Business Economics 3
CHAPTER 3: FINANCIAL STATEMENT
INVESTMENT & FINANCING
Running a company requires resources
Fixed Assets: tangible or intangible assets staying in the company > 1 year
Current Assets: in the company < 1 year; these assets need to be financed somehow there will be
time between moment of purchase and moments of cash flow; e.g. accounts receivable from
customers that received deliveries but did not pay yet
Financing can be obtained either by using equity or credit
Equity: capital made available by the owner(s) of the company; equity is available for an unlimited
period of time
Reward for providing equity is the profit generated owners decide if they want to receive a share of
the profit or retain the earning additional equity is made available
Liabilities: capital made available by creditors
Temporary financial resource prior agreement on repayment is made
BALANCE SHEET & INCOME STATEMENT
Balance sheet is made to compare the value of resources a company invested in (assets) and the financial
resources used to acquire these assets (liabilities)
Balance sheet 31-10-2012
Fixed assets Equity capital
E.g.: Buildings E.g.: Share capital
Computers etc Reserves
Current assets Long term liabilities
E.g.: Debtors E.g.: Mortgage
Inventories Short term liabilities
Cash E.g.: Creditors
Financial structure changes throughout the year through
Sales
Purchases
Loss of value of assets Depreciation
,PROFIT VERSUS CASH FLOW
Profit can be further analysed by taking a closer look at sales and costs over the period concerned Income
Statement
Sales: assigned to the period during which the company delivered and invoiced the goods/services,
regardless of whether the delivery resulted in payment
Costs: not automatically equal to cash outflows; e.g. depreciation
DIFFERENCE BETWEEN SALES/COSTS AND CASH INFLOWS/OUTFLOWS
There are specific items that create a difference between cash flow and profit:
Depreciation: investment should not be considered as a cost on the income statement for the entire
amount immediately, but should be spread for the economic lifespan
Provisions: considered in the event of future obligations;
Costs will be recognized on the income statement before any actual payment has taken place
e.g. Provisions of 20,000€ will be made on the credit side of the balance sheet equity & profit go
down; Provisions of 20,000€ will be recognized in the income statement if the 20,000€ will need to
be paid, payment will not result in costs reduction on cash will be equal to reduction of provision,
equity will not change
cash flow cannot be manipulated, profit however can be adjusted
Direct equity transactions: of the owner deposits or withdraws money, these owner deposits/owner
withdrawals have no influence on profit origin not related to business activities
CHAPTER 4: BUSINESS PLAN
PURPOSE OF THE BUSINESS PLAN
DRAWING UP A BUSINESS PLAN
Forces the creator to reflect if the ideas are realistic or not
Provides an overview of all the steps that need to be taken
, A business plan consists of several sub plans, however, in BE3 only the Financial Plan will be discussed
FINANCIAL PLAN
The Financial Plan consist of:
Investment Plan: overview with all required investments in resources: balance sheet opening
Financing Plan: How will the investments be financed?
Income Statement: forecast for the first year: sales estimates
Cash Flow Overview: forecast cash inflows and outflows
Balance Sheet: prognosis at the end of the first year (data derived from income statement & cash
Flow)
CHAPTER 6: WORKING CAPITAL MANAGEMENT
Working Capital = current assets
Net working capital = current assets – current liabilities
INVENTORY MANAGEMENT
Presence of inventory results in
Investments
Additional costs (financing, storage, insurance, decay,…)
Advantage of excessive inventory:
Obtaining discounts for bulk purchases
Saving on transportation costs
Less dependent on suppliers
Quick delivery to customers
It is important to find a balance between advantages and costs by choosing the optimum inventory size and
purchasing amounts. Efficient inventory management will lead to lowest sum of carrying costs and ordering
(set up) costs
Carrying costs: costs of carrying an inventory, depended on number of goods in inventory
Ordering costs: costs involved in purchasing goods or setting up machines, depended on. Number of
purchasing or production costs
Economic Order Quantity: At what order size are costs at a minimum?
EOQ=
√ 2∗D∗F
c
D … total purchasing costs
F … ordering costs per order
c … carrying costs per product per period
Suppose Blokker purchases 75,000 lunch boxes per year. The carrying costs are 0.30€ per lunch box per
year. The ordering costs are 5€ per order.
EOQ=
√ 2∗75,000∗5
0.30
= 1,581 lunch boxes Each time Blokker orders new lunch boxes, it will order
1,581. By doing so, the total or ordering and carrying costs will be at a minimum.
