TAKE YOUR BUSINESS TO THE CASINO! PART 1
Shepherd Shambira
Traditional thinking by economists proposes that there are three main factors of production namely: land, labour and capital. According to Alfred Marshal, “national income is the aggregate net product of and the sole source of payment for all the agents of production”. The payment to labour for example is wages and economists propose various ways in which the price of labour should be set. For example, set wages on the basis of marginal productivity such that the factor of production – labour is rewarded in proportion to the value which it is adding to the production process. The land generates rent to the landlord while capital attracts interest and profits or dividends. Entrepreneurs are the unique members of our society who are rewarded for taking risk with the factors of production. The smallest entrepreneur is usually a sole trader who may not necessarily be formally registered for taxes and other business functionalities. On the other hand there are medium sized and large corporations with one to several shareholders.
The small entrepreneurs risk their small savings from the monthly family grocery budget to buy material and saw clothes for sale or knit jerseys for sale. Such entrepreneurs normally live from hand to mouth. However, some of them do grow to employ the maid as a part time worker in the “factory” at the back of the house in the servant’s quarters or even the family lounge! If the entrepreneur is good the business can eventually grow to afford renting a proper office in the business district. However, very few small to medium sized businesses grow to bigger companies. They normally remain small and informal. The capital is also small and provided from family savings or personal loans from banks by the entrepreneur.
The position is however, different for fairly big businesses with more complicated operations and systems. Such firms employ lawyers, accountants and professional managers and the capital may still be provided by the founding member or members. The challenge for such companies is that when they wish to expand beyond certain levels of growth the founding members may not be able to provide sufficient capital let alone skills to run the bigger business empire effectively and to maximum advantage. At this stage, it is desirable to invite other investors to participate in the project. The first step is to approach a merchant banker or corporate finance advisor to assist in structuring a new financing structure for the growing business. Possible structures may actually require a significant change in ownership of the business.
The invitation of new shareholders to a previously privately held company will inevitably upset the existing culture and way of doing business. The promoters may no longer be free to take money from the till and leave an “I o u” slip and expect the bookkeeper to bill them later. New words like corporate governance become very common and controls begin to be followed and established in a new and more comprehensive way. On the other hand, the new shareholders may also bring with them new ideas which improve efficiency and profitability. For example, new contacts which may boost the sales of the company. The economies of scale arising from the utilization of capacity as the business receives additional capital is another obvious advantage of getting new shareholders.
The issue of corporate governance for example will depend on the nature of new shareholders coming on board. If the additional capital is raised by way of a private placement, there are certain requirements which the new investors may demand. However, where the additional capital is gathered from the public through an initial public offering of shares through the stock exchange, the regulations applicable to the rejuvenated enterprise are stricter. The idea is not to stifle business but to protect the public who provide funds to the capital market such that rogue elements do not defraud the unsuspecting public. The stock exchange is a regulated capital market where entrepreneurs go to seek for capital from investors who may not necessarily have the time, skill or flair to run a business. The major players in this market are pension funds and financial institutions who have long term investment time horizons. Empirical evidence has proved that the capital market is a long term investor which rewards the patient investor over time.
The stock market provides an efficient and effective way of creating entrepreneurial benefits to investors with various needs. For example, an investor in shares listed on the stock exchange does not have to wait for the business to find a buyer for him to exit from the project. He simply processes his transaction through a stockbroker and makes way for a new player who may want to take part in the business of the counter in question. The valuation of the shares is depended on investor sentiment and as discussed in previous articles the differences in opinion is what creates the market for listed shares! The benefits to the economy are that where the entrepreneurs are able to access capital through the stock exchange, they will be able to risk the factors of production and contribute to national income. The stock exchange therefore acts as a catalyst for economic growth. The critical question however, is whether the capital market is a casino and if it is who is the gambler?
This article is published for general investment advice and it must be noted that the price of
equities and the income derived from them can rise as well as fall. Neither First Mutual Limited nor the author shall be held liable for any losses as a result of the investment advice
contained in this article. It is important that specific investment advice is sought as each
investor’s investment will be dependent on their circumstances.
Contact:
Rashid Mudala: 091 276 226
Shepherd Shambira :091 252 639
First Mutual Limited Head Office: (263) (04)886000/34
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