Requirements for obtaining a loan

When making a loan for some business most banks want additional information. The complete list of such information is given below. It includes the business ability of a borrower, his past experience, his chances of success in the future, the need and purpose of the loan, etc.

There are 10 items:

1. Proper identification. 2. Nature of business. 3. How the business is organized, its ownership, and any special agreements. 4. Personal data on all principal owners as to age, connection with the business, connection with other businesses, life insurance, banking connections, and civic activities. 5. Other financial relations of the business, such as other bank connections and indebtedness. 6. The amount, the purpose, the need, and the plan for repaying the loan that is requested. 7. A detailed balance sheet showing the assets, liabilities, and ownership of the business. 8. A detailed income and expense statement showing the income and expenditures of the business. 9. Detailed information in regard to liabilities and claims, such as unpaid taxes and other business debts that are due or will become due. 10. Proof as to the future prospects and business plans.

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BANKS

Banks are closely concerned with the flow of money into and out of the economy. They often co-operate with governments in efforts to stabilize economies and to prevent inflation. They are specialists in the business of providing capital, and in allocating funds on credit. Banks originated as places to which people took their valuables for safe-keeping, but today the great banks of the world have many functions in addition to acting as guardians of valuable private possessions.

Banks normally receive money from their customers in their two distinct forms: on current account, and on deposit account. With a current account, a customer can issue personal cheques. No interest is paid by the bank on this type of account. With a deposit account, however, the customer undertakes to leave his money in the bank for a minimum specified period of time. Interest is paid on this money.

The bank lends the deposited money to customers who need capital. This activity earns interest for the bank, and this interest is almost always at a higher rate than any interest which the bank pays to its depositors. In this way the bank makes its main profits.

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ACCOUNTING

Anything of value that a business or organization owns is commonly known as an asset. Asset accounts include cash, which is the money on hand or in the bank; furniture and fixtures; accounts receivable, the claims against customers that owe money; stock or inventory; office supplies; and many others that show what the organization owns.

Debts owed to creditors are known as liabilities. If money is owed to an organization or person for things or services purchased on credit, this liability is called an account payable. Other liabilities include wages or salaries that are owed to employees, or taxes that have not yet been paid.

The value of the business to the owner or owners is known as capital. Other terms used to designate capital are proprietorship, owners' equity (usually abbreviated OE), ownership, or net worth.

A separate account is kept for each asset, liability, and capital item so that information can be recorded for each of them. Accounts are also maintained for income and for expenses, and like assets, liabilities, or capital, these accounts are also entered in the ledger, which is a detailed listing of all the accounts of an organization. Entries from all the journals are transferred to the ledger at regular intervals. This process — called posting — is usually done monthly.

Journals, or books of original entry, are designed to record information about different transactions, including sales, purchases, cash receipts, cash disbursements, and many others. Journals have two or more columns to record increases or decreases in the accounts affected by the transaction, and they often have space for a date and an explanation of the transaction.

All transactions affect at least two accounts. Each transaction must be analyzed to determine which accounts are affected, and whether they should be increased or decreased. An entry made on the left-hand side or column of an account is called a debit, while an entry made on the right-hand side or column is a credit. Debit, usually abbreviated DR, at one time meant value received, or literally he owes. Credit, usually abbreviated CR, meant value parted with, or literally he trusts. In modern bookkeeping, debit refers only to the left-hand side of an account, whereas credit refers to the right-hand side. Some bookkeepers use a far right-hand column to keep an up-to-date balance of the account.

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AUDITING

Auditing is an accounting function that involves the review and eval­uation of financial records. It is done by someone other than the person who entered the transactions in the records. Not so many years ago, the presence of an auditor suggested that a company was having financial difficulties or that irregularities had been discovered in the records. Currently, however, outside audits are a normal and regular part of business practice. In addition, many corporations, especially the larger ones with complex operations, maintain a continuous internal audit by their own accounting departments.

