INTRODUCTION

TO BUSINESS
Course 19405 – Bachelor´s in Management & Technology

Fernando Alfayate Fernandez

2022/2023
Tabla de contenido

1. INTRODUCTION ............................................................................................................. 3
1. GENERAL CONCEPTS: BUSINESS AND ENTREPRENEUR ................................................. 4
1.1 INTRODUCTION ...............................................................................................................................4
1.2 THE ENTERPRISE: CONCEPT AND MAIN ASPECTS ..............................................................................4
1.3 THE ENTREPRENEUR ........................................................................................................................5
1.3.1 THE STRATEGY .................................................................................................................................5
1.4 CLASSIFICATION AND TYPES OF ENTERPRISES .................................................................................6
1.5 BUSINESS OBJECTIVES .....................................................................................................................6
1.6 BUSINESS ENVIRONMENT .................................................................................................................6
1.6.1 SOLE PROPRIETORSHIP ....................................................................................................................6
1.6.2 PARTNERSHIP ..................................................................................................................................7
1.6.3 CORPORATION .................................................................................................................................7
1.6.4 SEPARATION OF OWNERSHIP AND CONTROL ....................................................................................7
1.6.5 COOPERATIVE ..................................................................................................................................8
1.7 OTHER FORMS OF BUSINESS OWNERSHIP ........................................................................................8

2. PRODUCTION ................................................................................................................. 9
2.1 THE PRODUCTION FUNCTION ...........................................................................................................9
2.1.1
CONCEPT AND OBJECTIVES (página 318 y 319 - fundamentos dirección de empresas) .........................9
2.2 TYPES OF PRODUCTION SYSTEMS (página 322 a 327 - fundamentos dirección de empresas) ...............9
2.2.1
RIGID SYSTEM OF PRODUCTION .......................................................................................................9
2.2.2
FLEXIBLE or INTERMITTENT SYSTEM OF PRODUCTION .................................................................... 10
2.2.3
JUST IN TIME PRODUCTION ........................................................................................................... 10
2.2.4
PLANT LAYOUT (página 329 a -) ..................................................................................................... 11
2.2.5
PRODUCTION SYSTEMS vs PLANT LAYOUT ...................................................................................... 12
2.3 PRODUCTION PLANNING AND CONTROL ......................................................................................... 12
2.3.1
DECISION MAKING ON THE PRODUCTION SYSTEM .......................................................................... 12
2.3.2
CONTROL OF EFFICIENCY ............................................................................................................... 12
2.3.3
PRODUCTIVITY............................................................................................................................... 13
2.3.4
COST ANALYSIS.............................................................................................................................. 13
2.3.5
MARGIN OF SAFETY ........................................................................................................................ 13
2.3.6 OPERATING LEVERAGE (OL) (APALANCAMIENTO OPERATIVO) (+Gross Margin => +Leverage =>
+Risk) 13
2.3.7 RELATIONSHIP BETWEEN BREAK-EVEN POINT AND OPERATING LEVERAGE...................................... 14
2.3.8 CONCLUSION ON OPERATING LEVERAGE (OL) ................................................................................. 14
2.4 APPENDIX ON PRODUCTION PLANNING AND CONTROL ................................................................... 14

