Introduction to Finance

170
C H A PT E R 7 Savings and Investment Process
TA B L E 7 . 2
Saving and Investment in the United States ($ Billions)
2006
2008
2011
2015
Gross saving
$2,174.4
$1,824.1
$1,837.5
$3,340.0
Net saving
513.7
–23.0
–99.3
484.4
Net private saving
666.5
659.8
1,240.1
1,168.2
Personal 
saving
235.0
286.4
489.4
678.3
Undistributed 
corporate 
profits
646.0
475.7
777.9
749.1
Inventory 
valuation 
adjustment
–38.0
–38.2
–62.6
69.7
Capital consumption adjustment
–176.4
–64.1
35.4
–329.0
Net government saving
–152.7
–682.7
–1,339.4
–683.8
Federal
–203.8
–642.6
–1,237.4
–601.7
State 
and 
local
51.0
–40.2
–102.0
–82.1
Consumption of fixed capital
1.660.7
1,847.1
1,936.8
2,855.7
Private
1,391.4
1,536.2
1,587.4
2,329.8
Domestic 
business
1,123.3
1,252.3
1,339.1
1,854.4
Households 
and 
institutions
268.1
283.9
308.8
475.4
Government
269.3
310.9
363.9
525.9
Federal
106.6
119.8
141.5
275.7
State 
and 
local
162.7
191.2
222.4
250.2
Gross domestic investment
2,752.2
2,632.4
2,335.1
3,648.6
Gross private domestic investment
2,327.2
2,136.1
1,854.9
3,030.6
Gross government investment
425.1
496.3
480.2
618.0
Capital account transactions
4.2
–.4
1.7
.3
Net lending or borrowing (–)
–802.6
–706.8
–467.4
–472.8
Note: Some numbers may not sum exactly to total numbers shown because of rounding.
Source: U.S. Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov.
Typical Life Cycle Patterns for 
the Small Venture Firm
A successful entrepreneurial fi rm will typically progress through 
several stages of fi nancing. The fi rst stage is called the “seed” 
or development stage. Here a fi rm works on an idea, develops a 
concept or prototype product, and may conduct some preliminary 
market research. If the fi rm is successful in producing a product 
or delivering a service, it moves into the start-up stage. Financing 
will be needed for “working capital” investments in inventories 
and to extend trade credit to customers. A manufacturing start-up 
also will need to invest in plant and equipment.
A third stage can be viewed as the 
breakeven
stage, the time 
when the fi rm is now starting to generate enough revenues to 
cover its operating costs. A fourth stage represents the 
recovery 
of investment
stage. If the fi rm continues to be successful, the 
fi fth stage results in the 
maximum generation of profi ts
. This 
occurs because cash fl ows from operations far exceed new capital 
expenditure requirements as well as additional investment in work-
ing capital. A sixth stage may be viewed as 
maturity 
or 
stability
.
Timmons and Spinelli report that it takes an average of two 
and one-half years for a fi rm to break even from an operating 
standpoint, and over six years on average to recover initial equity 
investments.* Of course, some fi rms will recover initial investment 
more rapidly, while others will fail or not progress beyond the 
start-up stage. Ultimately, a plan is needed for how the successful 
entrepreneur will “exit” or leave the business. For example, the 
fi rm could be sold or merged with another fi rm.