Even those companies that do not conduct an internal audit need to maintain a system of internal control. Most good systems will provide accounting controls against errors, as well as a division of duties to reduce the possibility of misappropriations. An example of a business paper used in an internal control system is the petty cash voucher. Vouchers indicate receipt of payment. In the case of petty cash vouchers, they are a record of payment from the small cash fund that most companies keep for minor transactions for which cash is needed. Another example is the expense account voucher that is required by many organizations before payment can be made to reimburse an employee for money spent for business travel and entertaining.

Ideally, a business should use as many internal controls as are consistent with efficient operation. In practice, the cost of installing and maintaining control systems forces management to decide which control devices to use. If there are too many controls, a time may come when the company's employees are spending more time filling out forms than performing productive work.

Many companies employ their own accountants to maintain an internal audit. They continuously review operating procedures and financial records and report to management on the current state of the company's fiscal affairs. These accountants also report on any deviations from standard operating procedures; that is, the company's established methods for carrying on its operating and recording functions. The internal auditors also make suggestions to management for improvements in the standard operating procedures. Finally, they check the accounting records in regard to completeness and accuracy, making sure that all irregularities are corrected. Overall, the internal auditors seek to ensure that the various departments of the company follow the policies and procedures established by management

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SPECIAL TERMS

Liability: An obligation that is owed by an organization: debts to other organizations for merchandise or services; wages owed to employees; accrued (owed but not yet paid) taxes; and payments due on loans or mortgages.

Capital: The investment in an organization or business by its owner or owners. Other terms often used instead of capital are owners' equity, often abbreviated OE, and proprietorship.

Account: A record of the changes and balances in the value of an individual item listed in the ledger of an organization. An example of an asset account is the company's furniture and fixtures, usually listed as one item since it would be impractical to list every desk and chair. Each account, usually abbreviated a/c, frequently has its own page in the organization's ledger.

Double-entry: A method of bookkeeping in which the twofold effect of every entry is recorded, thus requiring two entries to record each transaction. By recording both effects of each transaction, this system offers protection against error.

Single-entry: Any bookkeeping system that does not include the com­plete results of each transaction. It is usually used by small companies or to keep track of specific accounts: for example, a checkbook which only keeps a record of the cash balance.

Debit: An amount entered on the left-hand side of an account. Asset and expense accounts are increased by debiting, that is, by entering amounts in the left-hand column. Debit is usually abbreviated DR.

Credit: An amount entered on the right-hand side of an account. Liability, capital, and income accounts are increased by crediting, that is, by entering amounts in the right-hand column. Credit is usually abbreviated CR.

Journal: A book in which transactions are recorded. In double-entry bookkeeping, both sides of the transaction — both the debit and the credit side — are entered in the journal.

Ledger: A listing of detailed accounts, such as a record comprising the accounts receivable of each customer. The general ledger is the book used to list all the accounts of an organization. Entries from all the journals are transferred to the ledger at regular intervals, usually monthly. This process is called posting. The ledger then serves as a summary of all the fiscal activity for that period.

To Foot: To add or total the amounts in a column.

Trial Balance: When all the transactions for a certain period have been posted and footed, the debits should equal the credits. The test to see if this is

so is called a trial balance.

Accounting equation - a description of the relationship between a company's assets, liabilities, and equity; expressed as Assets = Liabilities +Equity.

Equity - owner's claim on the assets of a business; more precisely the residual interest in the assets of an entity that remains after deducting its liabilities; also called net assets.

Debtor - individual or organizations that owe money to a business.

Assets - resources owned or controlled by the business and expected to provide future benefits to the business.

Audit -a check of an organization accounting systems and records using

various tests.

Bookkeeping - the part of accounting that involves recording economic transactions and events, either electronically or manually (also known as recordkeeping).

Pro/it - the amount a business earns after subtracting all expenses necessary for sales (net income or earnings).

Accounting - an information and measurement system that identifies, records, and communicates relevant information about a company's economic activities.

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ACCOUNTS

There are different kinds of accounts. The most popular is the current account. A current account pays no interest but it has other advantages. Firstly, it enables people to keep their money in a safe place. Secondly, it allows them to withdraw it at any time. Thirdly, it provides them with a cheque book so that they do not have to carry a lot of cash.