3. FINANCE (FINANCIAL FUNCTION) ............................................................................... 15

3.1 INTRODUCTION. ECONOMIC & FINANCIAL STRUCTURE ................................................................... 15
3.2 INVESTMENT DECISIONS ................................................................................................................ 16
3.2.1 FINANCIAL MATHEMATICS .............................................................................................................. 16
3.2.2 CASH FLOW / INVESTMENT VARIABLES ........................................................................................... 16
3.2.3 PAYBACK ........................................................................................................................................ 16
3.2.4 NET PRESENT VALUE ...................................................................................................................... 16
3.2.5 INTERNAL RATE OF RETURN ........................................................................................................... 17
3.2.6 NPV vs IRR ..................................................................................................................................... 17
3.3 THE FINANCIAL STRUCTURE ........................................................................................................... 17
3.3.1 INTERNAL EQUITY: SELF FINANCING .............................................................................................. 18
3.3.2 EXTERNAL EQUITY: EQUITY CAPITAL & SHARES .............................................................................. 18
3.3.3 EXTERNAL EQUITY: EQUITY CAPITAL & SHARES .............................................................................. 18
3.3.4 LONG-TERM EXTERNAL RESOURCES ................................................................................................ 18
3.3.5 SHORT-TERM EXTERNAL RESOURCES .............................................................................................. 19
3.3.6 FINANCIAL STRUCTURE AND ITS COST ........................................................................................... 19
3.4 ANALYSIS OF RETURN (ROA & ROE) AND FINANCIAL LEVERAGE ...................................................... 19
3.4.1 PERFORMANCE ANALYSIS & LEVERAGE ANALYSIS ........................................................................... 19
3.4.2 TERMINOLOGY & FORMULAS .......................................................................................................... 19
3.4.3 ACCONTING INDICATORS ............................................................................................................... 20
3.4.4 RELATIONSHIP BETWEEN ROA & ROE ............................................................................................. 20
3.5 ANNEX – FINANCIAL STATEMENTS .................................................................................................. 20
3.5.1 UNTANGLING THE COST OF ASSETS................................................................................................ 20
3.5.2 RELATION WITH FINANCIAL STATEMENTS ...................................................................................... 21
3.5.3 BALANCE STATEMENT – ASSETS ..................................................................................................... 21
3.5.4 BALANCE STATEMENT – LIABILITIES ............................................................................................... 22
3.5.5 BALANCE STATEMENT – EQUITY ..................................................................................................... 22
3.5.6 PROFIT & LOSS ACCOUNTS ............................................................................................................. 22
1. INTRODUCTION
Lectures
Theory and concepts. Published in Aula Global after the class finishes. Read corresponding bibliography before class
takes place. (highly recommended)
Practice classes
Exercises, cases, mid-term exams; prepare and submit them before the corresponding class, indicated in Aula Global.
Exams
Mid-term tests and exams. There are 2 mid-term tests and 1 final exam.
Assesment
Final exam = 60%. Compulsory exam and achieve a minimum of 4 points over 10 to pass the course.
Continuous evaluation = 40%
- Activities = 20%
- 2 assessments = 20% (10% each)

Attendance

It is not compulsory to not come, but highly recommended. If not presented when case presentations and mid-term
tests, the points for each task are lost.

Bibliography

BJ Erasmus, JW Strydom, S Rudansky-Kloppers Introduction to Business Management., Cape Town: Oxford, 2013

Iborra, M., Dasí, A., Dolz, C., & Ferrer, C. Fundamentos de dirección de empresas, Conceptos y habilidades directivas
(2ª edición). Paraninfo, 2014

Maynar, P. La economía de la empresa en el espacio de educación superior, McGraw Hill. 2013

Schoell, W.F., Dessler, G., & Reinecke,J.A. Introduction to Business (7th Edition) Allyn and Bacon, 1993
-------------------
1. GENERAL CONCEPTS: BUSINESS AND ENTREPRENEUR
Organization: set to reach a specific goal; there is a necessity of resources (goods, human, financial); they operate
following procedures and rules. Organizations are usually companies without a profit objective. Organizations with a
profit are known as enterprises/companies. Profit is the main reason for an enterprise.
Therefore: all enterprises are organizations but nQot all organizations are enterprises.

1.1 INTRODUCTION
Basic definition of enterprise: entity that provides the consumer with goods and services that meet their needs.
Complex definition: entity that through the organization of human, physical, technical, and financial elements, provides
goods and services in exchange of a price, which allows it to replenish the resources used and achieve goals.

1.2 THE ENTERPRISE: CONCEPT AND MAIN ASPECTS

Enterprises are also understood as technical-economic units because they transform inputs, with the use of certain
technologies, into a series of economically valued outputs.
Technical unit: inputs → outputs. Investment in machinery and tools
Economic unit: there is a value creation necessity. Companies search the way in which the transformation
process is more valuable (this is, that the economic value of products of services) than the cost of the inputs.
Sociopolitical unit: a company is also a combination of people with different interests and objectives. Sometimes,
these interests may clash each other, and so the company must be there to conciliate.
Decision unit: a company must also have a decision unit that oversees setting the objectives and defining the
strategies to achieve them.
Resources. There are three basic resources that must be present in every company.

