BUSINESS ECONOMICS
SUMMARY
The Basics of Financial Management
Abstract
Summary of Chapter 3,4,6,7,8,9,10
Summary for BE3 test NHL-Stenden ITM
Summary of text, with formulas and examples
Willemijn van Doeveren
,Table of contents
Chapter 3 financial statements..............................................................................................................2
3.1 investment and financing.............................................................................................................2
3.2 balance sheet and income statement..........................................................................................2
3.3 Profit versus cash flow.................................................................................................................2
Chapter 4 business plan.........................................................................................................................4
4.2 purposes of the business plan......................................................................................................4
4.3 key features of the business plan................................................................................................4
Chapter 6 Working capital management...............................................................................................4
6.2 inventory management...............................................................................................................5
6.4 cash management........................................................................................................................6
Chapter 7 Equity....................................................................................................................................7
7.1 equity in companies with non-legal entity status........................................................................7
7.2 equity in companies with legal entity status................................................................................8
7.3 Share value..................................................................................................................................9
7.4 reserves.....................................................................................................................................11
7.5 issue of shares............................................................................................................................11
8 Liabilities...........................................................................................................................................12
8.3 bonds.........................................................................................................................................12
8.4 current liabilities........................................................................................................................13
8.5 new financing forms..................................................................................................................14
Loan: the company returns the loans in the form of interest and principal repayment. The credit
term and the interest rate are set in advance. The exact term and conditions of each loan differ
per crowdfunding platform..............................................................................................................14
Chapter 9 Assessment of the financial structure.................................................................................14
9.1 Ratio analyses............................................................................................................................14
9.2 Profitability ratios......................................................................................................................15
9.3 Solvency ratios...........................................................................................................................18
9.4 Liquidity rations.........................................................................................................................18
Chapter 10. Financial Markets.............................................................................................................19
10.2 Options....................................................................................................................................19
10.3 Investment Ratios....................................................................................................................21
1
, Chapter 3 financial statements
3.1 investment and financing
Resources: everything a company needs to be able to run – assets
Fixed assets: can serve the company a long period (longer than 1 year) buildings, cars etc.
Current assets: serve a company for a shorter time (shorter than 1 year) account receivables
Equity: the money that the owners put in the company – risk bearing capital.
Liabilities: capital that made available by creditors. Temporary financial resources. Creditors do not
have any control over the business. Risk avoiding capital.
3.2 balance sheet and income statement
Balance sheet: a snapshot in time of the comparison between assets and liabilities. What the
company has and how they finance it. Left side debit, right side credit.
Income statement: a comparison of sales revenue and costs.
3.3 Profit versus cash flow
Period profit: sales revenue minus costs
Cash flow profit: cash inflows minus cash outflows
There are 3 items that create a difference between cash flow and profit
Depreciation
Provisions
Direct equity transactions
Depreciation: fixed assets are in the company for a number of years. The investment should not be
considered an immediate cost on the income statement. But should be spread over the economic
life of the asset. The annual depreciation should be determined in order to know the value of the
asset. There are a number of depreciation methods:
Straight line depreciation: easiest method. The assets depreciated by the same amount each
year.
Accelerated depreciation: can be used if the asset performs better during its first years.
Higher depreciation first years. Lower depreciation later years. There are two methods for
applying this type of depreciation:
Sum of the years digits method: annual depreciation is calculated using a decreasing
weighting factor, being the years of economic life remaining.
2
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