To open a current account it is necessary to see the branch manager. He has to decide whether the applicant is likely to keep the account in credit (in the black). A current account holder can only overdraw with the manager's permission. The manager will therefore want to meet the applicant to get the necessary background information. For example, he will want to know the applicant's occupation and his place of work. He will also probably want a reference from his/her employer. If, after the interview, the manager is satisfied with the applicant, he will approve (agree to) the application, arrange for the applicant to be given a cheque book and arrange for a monthly statement to be sent to him/her.

A deposit account is another popular kind of account. It has advantages over a current account. First of all, it is easier to open than a current account. There is no need to see the manager. A customer only has to fill in a form and then deposit the minimum amount of money required by the bank. The customer is then given a passbook, which he must bring to the bank every time he wishes to withdraw or deposit money. The passbook is the customer's record of the account.

Secondly, a deposit account earns interest for the customer. The bank invests the money that the customer pays in and, in return, the bank pays the customer interest. The rate of interest in the U.K. is not fixed but it is usually between 5-10%.

However, a deposit account has certain disadvantages too. In the U.K. at the moment the maximum a customer can withdraw in one day is £20. Another disadvantage is that the customer receives no cheque-book and therefore he cannot pay bills so easily.

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MICRO-AND MACROECONOMICS

Due largerly to the work of the great economist John Maynard Keynes, it has been customary to divide economic theory into microeconomics and macroeconomics. As its name implies microeconomics is connected with small parts of the economy and the interrelationship between these parts, while macroeconomics is connected with the behaviour of broad aggregates affecting the whole economy.

A macroeconomic topic therefore might be explaining movements in the prices of shoes or whether there has been under-investment in manufacturing vis-a-vis the service sector.

Macroeconomic topics come under the four headings of inflation, unemployment, the balance of payments and growth.

Obviously, macroeconomic explanations are not necessarily separate from microeconomic explanations, e.g. The growth of the economy is most likely to have been affected by the allocation of investment funds across the various sectors of the economy; unemployment will be affected by the decline and rise of individual industries. But the fundamental reason for a distinction being made is the notion that broad aggregates might behave differently from the way that is predicted by theories based on observing the behaviour of individual markets. For example, a cut in wages in one industry may make it profitable for employers in that industry to employ more workers, but Keynes suggested that a cut in wages across economy as a whole might reduce the aggregate demand for goods and services hence forcing all employers to cut back on production and hence workers.

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THE BANKING HISTORY

Banking is an ancient business. Banks existed already in ancient Babylon and in the classical civilizations, particularly in Rome. But modern banking started in Renaissance Italy where bankers, apart from buying and selling foreign currencies, also took demand and time deposits. These demand deposits were usually transferred orally by the owner visiting the banker who sat behind his bench or table, though checks were not unknown. (The term bankruptcy comes from the Italian custom of breaking the bench of a banker who could not pay off his creditors.) The most famous of these Italian bankers were the Medici family, who for a long time ruled Florence and made loans to princes and merchants both in Italy and in the rest of Europe.

In England banking grew out of the custom of goldsmiths, who took in their customers' gold and silver for safekeeping. They then discover that they could lend such coins out, keeping just a certain proportion as a reserve, since not all customers would come in for repayment at the same time. Moreover they gave their depositors receipts, which these depositors could pass on to other people. Eventually, to make such transfers more convenient, they issued these receipts in round-number sums. They thus became private banknotes; that is, notes repayable on demand by the banker in gold or silver.

In colonial America the first bank, in the modern sense of the term, was the Bank of North America, founded in 1782. Subsequently, banking spread rapidly as the states chartered more and more banks, some of them owned by the state itself. Between 1781 and 1861 over twenty-five hundred banks were organized, but many of them were unsound; almost two-fifth of them had to close within ten years after they had opened.