 Tangible resources: elements that can be physically located. They include:

o Human elements: they make the value of an enterprise. It will always be necessary, and it can range from
one person who assumes all tasks, to thousands of people
o Physical elements: including physical assets such as locations, storage units, technological devices…
o Financial elements: money is essential for the development of a company. It is needed from the very
beginning (investment) throughout all the enterprise´s course.

 Intangible resources: many times, they can even be better valued than tangible resources. This is the case
of the brand, corporate image, its value…These can be the key factor for a consumer to decide buying a certain
product or another. There are also three types:
o Relational elements: these constitute the value of the enterprise external relations.
o Human elements: the whole of knowledge and abilities that the people inside the company have and can
provide the company new methods, ideas, and a positive environment.
o Structural elements: these refer to procedures, databases…

 Organizational resources: organization implies that each element has an assigned purpose and that there is
coordination with every other element. All these elements can be classified as active and/or passive, which is
not related to assets/liabilities.
o The human element would constitute the only active type. The rest of resources would be passive
elements because they are the resources of which the human can make use of.
Main areas: a company has a main goal, which is to obtain monetary profit. But, in order to achieve it, it is made of
different functions, here are four main of them:

 Supplying area: (función de compra o aprovisionamiento) the company needs raw materials and semi
elaborate products (inputs) that can be transformed into goods and services (outputs) that satisfy necessities.

 Production area: (función de producción) through which the company transforms those inputs into outputs.
 Distribution area: (función comercial) as its main goal, this function must carry the product or good to a place
where it is accessible for the customer.
  Investigation and development area: (función de investigación y desarrollo) this function allows companies
to improve the quality of their products, as well as being more efficient, economically, and technically.
 Finance area: (función financiera) oversees performing functions that lead to liquidity, profitability, and
management of assets.
All these functions are controlled and managed by a higher one, which is the Management function. Management can
be defined as the rationalization and systematization of practices that lead to better business performance.

 Creation of value: accounted by the added value. Added Value is the difference between monetary value of
enterprise production (outputs) and the monetary value of all goods and services acquired to other productive
units (inputs).
o Added Value is not a financial approach, it is a mix of circumstances in which you acquire the
product/service. Class example of Coca-Cola. In the end, Added Value is a set of factors added to the
financial cost of the product itself.

 Generation of income: enterprises and domestic economies (households) interact with goods and services
markets, and the factors of production markets, creating a continuous process that generates a Circular Flow
of Income.
o Production factor´s market: buy and sell production factors (land, work, capital - inputs)
o Goods and services factor´s market: buy and sell goods and services (outputs)
Regarding the Circular Flow of Income, in the economic system we distinguish between two types of flows. Real flows
and Financial flows. Real flows are goods, services, and factors, while Financial flows are monetary compensations.

Company ownership: assumed by the person or persons who have the ownership title. Entrepreneurs are the owners
involved into business management. They can work or not in the company. Managers are hired to do the function of
management. They are the ones with the skills to take decisions and manage the work of others.

MANAGEMENT. Rationalizing and systematizing of businesses practices with an aim which is usually measurable.

 Managerial roles.
 Organization and coordination of the whole transformation process done by the enterprise.
 Efficient use of resources.
 Maintain relationships with external, internal, and collateral agents related to the enterprise.

1.3 THE ENTREPRENEUR

An entrepreneur, is the person who person who leads, coordinates, manages, and controls the business process. Many
authors have underlined that creativity is the most important aspect of an entrepreneur, which is what drives innovation.
His success is embodied in the materialization of ideas.
=> Owner (capital) is not Entrepreneur (operation) => Entrepreneur (innovator) is not Manager (worker)

1.3.1 THE STRATEGY

Mission => what do we do? // who we are? ----- Vision => what do we aim to be? // where do we want to go? The
strategy takes us from Mission to Vision. A strategy is an action plan aimed to reach the vision and fulfill the mission.

