Microeconomic and Organisational Context I Flashcards
Organisation Definition
It is a social arrangement for controlled performance of collective goals.
It is a group or institution arranged for efficient work.
Is is a process of structured activities to achieve objective
Why do we need organisations?
To share skills &knowledge, specialise and pool resources.
Synergy of a group allows to achieve more than individuals could on their own.
Profit-seeking organisations - goal and objectives
Profit-seeking Goal: maximize the wealth of their owners Objectives: to make a profit, to maintain growth and development, to continue existence (survival)
Not-for profit (NFP) / Non-profit organisations (NPO)
- don’t have financial objectives as primary one
- to satisfy need of their members or of particular sector of society
- museums, schools, councils, gov
- they still need to maintain their budget
Financial objective of NFP
For NFP financial matters are contraints under which they need to operate rather than they are their main objective
Mutual organisation definition
It is voluntary NFP, to raise funds by subscriptions/deposits of their members.
(building societies, co-operatives, trade unions)
it does not have shareholders
Public sector organisation definition
Part of the economy to provide basic government services, controlled by government
(police, military, public roads, healthcare)
Private sector organisation definition
- part of economy that is not controlled by government
- it may be profit-seeking or not-for-profit org
- businesses, charities, clubs
How to measure shareholder wealth?
By share prices
By dividends
*Managers make decisions to»_space; increase company value»_space; shareholder wealth
Define three main focus points to measure and increase shareholder value.
- Cash flows correlate more to shareholder value than making profit. (Cash is prefrable)
- Exceeding cost of capital - earings made above cost of capital leads to growth of business value.
- Short & long-term financial perspective- investors are more interested in long-term perspective
Why cash is more important to investors than making profit?
Profit = sales - expenses
Net cash flow = cash receipts - cash payments
If sales is made on credit than cash received is smaller than sales.
Dividends for investors are calculated based on cash received.
Profit and cash belongs to the shareholders whether or not thay are paid out as dividends.
Example - calculation of shareholder value
Debt $100 milion, interest rate 6% -> $6m
Equity $200 milion, return expected 15% -> $30m
Taxes 30%
Profit $36m
Income statement
- Profit made (before interest & tax) $36m
- -interest gives profit before tax $30m
- -tax 30% *30 =9m gives profit after tax $21m
Profit after interest and after tax is a profit available to investors.
Minimum profit required by investors is $30m, so company has made a profit but it is not enough to cover cost of capital and by this we can say that it have decreased shareholder value.
Identify two SHORT-TERM measures of financial performance
- Earnings per share
2. Return on capital employed (ROCE)
Define ROCE
- Short-term measure of financial performance
- Return on capital employed
- ROCE = (profit before interest & tax)/(average capital employed)*100%
Operating profit = profit before interest and before tax***
> how well business uses its capital to generate profit
it is easy to compare different companies using this measure
Weakness: it does not correlate with the goal of maximizing shareholder wealth.
Define RONA
- Short-term measure of financial performance
- Return on net assets
- RONA= (operating profit before interest and tax) / (total assets minus current liabilities) *100%