CHAPTER 3: FINANCIAL STATEMENT
INVESTMENT & FINANCING
Running a company requires resources
Fixed Assets: tangible or intangible assets staying in the company > 1 year
Current Assets: in the company < 1 year; these assets need to be financed somehow there will be
time between moment of purchase and moments of cash flow; e.g. accounts receivable from
customers that received deliveries but did not pay yet
Financing can be obtained either by using equity or credit
Equity: capital made available by the owner(s) of the company; equity is available for an unlimited
period of time
Reward for providing equity is the profit generated owners decide if they want to receive a share of
the profit or retain the earning additional equity is made available
Liabilities: capital made available by creditors
Temporary financial resource prior agreement on repayment is made
BALANCE SHEET & INCOME STATEMENT
Balance sheet is made to compare the value of resources a company invested in (assets) and the financial
resources used to acquire these assets (liabilities)
Balance sheet 31-10-2012
Fixed assets Equity capital
E.g.: Buildings E.g.: Share capital
Computers etc Reserves
Current assets Long term liabilities
E.g.: Debtors E.g.: Mortgage
Inventories Short term liabilities
Cash E.g.: Creditors
Financial structure changes throughout the year through
Sales
Purchases
Loss of value of assets Depreciation
,PROFIT VERSUS CASH FLOW
Profit can be further analysed by taking a closer look at sales and costs over the period concerned Income
Statement
Sales: assigned to the period during which the company delivered and invoiced the goods/services,
regardless of whether the delivery resulted in payment
Costs: not automatically equal to cash outflows; e.g. depreciation
DIFFERENCE BETWEEN SALES/COSTS AND CASH INFLOWS/OUTFLOWS
There are specific items that create a difference between cash flow and profit:
Depreciation: investment should not be considered as a cost on the income statement for the entire
amount immediately, but should be spread for the economic lifespan
Provisions: considered in the event of future obligations;
Costs will be recognized on the income statement before any actual payment has taken place
e.g. Provisions of 20,000€ will be made on the credit side of the balance sheet equity & profit go
down; Provisions of 20,000€ will be recognized in the income statement if the 20,000€ will need to
be paid, payment will not result in costs reduction on cash will be equal to reduction of provision,
equity will not change
cash flow cannot be manipulated, profit however can be adjusted
Direct equity transactions: of the owner deposits or withdraws money, these owner deposits/owner
withdrawals have no influence on profit origin not related to business activities
CHAPTER 4: BUSINESS PLAN
PURPOSE OF THE BUSINESS PLAN
DRAWING UP A BUSINESS PLAN
Forces the creator to reflect if the ideas are realistic or not
Provides an overview of all the steps that need to be taken
, A business plan consists of several sub plans, however, in BE3 only the Financial Plan will be discussed
FINANCIAL PLAN
The Financial Plan consist of:
Investment Plan: overview with all required investments in resources: balance sheet opening
Financing Plan: How will the investments be financed?
Income Statement: forecast for the first year: sales estimates
Cash Flow Overview: forecast cash inflows and outflows
Balance Sheet: prognosis at the end of the first year (data derived from income statement & cash
Flow)
CHAPTER 6: WORKING CAPITAL MANAGEMENT
Working Capital = current assets
Net working capital = current assets – current liabilities
INVENTORY MANAGEMENT
Presence of inventory results in
Investments
Additional costs (financing, storage, insurance, decay,…)
Advantage of excessive inventory:
Obtaining discounts for bulk purchases
Saving on transportation costs
Less dependent on suppliers
Quick delivery to customers
It is important to find a balance between advantages and costs by choosing the optimum inventory size and
purchasing amounts. Efficient inventory management will lead to lowest sum of carrying costs and ordering
(set up) costs
Carrying costs: costs of carrying an inventory, depended on number of goods in inventory
Ordering costs: costs involved in purchasing goods or setting up machines, depended on. Number of
purchasing or production costs
Economic Order Quantity: At what order size are costs at a minimum?
EOQ=
√ 2∗D∗F
c
D … total purchasing costs
F … ordering costs per order
c … carrying costs per product per period
Suppose Blokker purchases 75,000 lunch boxes per year. The carrying costs are 0.30€ per lunch box per
year. The ordering costs are 5€ per order.
EOQ=
√ 2∗75,000∗5
0.30
= 1,581 lunch boxes Each time Blokker orders new lunch boxes, it will order
1,581. By doing so, the total or ordering and carrying costs will be at a minimum.
