Basics of Financial Management
Part 1: Financial management in business
Summary
1 Business and their role in the economy
1.1 Consumers and manufacturers
Economics are people that study the relationship between consumers and companies
and these companies’ mutual interactions.
Microeconomics comprise among others the theory of markets: how the price
mechanism work in particular markets.
Macroeconomics look into economic problems that affect the society as a
whole.
Business economics are people who focus on economic behaviour in production
organizations. Production refers in this context refers to both the production of physical
goods and trade & services.
Companies are organization that focus on earning income for their owners;
they are in pursuit of profit.
Production organizations operate between: the supplier market and the retail markets.
Resources one uses are commodities/nature on one hand and machines, buildings etc.
on the other. The latter one are tangible or non-current assets; they remain inside the
company for a long period of time. Production organization is a combination of multiple
factors, two most important of which:
Labour
Capital which refers to the resources both tangible assets and raw materials.
Most organizations have a formal nature; all rights and obligations are written down.
Seeking maximum profit is what distinguishes companies from enterprises. The level of
profit depends on two things:
Efficiency the cost-effectiveness of the production process.
Effectiveness meeting the target objectives of the production process or the
level at which the end product meets the customer requirements.
To measure these two things profit is often used since it’s the difference between sales
(measure of effectiveness) and costs (measure of efficiency). Additionally:
o Priority can also be given regarding continuity; the unbroken and
consistent existence of a company.
o Companies often present a mission statement; a summary of the
organization’s objectives.
o For some companies maximizing sales can be more desired than
maximizing profit.
1.2 Profit and non-profit organizations
Non-profit organizations don’t focus on maximizing profit. A distinction between public
and private non-profit organizations can be made:
The public sector comprises the state, provinces, municipalities and regional
water authorities. They provide public good and services, since they cannot be
, provided by private enterprises due to failure of the market mechanism; some
things need to be bought collectively, hence the budget mechanism. The
government imposes tax to create budget for the production of public goods.
o Privatizing (changing a business from public to private control or
ownership) such public goods results into separation of government
and the market great examples of these things are: mail delivery or
public transport.
Private non-profit organizations are created to achieve a worthy social
objective; for example fund-raising or leisure creation. Non-profit organizations
differ from companies by the following aspects:
o They have a target to provide certain facilities and their activities are
connected to their social objectives.
o They depend on contributions, subsidies, and inheritances.
o Effectiveness can hardly be measured; validation by the people making
use of their services can be used as measurement.
1.3 Business activities
Companies in the agriculture and mining sector, have a relatively small quantity of
commodities, however assets are deemed very important; a lot of equipment is
necessary for the production of end products.
Companies in the industry sector create physical, tangible products that did not exist
before production. Two types of productions and combination of them are used:
Job production is customized production; products are tailored to the
consumers’ requirements.
Mass production; one type of product is produced in large quantities.
o Batch-job production; components are produced in large quantities,
however are put together by the consumer in question.
o Batch-mass production; a variety of models of a particular product are
produced.
The importance of the three resources (raw material, tangible assets and labour) depend
on which type of industry a company operates in.
Companies in the trade sector, do not produce new products. They derive from an
imbalance between production and consumption. They build an inventory which allowed
the consumer to buy something at any given time. Two types of trade can be seen:
Retail trade; the final link in the chain which supplies products directly to the
consumer.
Wholesale trade; the buyer from manufacturers that in the end redistributes it
amongst the retail trade.
Costs mainly consist of purchased merchandise and tangible assets. Labour costs can be
considerable, especially in retail trade, Due to the internet, it is now made possible for
wholesale traders to provide products directly through internet stores.
Companies in the service sector; provide a service without manufacturing products or
redistributing one. No raw materials are used. Both tangible assets and labour costs are
seen as very important.
Part 1: Financial management in business
Summary
1 Business and their role in the economy
1.1 Consumers and manufacturers
Economics are people that study the relationship between consumers and companies
and these companies’ mutual interactions.
Microeconomics comprise among others the theory of markets: how the price
mechanism work in particular markets.
Macroeconomics look into economic problems that affect the society as a
whole.
Business economics are people who focus on economic behaviour in production
organizations. Production refers in this context refers to both the production of physical
goods and trade & services.
Companies are organization that focus on earning income for their owners;
they are in pursuit of profit.
Production organizations operate between: the supplier market and the retail markets.
Resources one uses are commodities/nature on one hand and machines, buildings etc.
on the other. The latter one are tangible or non-current assets; they remain inside the
company for a long period of time. Production organization is a combination of multiple
factors, two most important of which:
Labour
Capital which refers to the resources both tangible assets and raw materials.
Most organizations have a formal nature; all rights and obligations are written down.
Seeking maximum profit is what distinguishes companies from enterprises. The level of
profit depends on two things:
Efficiency the cost-effectiveness of the production process.
Effectiveness meeting the target objectives of the production process or the
level at which the end product meets the customer requirements.
To measure these two things profit is often used since it’s the difference between sales
(measure of effectiveness) and costs (measure of efficiency). Additionally:
o Priority can also be given regarding continuity; the unbroken and
consistent existence of a company.
o Companies often present a mission statement; a summary of the
organization’s objectives.
o For some companies maximizing sales can be more desired than
maximizing profit.
1.2 Profit and non-profit organizations
Non-profit organizations don’t focus on maximizing profit. A distinction between public
and private non-profit organizations can be made:
The public sector comprises the state, provinces, municipalities and regional
water authorities. They provide public good and services, since they cannot be
, provided by private enterprises due to failure of the market mechanism; some
things need to be bought collectively, hence the budget mechanism. The
government imposes tax to create budget for the production of public goods.
o Privatizing (changing a business from public to private control or
ownership) such public goods results into separation of government
and the market great examples of these things are: mail delivery or
public transport.
Private non-profit organizations are created to achieve a worthy social
objective; for example fund-raising or leisure creation. Non-profit organizations
differ from companies by the following aspects:
o They have a target to provide certain facilities and their activities are
connected to their social objectives.
o They depend on contributions, subsidies, and inheritances.
o Effectiveness can hardly be measured; validation by the people making
use of their services can be used as measurement.
1.3 Business activities
Companies in the agriculture and mining sector, have a relatively small quantity of
commodities, however assets are deemed very important; a lot of equipment is
necessary for the production of end products.
Companies in the industry sector create physical, tangible products that did not exist
before production. Two types of productions and combination of them are used:
Job production is customized production; products are tailored to the
consumers’ requirements.
Mass production; one type of product is produced in large quantities.
o Batch-job production; components are produced in large quantities,
however are put together by the consumer in question.
o Batch-mass production; a variety of models of a particular product are
produced.
The importance of the three resources (raw material, tangible assets and labour) depend
on which type of industry a company operates in.
Companies in the trade sector, do not produce new products. They derive from an
imbalance between production and consumption. They build an inventory which allowed
the consumer to buy something at any given time. Two types of trade can be seen:
Retail trade; the final link in the chain which supplies products directly to the
consumer.
Wholesale trade; the buyer from manufacturers that in the end redistributes it
amongst the retail trade.
Costs mainly consist of purchased merchandise and tangible assets. Labour costs can be
considerable, especially in retail trade, Due to the internet, it is now made possible for
wholesale traders to provide products directly through internet stores.
Companies in the service sector; provide a service without manufacturing products or
redistributing one. No raw materials are used. Both tangible assets and labour costs are
seen as very important.