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MARKETER'S ACTIVITIES

To market a product successfully, a marketer must develop a strategy. His decisions depend upon many variables or factors that are constantly changing. Some variables are internal. The marketer has some control over the variables that affect the product - its nature, promotion, the path it will follow from producer to consumer and its price. But when something is produced, it enters the existing external environment of law, economy, society or culture. Intelligent decisions about the product can be made only within the current and changing environment. The marketer cannot control these external variables, instead they control him. The legal limits may be in form of restrictions on safety, advertising and price. A company competes not only with other companies that make similar products, but with all other companies. All want a share of the same consumer market.

The social and cultural nature of that public further influences the marketer's decisions. He must know what kind of people will need and use the product. Are they rich or poor? What is their level of education? Are they increasing or decreasing in numbers and buying power? What are their interests, attitudes and values? Without a marketer the product is useless, knowledge of the environmental factors is necessary in marketing any product. It is especially crucial in international marketing, where one must understand the legal, economic and sociocultural differences of a foreign country. These are some of the questions to be answered before trying to enter a foreign market.

The marketing researcher can use internal (within the company) and external (outside the company) sources. The data he gathers might be secondary or primary. Secondary data, such as government census figures or company sales reports have already been gathered for some other purposes. Using secondary data is almost always cheaper and faster than using primary data, but secondary data may be out of date or inappropriate for the study. Primary data are collected for the first time for a specific marketing research study.

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ON MONEY

The word money comes from the name of the Roman goddess Moneta in whose temple silver coins were made.

Money did not always look like our money. Sometimes it was a ring or an ornament, or just a slab of gold or silver, from which coins were made. Still later cheaper metals replaced gold and silver.

British coins are made in the Royal Mint. The metals come in the form of slabs. The right proportion of each metal for the sort of coin being made, are put into large graphite pots and melted in very hot furnaces for two hours.

Then the metal is poured into moulds which have the shape of bars and left to cool. The bars of metal go through heavy rollers and become thin metal strips. The strips go into another machine which stamps out circles in them. The circles drop into a box. The waste metal is collected and remelted.

Next the circles are annealed: they are heated to red-hot and then dropped into cold water. During the process of annealing the copper takes some of the oxygen from the air. As a result a thin layer of copper oxide appears on the surface of the circle, which is removed with a weak solution of sulphuric acid.

While, hot the circles are stamped, and also pass through a special pressing machine which raises a rim on the coin. (The rim will help the coin to live longer.) In stamping the softish circle of the future coin is pressed above and below by two pieces of metal called dies. The upper die stamps the heads of the coin and the lower die stamps the tails. While being stamped the coin becomes hard again. When the coins are ready they are counted on an automatic machine, and inspected by hand. Then they are recounted and bagged up by machine, tied up and weighed and sent to the bank. The British monetary system was very complicated. The biggest unit is the pound (£). One pound has 20 shillings (s): £ 1 = 20 s. One shilling has 12 pennies (d): Is = 12 d. (Compare this to the Russian rouble (100 copecks), American dollar (100 cents), etc.) Changes have taken place in the British monetary system. One pound has 100 pennies. The new penny is 2.4 of the past penny. The new system is a decimal system.

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HOW MONEY AROSE

Money arises when exchange develops beyond the stage of direct barter. In man's earliest days exchange did not exist. The level of production was so low that there was no surplus of anything which could be exchanged. Everything that was produced was consumed. Exchange, however, presupposes the existence of a surplus of things in order to obtain other things.

If the technique of production had not improved, the basis would not have been laid for the production of some surplus over and above immediate needs. Originally this surplus was exchanged by means of direct barter between tribes. Surplus was exchanged for surplus and the fact that such barter was possible and helped to satisfy needs is due to the fact that the division of labour within and between tribes had developed. Some tribes specialized in hunting, others in agriculture, still others in some other fields.

Exchange by direct barter served the satisfaction of needs which were beyond the capacity of individual tribes to satisfy.

As society developed there began to take place, the production of goods primarily for exchange and not for direct, immediate consumption of the producers. This signified the rise of commodity production, for a commodity is an article produced for exchange on the market. Commodity production has existed for a very long time. However, it has reached its highest form in capitalism, which is a system for the production of commodities.

It is commodity production that gives rise to money. But not immediately in the forms we know today - coins, banknotes, etc. Some standard has to be worked out as a basis for exchange.

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