what you have to say.

Entrepreneurship informs all my professional activities. For entrepreneurial real estate go to www.yourstopforrealestate.com/blog and for entrepreneurial writing and publishing to to www.kearneymusicschoolmurders.blogspot.com

Expense

Expenses are one of the drivers of cash flow. Wikipedia, the free, on-line encyclopedia, gives us this description of an expense:

In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive".

In accounting, 'expense' has a very specific meaning. It is an outflow of cash or other valuable assets from a person or company to another person or company. This outflow of cash is generally one side of a trade for products or services that have equal or better current or future value to the buyer than to the seller. Technically, an expense is an event in which an asset is used up or a liability is incurred. In terms of the accounting equation, expenses reduce owners' equity.

The International Accounting Standards Board defines expenses as...decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Those interested in this should read the entire entry and follow its links and references.

The entrepreneur must watch expenses carefully, keeping them to a minimum and to ensure that every expense is justified and has a reasonable chance of returning value or revenue at or above some predetermined benchmark in a specified length of time.

What do you think? Post a comment.

Entrepreneurship informs all of my professional activity. For entrepreneurial real estate, go to www.yourstopforrealestate.com/blog and for entrepreneurial writing to www.kearneymusiscshoolmurders.blogspot.com.