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Summary The Basics of Financial Management CH 1 - 4
A summary of chapters 1 - 4 from "The Basics of Financial Management", a course given in the first year of the study Creative Business at Breda University (NHTV)
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FINANCE, MAN 4April 2021, Chapter 1-4
Chapter 1 Businesses and their Role in the Economy
- Exercises for exam: E1.1, E1.2, E1.8
1.1 Consumers and Manufactures
Business economics, focuses on economic behavior in a production organization.
Production organizations (businesses), manufacture products and services and sell
these to consumers at a certain price.
Economics, Science that studies human behavior with respect to the striving for
wealth, being the optimal provision of goods and services. A distinction can be made
between microeconomics and macroeconomics.
- Microeconomics comprises, among other things, the theory behind markets: how
does the price mechanism work in a particular market etc.
- Macroeconomics studies economic problems that affect society as a whole, such
as inflation and unemployment.
Supplier market → Capital (raw materials, fixed assets), Labor → Production
process → end products → Retail market.
Businesses strive to create value = the profit is depended on:
- Efficiency: producing a given quantity with the least possible costs (related to the
costs of the production process).
- Effectiveness: the degree to which the end product fulfils the requirements and
wishes of the end buyer (relates to the purpose of the production process).
Businesses usually use their profit to measure efficiency and effectiveness.
Profit is the balance between Sales revenue, Turnover and Costs.
Profit is the number one objective in businesses.
Also important:
- Continuity of a company. A company has to generate profit to secure the future.
Profit has to be viewed in a long term perspective.
- Mission statement: an outline of their goals and philosophy.
- Striving to achieve the highest possible sales.
, 1.2 Profit and Non-profit Organizations
Companies focus on maximizing profit and are part of the profit sector. But there are
also non-profit organizations.
Types of non-profit organizations:
- Public sector (the state, provinces, municipalities and regional water authorities).
Concerned with providing public-sector goods and services: facilities intended for the
population as a whole. Private enterprises cannot provide these, because of the
absence of market mechanisms.
Privatization: all operations and activities deemed eligible for privatization are being
freed from government control and let loose on the market to justify their existence.
- Private non-profit institutions: they raise money to achieve certain social
objectives (fund-raising institutions).
Differences between businesses and non-profit organizations:
- The non-profit organization's objective is to achieve certain socially important
objectives, the business objective is making profit.
- Non-profit organizations cannot usually exist by only conducting market transactions
and are consequently not economically dependent.
- Assessing the effectiveness of non-profit organizations harder.
1.3 Business Activities
Job Production Mass Production
Customized product Standard product
Intended for one particular customer Intended for the ‘market’
Made to order Made for build-up inventory
Retail trade, supplies directly to the end user: the consumer.
Wholesale trade purchases from the manufacturer and redistributes the purchased
goods among the retail trade.
1.4 Legal Forms of Businesses
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