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The Basics of financial management summary chapter 1-4
In depth summary of The Basics of financial management summary chapter 1-4
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Finance summaryChapter 1
Productions organizations/ businesses, manufacture products and services and sell
these to consumers at a certain price.
Costumers obtain purchasing power from the income generated by working for these
companies.
Economics studies the relationship between consumers and businesses and the
mutual interactions between business
- Microeconomics: the theory behind the markets (how does a price
mechanism work in a particular market) determining factors include customers
and suppliers in a particular market.
- Macroeconomics: studies economic problems that affect society as a whole,
such as inflation and unemployment
- Business economics: focuses on economic behavior in a production
organization
Company: production organizations focused on earning income for their owners on
the market in (pursuit of profit).
Productions process:
A production organization operates between 2 markets:
- The supplier market, where resources are obtained
- The retail market, where manufactured goods or services are sold
Resources include raw materials but also the fixed assets of a company and labor
Example: a brewery buys hops and water and converts these into beer through a
series of processes. The water and the hops are raw materials used for the end
product. In addition, the company needs fixed assets: a building, boilers, trucks,
computers etc. and the employees are indispensable
Capital: refers to the raw materials and fixed assets used by a company
A production organization can have a formal nature: rights and obligations of the
participants laid down in writing: the empowerment of shareholders, directors and
employees are described in the job descriptions.
But a production organization can also have mean two students having a courier
service.
Value creation: the sales of the produced goods and services need to outweigh the
price paid for the production factors (labor, raw materials and fixed assets) at the
suppliers market.
,The owners of the company are beneficiaries of the surplus in payment: profit
Objective maximizing profits is what distinguishes companies from businesses
The level of profit depends on:
- Efficiency: relates to the cost effectiveness of the production process (it is
efficient if a given quantity is produced at a minimum cost)
- Effectiveness: the ability to meet the target objectives of the production
process or the extent to which any products meet the customer requirements
(it is effective if the end product is appreciated by customers and customers
are willing to pay for it)
Efficiency Effectiveness
unit cost sales revenue
Measure efficiency Measure effectiveness
Profit Profit
Costs of something Turnover/ sales revenue
Priority company: maximizing profits profit is the target: the activities are means to
an end but maximizing profits at all costs is not the highest priority the continuity of
company is also important as well as a long-term perspective towards profit targets.
Companies generally present their own mission statement outlining their targets
without addressing their trade for profit as a prominent factor, instead of focusing on
environmental issues job satisfaction for employees etc.
Profit and non-profit organizations
- The public sector: the state, provinces, municipalities and regional water
authorities. The government mainly provides public goods and services for the
general public such as road, protection against a sea and general safety.
o These facilities cannot be provided by the private enterprises due to
failure of the market mechanism: consumers cannot purchase a small
piece of sea defense to protect themselves against the tide
o Budget mechanism is applied to produce public goods and services.
The government imposes compulsory contributions(tax) and provides a
budget to finance the production of the public goods.
o The government supports privatizing: activities where applicable
activities are separated from the government and must provide
themselves to be viable as a part of the market examples are public
transport, telecommunications, mail delivery and supplying of energy
- Private non-profit businesses: compromise a wide variety of organizations
from amateur sport clubs to charitable organizations such as Red Cross.
o Is also known as fundraising institution as it attempts to raise funds to
achieve a wordy social objective.
, Non-Profit organizations Profit organizations
The target set by non-profit Shareholders of a profit organization
organizations is to provide certain would not lose sleep if a production of a
socially important facilities. The activities product were to be replaced by other
they perform are connected to their activities with higher profit prospects.
social objectives. Changing their
activities based on financial reason it’s
not a consideration.
Non-profit organizations cannot exist by Rely on business transactions and
conducting business transactions and conducting business.
are not economically independent. They
depend on gifts such as contribution
subsidies inheritance etc.
The assessment of the effectiveness of x
a non-profit enterprise is much more
difficult because profit cannot be used
as a key indicator. Effectiveness must
be established by registering waiting
times or conducting client satisfaction
surveys. Non-profit businesses can
monitor their efficiency by calculating
their costs
Business activities
4 classifications of companies:
- Agriculture and mining
- Industry
- Trade
- Services
Agriculture and mining
- With relatively small quantity of raw materials large quantity of end products
- Fixed assets are important: farmland, concession for mine or oilfield and
equipment
Industry
- Create physical tangible product
Job production Mass production
Customized product Standard product
Intended for one particular customer Intended for the market
Made to order Made for build-in inventory
- Batch production process: Intermediate production processes that generate a
series of identical (half) products
- Batch- job production process: the idea that every customer gets a particular
individual product but costs are saved by producing the components in larger
quantities and therefore cheaper. (create own boat from different items)
- Batch- mass production: of variety of models of the standard products are
produced and every so often the machines are adjusted to produce a different
variant
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