Task 6. Reduce the text saving the main ideas

WORKING CAPITAL PROBLEMS IN A SMALL BUSINESS

Many small businesses that are seasonal in nature have difficult financing problems. This is particularly true of retail nursery (plants) stores, greeting card shops, boating stores and so on. The problem is that each of these businesses has year-round fixed commitments, but the business is seasonal. For example, Calloway’s Nursery, located in the Dallas – Ft. Worth Metroplex does approximately half of its business in the April to June quarter, yet it must make lease payments for its 16 retail outlets every month of the year. The problem is compounded by the fact that during seasonal peaks it must compete with large national retail chains such as Kmart and Home Depot who can easily convert space allocated to nursery products to other purposes when winter comes. While Calloway’s Nursery can sell garden-related arts and crafts in its off-season, the potential volume is small compared to the boom periods of April, May and June.

Seasonality is not a problem that is exclusive to small businesses. However, its effects can be greater because of the difficulty that small businesses have in attracting large pools of permanent funds through the use of equity capital. The smaller business firm is likely to be more dependent on suppliers, commercial banks and others to provide financial needs. Suppliers are likely to provide necessary funds during seasonal peaks, but are not a good source of financing during the off-seasons. Banks may provide a line of credit (a commitment to provide funds) for the off-season, but it can sometimes be difficult for the small firm to acquire bank financing. This has become particularly true with the consolidation of the banking industry through mergers. Twenty years ago, the small business person was usually on a first-name, golf-playing basis with the local banker who knew every aspect of his or her business. Now a loan request may have to go to North Carolina, Ohio, California, New York or elsewhere, for final approval.

The obvious answer to seasonal working capital problems is sufficient financial planning to insure that profits produced during the peak season are available to cover losses during the off-season. Calloway’s Nursery and many other small firms literally predict at the beginning of their fiscal period the moment of cash flow for every week of the year. This includes the expansion and reduction of the workforce during peak and slow periods and the daily tracking of inventory. However, even such foresight cannot fully prepare a firm for an unexpected freeze, a flood, the entrance of a new competitor into the marketplace, a zoning change that redirects traffic in the wrong direction and so on.

Thus, the answer lies not just in planning, but in flexible planning. If sales are down by 10 per cent, then a similar reduction in employees, salaries, fringe benefits, inventory and in other areas must take place. Plans for expansion must be changed into plans for contraction.

Task 7. Read the text “Why Japanese Firms Tend to Be So Competitive” and translate it.

Task 8. Find answers to the following questions in the text and write them down:

1. What do firms such as Hitachi, Honda, Mitsubishi and Sony have in common except that they all are Japanese companies?

2. What are Japanese companies known for?

3. Do Japanese companies have a high fixed cost commitment?

4. Are the credits much more available in Japan than in the USA? Why?

5. What makes Japanese firms act very competitively?

6. What is a general rule of business?

WHY JAPANESE FIRMS TEND TO BE SO COMPETITIVE

What do firms such as Fijitsu, Hitachi, Honda, Mitsubishi and Sony have in common? Not only are they all Japanese companies, but they are highly leveraged, both from operational and financing perspectives.

Japanese companies are world leaders in bringing high technology into their firms to replace slower, more expensive, labour. They are known for automated factories, laser technology, memory chips, digital processing and other scientific endeavours. Furthermore, the country has government groups such as the Ministry of International Trade and Industry (MIYI) and the Science and Technology Agency encouraging further investment and growth of government grants and shared research.

To enjoy the benefits of this technology, Japanese firms have a high fixed cost commitment. Obviously high initial cost technology cannot easily be “laid off” if business slows down. Even the labour necessary to design and operate the technology has something of a fixed cost element associated with it. Unlike in the United States, workers are not normally laid off and many people in Japan consider their jobs to represent a lifetime commitment from their employers.

Not only does the Japanese economy have high operating leverage as described above, but Japanese companies also have high financial leverage. The typical Japanese company has a debt-to-equity ratio two to three times higher than its counterparts in the United States. The reason is that credits tend to be much more available in Japan because of the relationship between an industrial firm and its bank. They both may be part of the same cartel or trading company with interlocking directors (directors that serve on both boards). Under such an arrangement, a bank tends to make a larger loan commitment to an industrial firm and there’s a shared humiliation if the credit arrangement goes badly. Contrast this to the United States, where a lending institution such as Citicorp or Bank of America has extensive provisions and covenants in its loan agreements and is prepared to move in immediately at the first sign of a borrower’s weakness. None of these comments imply that Japanese firms never default on their loans. There were, in fact, a number of bad loans sitting on the books of Japanese banks in the mid-1990s.

The key point is that Japanese firms have high operating leverage as well as high financial leverage and that makes them act very competitively. If a firm has a combined leverage of 6 to 8 times, as many Japanese companies do, the loss of unit sales can be disastrous. Leverage not only magnifies returns as volume increases, but magnifies losses as volume decreases. As an example, a Japanese firm that is in danger of losing an order to a U.S. firm for computer chips is likely to drastically cut prices or take whatever action is necessary to maintain its sales volume. A general rule of business is that firms that are exposed to high leverage are likely to act aggressively to cover their large fixed costs and this rule certainly applies to leading Japanese firms. This, of course, may well be a virtue because it ensures that a firm will remain market oriented and progressive.

UNIT 5

Task 1. Read the text “History of Insurance” and translate it.

Task 2. Find answers to the following questions in the text and write them down:

· What did Chinese merchants do to limit the risk of losing their goods?

· What was recorded in the famous Code of Hammurabi?

· What did the concept of ‘general average’ imply?

· What did Greeks and Romans introduce?

· Why was there demand for marine insurance in London?

· What was Lloyd’s coffee house famous for?

· When and where was insurance as we know it today introduced?

· What was Franklin’s contribution to the history of insurance?

HISTORY OF INSURANCE

Early methods of transferring and distributing risk were practiced by Chinese and Babylonian traders as long as the 3^rd and 2^nd millennium BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1759 BC and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender additional sum in exchange for the lender’s guarantee to cancel the loan should the shipment be stolen.

A thousand years later, the inhabitants of Rhodes invented the concept of the ‘general average’. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.

The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organised guild called ‘benevolent societies’ which acted to care for the families and funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17^th century, “friendly societies” existed in England, in which people donated amounts of money to a general sum that could be used in case of emergency.

Separate insurance contracts (i.e. insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14^th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles first proved to be useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe and specialised varieties developed.

Toward the end of the 17^th century, the growing importance of London as a centre for trade led to rising demand for marine insurance. In the late 1680s, Mr. Edward Lloyd opened a coffee house which became a popular haunt of ship owners, merchants and ships’ captains and thereby a reliable source of latest shipping news. It became a meeting place for parties wishing to insure cargoes and ships and those willing to underwrite such ventures. Today Lloyd’s of London remains the leading market for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.

Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this disaster Nicholas Barbon opened an office to insure buildings. In 1680 he established England’s first fire insurance company, “the Fire Office”, to insure brick and frame homes.

The first insurance company in the United States provided fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.

Benjamin Franklin helped to popularise and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin’s company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazard, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses.

Task 3. Read the text “High Stake Espionage in International travel” and translate it.

Task 4. Find answers to the following questions in the text and write them down:

1. Where do the majority of cases of stealing information appear?

2. Why does this happen according to security experts?

3. What are the former personnel of secret police busy with now?

4. What are the main ways of stealing information?

5. What are the consequences of information thefts?

6. What are the main pieces of advice for avoiding theft?