 Efficacy: reach defined targets

 Efficiency: productivity or yield. Reach defined targets or goals with minimum consumption of resources and
maximum production.
Identify and analyze factors to reach the target => use the SWOT (DAFO) diagram => implement new strategies =>
optimize resources and processes.

 Internal: Strengths and Weaknesses. External: Opportunities and Threats.

1.4 CLASSIFICATION AND TYPES OF ENTERPRISES
ECONOMIC CRITERIA LEGAL CRITERIA

Sector Geographical Main forms of business ownerships

Size Ownership of
area the production
factors
Primary, Big: + 250 Sole Partnership Corporation Others
secondary or proprietorship
Medium: 50 - 250
tertiary Local, regional,
Small: 10 - 50 Private
national or
Micro: -10 international General partnership Cooperative
Associations
Mix
Limited liability partnership
Joint Ventures
State
owned
Mutual
companies

1.5 BUSINESS OBJECTIVES

The main aim of a business is to succeed, but it needs to be subdivided in a secondary list of business principles that
refer to certain goals:

 Obtain profit
 Financial stability
 Saving capacity
 Product/Service quality

1.6 BUSINESS ENVIRONMENT

Everything that is external to the company is environment. There are factors that are not under the control of the firm
and affect the business. Success requires two things: adaptation to the environment and changes through strategy.
Generic Environment  Specific/Industrial Environment

PESTLE FACTORS PORTER´S 5 FORCES - Bargaining power of suppliers

- Political - Rivalry within industry - Threat of substitutes
- Economical - Relationship with customers - Bargaining power of buyers
- Social - Relationship with suppliers - Threat of new entrants
- Technological - Substitutes - Rivalry among actual firms.
- Legal - Barriers of entry
- Environmental - Barriers of exit

1.6.1 SOLE PROPRIETORSHIP

 Business owned by one person, who assumes all the risks, taking decisions and looking for business opportunities.
Therefore, that person owns all the rights.

Advantages Disadvantages

Simple to start Unlimited financial liability

Proprietor owns all profits Hard to raise funds

Personal satisfaction No sharing of the business

Sole decision maker Impermanence

Easy to dissolve
1.6.2 PARTNERSHIP
 Association of two or more people to carry on as co-owners of a business for profit. People form a partnership by
entering into an agreement.
o A partnership agreement is a written contract between the owners of a partnership that identifies the business
and states the partner´s rights and duties.

Advantages Disadvantages

Limited and joint responsibility Frozen investment (no evolution)

Pooling of funds Profit sharing

More chance to specialize and expand Potential for personal disagreements

Property rights can be traded Relative impermanence

Easy to dissolve

o Control bodies
▪ General Shareholder´s Meeting
▪ Board of Directors
▪ Chief Executive Officer (General Manager)

1.6.3 CORPORATION
 Legally chartered organization that is a separate and legal entity apart from its owners. It is a legal person and
according to that it has most of the rights and responsibilities that a person has.

Advantages Disadvantages

Separate legal entity (shareholders are owners) Special and double taxation

Limited financial liability of owners Complex and costly to form and dissolve

Permanence Government regulation and public disclosure requirements

Easy transfer of ownership

Greater financial capability

1.6.4 SEPARATION OF OWNERSHIP AND CONTROL

There is a problem of separation of ownership – control. In large corporations, the Board of Directors guides the affairs
of the business. Problem description:

 Companies are managed by Directors, who are employees and take decisions and assume risks.
 Directors may take decisions in their interest, disregarding their effect on shareholders.
 Shareholders do not control Directors´ way of acting day by day.
 Shareholders and directors have different access to information and different objectives.
In few words, the Board of Directors looks for its own benefit => starting an interest conflict among ownership and
control, which finally becomes an Agency problem. What is the solution?
Shareholders are able to control the Director´s way of acting in order to avoid they looking for their own benefit, through
a variety of mechanisms:

 Selection of the Board of Directors

 Contracts signed with Directors (goal linked)
 Request of Audits
 Indicators as an additional mechanism
Moreover, as a shareholder owns more and more shares, the capacity of decision will also be higher.

