Monday, November 5, 2012

A Return to the Story Of Best Blogs Ever, Inc. (1)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

Starting at the end of January of last year, I wrote a series of blogs on the formation of a business.  The purpose of the series was to introduce readers to investment and financial terms, including some accounting concepts.  After several blogs chronicling the progress of the business, I turned to other topics, but promised to pick up the story again at some point.  Now is the time to return to the story of the blog company, which I called Best Blogs Ever, Inc. ("BBE").   The business terms are highlighted in bold and are explained as the story of the business unfolds.  Before I pick up the story where I left off, I think it is appropriate to acquaint new readers who may not have read the earlier blogs with the story of BBE.   I will include small sections of each blog and provide a link to the entire blog.  I will include sections from two blogs in each of the next few blogs until I bring the readers up to the point at which I stopped the story.  Then we will continue to follow the course of this fictional business learning more terms as we proceed.

Here is a  portion of the first blog, which was called Birth of a Business:

"After badgering my friends and family, I get 5 people to commit to buying shares.  They could be called angel investors, since their money seems almost heaven sent.  However, not everyone is willing to invest an equal amount, in this case, $1,000 from each of the 5 investors to raise the necessary $5,000.  Some are willing to invest only $200, while others may have more money to risk.  I have $1,000 to put into the business.  Having secured investment commitments, I organize a corporation and call it Best Blogs Ever, Inc. We will call it BBE for short.  BBE will issue (sell to the investors) shares of its common stock for $10 per share.  The price per share is called the stock's par value.  Someone with $200 to invest will get 20 shares.  I get 100 shares for my $1,000 investment and so on with each of the other investors.  For their money, the investors each get a stock certificate indicating the number of shares they own in BBE.  The corporate papers I file with the state, the Articles of Incorporation, provide that the company has the right to issue up to 1,000 shares.  Those shares are authorized, but only 500 of them are needed at this time in order to raise the $5,000.  The 500 shares sold by the corporation at $10 each to the investors are now outstanding.  Each investor owns a percentage of the corporation equal to the percentage his or her cash investment represents of the total $5,000 of capital raised.  Since I put in $1,000 of the $5,000, I have a 20% interest in the business and its profits or losses.  The money raised is the equity in the company.  It is invested in, not loaned to, the company.  The company need not pay it back."

Here is a link to the entire blog, which was posted on January 31, 2011.

Here is a portion of the second blog, which was called Early Days:

"On the other hand, let's assume that my blogs have been well received on the Web, and BBE made some money over and above the expenses of the business, a profit.  Gross revenue is the term for all of the money paid by the subscribers to read the blogs.  The goal is for gross revenue to be greater than the rent, payroll, utilities, advertising, computer maintenance and the like.  Once those expenses are deducted from the revenue, the remaining funds are the company's income or earnings.

The shareholders will want to know what the board of directors proposes to do with the earnings for the year.  For purposes of our story and to keep the math simple, let's assume BBE had earnings of $1,000 after the first year.  Remember that the shareholders put in a total of $5,000 of equity or capitalization in the company.  If however, the shareholders had said no to my requests for their money, they might have put that cash into a savings account at a bank and earned some interest on it.  Unless they can get a return on investment, some money back on their stock investment, the bank account might look like the better decision.  To reward the shareholders for buying stock in BBE, the directors could decide to pay some or all of the earnings out to the shareholders.  Since BBE might need some of that money in the future, the directors decide to pay the shareholders a dividend of $1 per share. Since each share was purchased for $10 and a $1 dividend is paid per share, the rate of return on the investment of the shareholders is 10%, which far exceeds the interest rates paid on bank savings accounts these days.  A 10% return should make the shareholders very happy.  For my $1,000 investment, I receive $100 after only one year.  The other shareholders receive the same return, $1 for each share of stock they own."

Here is a link to the entire blog, which was posted on February 7, 2011.

We will look at the next two chapters of BBE's story in the next blog.

Comments are always welcome.

No comments:

Post a Comment