Wprowadzenie Do Zarządzania Finansami Przedsiębiorstw (Introduction to Entrepreneurial Financial Management)
Wroclaw University of Economics
September 26, 2011
Primary objective before the firm managers affects all economic parameters (and their interpretation) that describe both the contractor's business being evaluated as well as ours. The basic financial objective of company operation was defined differently and differently as a consequence of this, looked the picture of a company for players evaluating the company.
Among many areas of business management, one of the areas is management of its finances. This is a rather specific sphere of management of the resources of these inventories and flows generated by the company. Its performance decides whether success or failure is achieved. It is not enough, however, to manufacture and sell the products of which there is significant demand at a sufficiently high price. Bad financial management of company may destroy the benefits emerging from this fact. This raises immediately the first financial goal of the enterprise: do no harm. So the idea is to manage the assets and sources of business assets in a manner, which will not affect destructively the developed benefits in non-financial areas.
Doing-no-harm itself is not the primary financial objective of company management. To note it, just think about why people undertake any economic activity. They do this not just to protect them against not loosing available resources, because then it would be enough to hide the assets held in a safe place, or simply deposit them in the bank. The aim of the people doing business is a profit exceeding the minimum interest rate the bank. These benefits would not necessarily have only a monetary dimension.
How do I set this goal? For a long time, this objective was determined briefly: to maximize profit. It can be achieved by the positive impact of the business owner, seeking to increase sales revenue through appropriate policies to finance their customers by means of trade credit granted to them through the relevant impact on reducing the costs of company activities, through the influence on the price of products offered, etc. But, you have to realize that in most cases companies do not have any possibility of influencing the price of their products (an exception may be those companies that operate in market niches). It should also be taken into account the fact that so-defined objective (maximizing profits) creates certain risks. To achieve maximum high current benefit, it should be done as much as possible to reduce costs and increase revenues. Reducing costs can be achieved by reducing spending on advertising, research, development and training. Increasing revenue can be achieved by reducing or even sale of assets. The objective set as such creates a danger of lack of investment in important areas of business, although probably protects against mistakes of overinvestment.
Another well-known proposal of the company's purpose is 'operation continuity'. Such an approach to target is also unsatisfactory. The quest for the firm's survival at all costs, despite lack of benefits, it is not desirable. Similarly, it is difficult to imagine that a rational owner of the company operated just for the purpose of the continuity of company lasted, no matter how, but forever.
You can meet several other proposals for the company activities financial purpose, which in fact cannot be it. These include: the defeat of the competition, maximizing sales, maximizing market share, and maintaining a stable revenue growth. You can beat the competition by trying to accede to the devastating price war, or otherwise lead to win leading to self-destruction. The next two goals, maximizing sales and maximizing market share, are similar in nature. This can be done by proposing too low selling prices, or by the use of too liberal policies of trade credit. The effect of such a target may be set too high accounts receivable, many of which would be irrecoverable, and hence will have effect only on paper.
Essentially, all of the earlier proposals for the financial target of management of an enterprise can be divided into two groups. The first group of proposals emphasizes on reducing the risk of the business. The other relates to the increasing profitability. Both of these groups are considered separately, may consequently lead to improper financial management of enterprises. Indeed, they are somewhat contradictory. Maximization of profit is usually closely associated with an increased risk activity. Similarly, excessive attention to reducing the risk at all costs, eliminates the possibility of generating profits from the use of such financial tools as a lever.
The owner of the company, as already mentioned, is trying to achieve with his wealth invested in the company, more benefits than those, he would obtain by investing his resources elsewhere. This suggests to us the financial objective of business management from the perspective of owners: maximizing its benefits. Any action in the financial management of enterprises should be evaluated from this perspective. If an action increases the assets and/or non-material benefits of the owners – they should be undertaken if such action would destroy them – it should be abandoned.
The objective of financial management of the enterprise is to maximize its business value. There is probably no more true statement for the financiers, but one also needs to realize that it is very questionable to determine the target of the company actions. While, one can assume that there is relative agreement that maximizing the business value may be a target for big commercial companies, it is almost impossible to convince everyone that this objective can be set to any type of financial companies.
Most of the objections most often put forward is that most business owners primarily started the business on their own to achieve economic independence, not to have any boss above them, have more time for family and all the other reasons that may be important for the owners. This is often true. Therefore, the definition of the target we used was: to maximize the benefits (and not just property). The benefits of the owner consist of elements that both can easily be expressed in monetary form as well as those elements, which may try to be evaluated and expressed in the form of cash, only by the owner himself.
Value (price) of the company can be assessed from the point of view of its potential sellers and its potential buyer. Mentioning the value of the company for its owner, we will have in mind is, for what their owner would (or should be) willing to sell his business. Similarly, speaking of the value of the company (without additional definition for whom) we had in mind that, for what value he could be buying/selling of such a business. Potential buyer, especially if it is a big buyer, probably will not even pay attention to those elements of the company that are essential for the owner.
Value of the company to which the potential buyer mostly will pay attention to, usually is due to three main reasons:
- Current and future cash flows generated by the company,
- Cost of capital which finances small and medium-sized enterprise,
- Volatility of current and future cash flows and the likelihood of disturbance in regular repayment of liabilities and the resulting likelihood of bankruptcy.
Note: Downloadable document is in Polish.
Number of Pages in PDF File: 20
Keywords: corporate finance, liquidity management, value of the firm
JEL Classification: D92, G30, G31, G32, G33, G39working papers series
Date posted: September 28, 2011
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