Basics of financial management
Chapter 1: business and their role in the economy
1.1 consumers and manufacturers
All goods and services need to be manufactured.
Economics is concerned with consumer-manufacturer and manufacturer-
manufacturer relationships. It is concerned with all issues relating to man’s
quest for ‘prosperity’: how can goods and services be offered as efficiently
as possible.
Micro-economics: seeks to analyse – among other things – market
forms. The essential factor is supply and demand.
Macro economics: concerned with the economic problems that affect
society as a whole.
Financial management: concerned with the economic activities within a
production organization.
Business: an economic unit that aims to sell goods and services to
customers at prices that will provide an adequate return to its owners.
(Production organizations that are specially geared towards generating
income in the marketplace.)
A production organization operates between two markets:
1. Production resources are acquired in the procurement market.
2. The manufactured goods are sold in the sales market.
Fixed/long-term assets: economic resources. Anything (tangible/non-
tangible) that is held to have positive economic value.
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 (effectiveness) and costs (efficiency).
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
Types of non-profit organizations:
public sector: concerned with providing public-sector goods and
services: facilities intended for the population as a whole Private
enterprises can not 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 organizations objective is to achieve certain socially
important objectives, the business objective is making profit.
Non-profit originations cannot usually exist by only conducting market
transactions and are consequently not economically dependent
Assessing the effectiveness of non-profit organizations is harder.
1.3 business activities
we can classify businesses according to the nature of the process of
converting assets into goods or services:
agriculture and mining companies: they typically use natural resources.
They use relatively few raw materials and produce larger quantities of
finished products.
Manufacturing businesses: they create physical, tangible products, which
did not exist in that form prior to the manufacturing process.
Job production: a customised product is produced. The product is made
to order, for one specific customer, with a customized design.
Mass production: one type of product is manufactured in large
quantities. It is made for stock, made for the market and a standardized
design.
Batch production: varieties or models of one standard product are
manufactured.
Chapter 1: business and their role in the economy
1.1 consumers and manufacturers
All goods and services need to be manufactured.
Economics is concerned with consumer-manufacturer and manufacturer-
manufacturer relationships. It is concerned with all issues relating to man’s
quest for ‘prosperity’: how can goods and services be offered as efficiently
as possible.
Micro-economics: seeks to analyse – among other things – market
forms. The essential factor is supply and demand.
Macro economics: concerned with the economic problems that affect
society as a whole.
Financial management: concerned with the economic activities within a
production organization.
Business: an economic unit that aims to sell goods and services to
customers at prices that will provide an adequate return to its owners.
(Production organizations that are specially geared towards generating
income in the marketplace.)
A production organization operates between two markets:
1. Production resources are acquired in the procurement market.
2. The manufactured goods are sold in the sales market.
Fixed/long-term assets: economic resources. Anything (tangible/non-
tangible) that is held to have positive economic value.
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 (effectiveness) and costs (efficiency).
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
Types of non-profit organizations:
public sector: concerned with providing public-sector goods and
services: facilities intended for the population as a whole Private
enterprises can not 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 organizations objective is to achieve certain socially
important objectives, the business objective is making profit.
Non-profit originations cannot usually exist by only conducting market
transactions and are consequently not economically dependent
Assessing the effectiveness of non-profit organizations is harder.
1.3 business activities
we can classify businesses according to the nature of the process of
converting assets into goods or services:
agriculture and mining companies: they typically use natural resources.
They use relatively few raw materials and produce larger quantities of
finished products.
Manufacturing businesses: they create physical, tangible products, which
did not exist in that form prior to the manufacturing process.
Job production: a customised product is produced. The product is made
to order, for one specific customer, with a customized design.
Mass production: one type of product is manufactured in large
quantities. It is made for stock, made for the market and a standardized
design.
Batch production: varieties or models of one standard product are
manufactured.
