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Basics of Financial Management | Summary | MAN4

Name: Basics of Financial Management | Summary | MAN4
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Author: Daniquedhs

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Basics of financial management

Summary of: Basics of Financial Management I received a 9.6 for my exam by learning this summary! Consists of Part 1: Chapters 1-4 1 Businesses and their role in the economy 2 Financial management disciplines and positions 3 Financial statements 4 Business plan Breda University of Applied Scienc...

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Geupload op 8 maart 2019
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Aantal pagina's 10
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basics of financial management

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THE BASICS OF FINANCIAL
MANAGEMENT
Rien Brouwers MSc. & Wim Koetzier MSc.
Third Edition | Noordhoff Uitgevers

Part 1 Financial management in business
Chapters 1-4

, 1 Businesses and their role in the economy
1.1 Consumers and manufacturers
- All products and services have to be manufactured (made)
- Enterprises/production companies manufacture products/services and offer those to consumers
 A company is a production organization
 Operates between the supplier market (resources obtained) and the retail market (goods sold)
- Economics study the relationship between consumers and companies & their mutual interactions
 Microeconomics: among others, theory of markets (price mechanism in particular market)
 Macroeconomics: economic problems that affect the society as a whole (inflation)
 Business economics: economic behavior in a production organization
- Tangible assets/non-current assets = remain for a long period of time; machines and buildings
- Resources = commodities/nature (raw materials), machines/buildings or labor
- Capital = raw material and tangible assets used by company
- Formal nature: all rights and obligations written down on paper
- Enterprise produce goods/service without a profit target – company; seeks maximum profit
- Effectiveness = focus on production process: meeting target objectives and end product (sales)
- Efficiency = focus on producing a certain amount at minimal cost: cost-effectiveness (process)
- Maximizing a profit means maximum effectiveness and efficiency
 Sometimes want to maximize sales or see continuity as more important
- Mission statement = outlining their targets – environmental issues, job satisfaction, etc.

1.2 Profit and non-profit organizations
- Profit organization = focus on maximizing profit: companies
- Non-profit organizations
 Target to provide facilities, activities are linked to social objective
 Not economically independent, depend on gifts such as contributions/subsidies/inheritances
 Profit cannot be used as indicator of success of organization
- Non-profit organization can be either public or private
 Public: the State, provinces, municipalities and regional water authorities
 Private: amateur sports clubs, charitable organizations and fund-raising institutions
- Government provides mainly public goods and services, like infrastructure and safety
 Budget mechanism = compulsory contributions (tax)
 Privatizing = separating activities from government: e.g. public transport and mail delivery

1.3 Business activities
- Four sectors with each a different way of transforming resources into goods or services
1) Agriculture and mining
 Wealth of nature: turn small quantity of commodities into large quantity of end product
 Use of minerals such as gold or copper for example
2) Industry
 Create a physical, tangible product that did not exist before production
 Job production = each product tailored to customers’ requirements, sale before production
 Mass production = one type of product produced in large quantities, build-up of inventory
 Batch-job production process = produce a series of identical products
3) Trade
 No new products produced, solve imbalance between production and consumption
 Imbalance in scale, product range, time or location of production and consumption

,  Retail trade = final link in chain – supply to end user: consumer
 Wholesale trade = purchases from manufacturer and redistributes to retail trade
 Business-to-business
4) Services
 Provide service without manufacturing or redistributing a product
 Can be: financial services (banks), hospitals, transport, IT-services and facility services
 Almost no raw materials purchased from suppliers
 Tangible assets (buildings) and labor costs almost always very important

1.4 Legal forms of businesses
- Companies can be divided into two categories:
 With legal entity: considered as independent in legal agreements – nv, bv and cooperative
 No legal entity: agreements in the name of the owner – sole proprietorship or partnership
- Non-profit organizations can be foundation and association – both legal entities
1) Sole proprietorship
- The owner is also the management, company depends entirely on the entrepreneur
- Can be financed with own capital of owner (equity) or loans (liabilities)
- Often limited size due limited availability of equity
- Owner is liable for debts incurred by the company
- Owner pays income tax on profits made by sole proprietorship – income tax box 1
 In the Netherlands, the more you earn, the more tax you have to pay
- Accounting obligations = legal obligation to maintain administration
- Not obligated to disclose any financial information, no disclosure requirements
2) The partnership
- Two or more persons working together in business without a legal entity
 E.g. doctors, lawyers, accountants, etc.
- Joint partners control business – all own qualities and also own opinions
- Jointly and severally liable for debts: creditor can demand full payment from either partner
- Partnership is not acknowledged by the tax authorities: income tax based on each profit share
- Limited partnership = partial separation of ownership and control – way to attract extra capital
 General partners are both own and control – several liability
 Pay income tax on their share of the profit – income tax box 1
 Limited partners owners since they invested capital but no control
 Not liable with their private assets, for the debts of the business
 Pay income tax on their share of the profit, however no tax advantages
3) Joint-share companies
- Legal entity with limited liability, legal separation between ownership and control
- Equity of joint-share company is divided into shares
 Annual general meeting of shareholders is the highest authority
 Shareholders have limited liability – not obligated to compensate debts with private assets
 Shareholders pay income tax on their share of the profit
- Board of directors handles daily management
- could also be third party: Supervisory Board (SVB) – supervises the board of the directors
- Limited Liability Company (LLC): shareholder(s) involved in daily business
- Public limited Company (PLC): purpose of gathering large capital
- Corporate tax is charged on profit of both the LLC and PLC
 shareholders pay income tax on the dividend – therefor dividends paid will be taxed twice
- Dividend = net profit payed to shareholders, instead of added to the equity of the company
- LLC and PLC have both disclosure requirements: financial reports to office of Trade Register
4) Differences between LLC and PLC
- LCC: always registered shares, PLC could issue bearer shares; can easily change legal ownership
 Stock exchange listed companies are always PLCs

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