FIN2603 Exam Study Notes 2021

The Financial goal of a firm. 1. Introduction. • Firms exist because they satisfy a need by providing a product or service. • Firms do not only meet the need for consumers but also the needs of other firms. • The emphasis on customers needs and on providing a quality product/service to meet the needs of customers is normally stated in the firms mission statement. • Mission statement - describes the fundamental purpose that sets a firm apart from other firms of its type and identifies the scope of its operations in product and market terms. • A mission statement is vital in providing focus and direction to the firms management in deciding how best to utilise the resources of the firm in the competitive environment in which it functions. • This environment contains 5 main forces: - Rivalry within the industry. - Bargaining power of suppliers. - Bargaining power of clients. - Threat of new entrants. - Threat of new technology. • Starting up and managing a firm successfully in a competitive environment requires a sustainable competitive advantage. This can be achieved by one of the 3 generic strategies: - Cost leadership - involves the sustainable mass production and marketing of standardised items at a cost below the competitors. - Differentiation - involves the supply of product/service that are unique, and which provide good value to customers. The product/service must be capable of offering high perceived value to buyers on a continuing basis, and competition must be able to imitate such differentiation. - Focus - involves concentrating on serving a narrowly defined market, called the niche market. Focus enables a relatively small firm to respond more rapidly to the customers needs of the customers than larger, diversified competitors. • A firms strategies need to be reflected in its marketing plan. 2. Forms of business organisation. • The size and nature of a firm will determine if it should be organised as a: - Sole Proprietorships - Proprietorship - Partnerships - Private or public company • Two types of companies: • Not all public companies are listed on the JSE. Chapter 1 Private Companies Public companies (proprietary) Limited - (Pty) Ltd Limited - Ltd One and 50 shareholders Minimum 7 shareholders At least one director Minimum of 2 directors Right to transfer shares is restricted, and public are not invited to subscribe to its shares Right to transfer shares is not restricted, and public may be invited to subscribe to its shares Financial statements need only be made available to shareholders and directors or people selected by them. Obliged to lodge a certified copy of its annual financial statements with Registrar of Companies. Must send members half-yearly interim reports and audited financial statements S - The Marketplace to Buy and Sell your Study Material Downloaded by: Nurse01 | Distribution of this document is illegal S - The Marketplace to Buy and Sell your Study Material 3. The financial goal of a firm. • Role of financial management is assessed form viewpoint of an investor in a firm. • Investors need to diversify their investments. • Diversification - means not placing all ones money in a single investment, but spending it over various investments. • The investor has a choice between various asset classes, the main ones: - Real estate (rent generating assets) - Shares (dividend generating assets) - Fixed-interest securities ( interest generating assets) - Cash • Investors want to achieve the highest possible return for the lowest possible risk. • Investors not only run risk of losing money but also the the opportunity cost when making an investment. • Investors and managements long-term financial goal should be to increase the value of firm, thereby increasing the wealth of owners. • Short-term financial goals should be: - Profitability: the firm’s ability to generate revenues that will exceed total costs by using the firm’s assets for productive purposes; may be achieved by marketing products/services to maintain a sufficient profit margin with the support of promotions at competitive prices directed to appropriate target markets through appropriate distribution channels. - Liquidity: is firms ability to satisfy its short-term obligations as they become due. - Solvency: the extent to which a firm’s assets exceed its liabilities; differs from liquidity in that liquidity pertains to the settlement of short-term liabilities, while solvency pertains to the excess of total assets over total liabilities.