1.6.5 COOPERATIVE
Incorporated organization whose user-members (owners) get back any revenue left after expenses are paid. Principles:

 Membership is open
 Owned and democratically owned by its members
 Economic benefits are distributed proportionally according to each member´s participation level in the
cooperative.
 Based on the values of self-help, self-responsibility, democracy, and equality.
 Cooperative members believe in the ethical values of honesty, openness, social responsibility and caring for
others.
A clear example is Employee Credit Unions. These accept savings deposits from members who own shares in the
cooperative. Other members can borrow from those financial institutions. Savers receive interest, and borrowers pay
interests.

1.7 OTHER FORMS OF BUSINESS OWNERSHIP

A limited partnership is a business in which one or more of the partners are liable for the firm´s debts only to the extent
of their investment.
A joint venture is a special type of partnership set up by individuals or firms to accomplish a specific task or project. It
is very important and usual in international business.
A mutual company is a corporation that issues no stocks and is owned by its policyholders/depositors and whose
revenue is distributed among the owners in the form of dividends. Many insurance companies are mutual companies.
2. PRODUCTION
2.1 THE PRODUCTION FUNCTION
2.1.1 CONCEPT AND OBJECTIVES (página 318 y 319 - fundamentos dirección de empresas)
CONCEPT
The aim of the production function is to create goods and services that have an added value for the client. Simplifying
it, transforming inputs into outputs.
Its main objective is to obtain goods or services to sell in the market, through the transformation of a series of resources
(materials, machinery, energy, capital…)
Production management: set of activities aimed to plan (when and how much), design (, staff (people involved) and
control (evaluation) a firm´s production system.

OBJECTIVES
Flexibility --- Cost --- Quality --- Delivery time
Constant discussion on how these objectives clash. The aim is to find an equilibrium to balance them.

 Cost. Minimization of costs means to lower the economic value of all consumed production factors. In the end,
lower costs allow the business to fix lower prices and then achieve a higher market share.

 Quality. Allows to fix a higher price, which in the end, also allows for a higher market share. Internal or External
 Time of delivery

 Flexibility. Capability of producing new products or time to change to a new product, volume, and use of
resources. Capability of rapid responses and anticipate uncertain events.

2.2 TYPES OF PRODUCTION SYSTEMS (página 322 a 327 - fundamentos dirección de empresas)
Strategic decisions: What? How? How much? Where? There is a need of choosing the most adequate process for
the transformation of inputs into outputs, and the process must be efficient, as well as count with certain quality.
Before businesses used to be vertically integrated (they completed almost every phase of the productive process).
Recently, businesses chose specialization, subcontracting secondary or less added-value activities.
Subcontracting allows for more flexibility. However, vertical integration also has advantages: business makes sure of
getting adequate inputs without depending on suppliers and allows for a reduction in the final production costs.

 Project: customized products developed to according to customer´s specifications. e.g.: airports, stadiums
 Craft: made by hand or with the help or specific tools. e.g.: artisans

 Batch: low volume and high variety; more uniform than craft. e.g.: fast fashion; bimbo

 Mass: high volume and low variety

 Continuous: highest volume and no product differentiation. Machines and automatized processes.

2.2.1 RIGID SYSTEM OF PRODUCTION

The most important factors of this system are an increasing demand and high stock levels (understanding stocks as
materials). It is aimed towards mass production and continuous production.
  Characteristics:
o Big production volumes; standardized products.
o Capital intensive; specialized machines
o Low price commercialization
o Labor intensive; but low qualified.
▪ High standardization and specialization
o High fix costs and low variable ones.

 Based on Assembly line: job specialization

Machines are the most important aspect, which always perform the same tasks. There is less time from task to
task, there is always a product entering the assembly line while another is being finished.
For the workers, it means less time to lear tasks, which are simpler. This results in easy acquisition of expertise
and better adequacy worker-job position. There is also an easy replacement of workers.

 Organization of the factory

o Division of labour creates different job positions
o The assignment criteria is Seniority
o These two factors lead to the bureaucratization of the company.
2.2.2 FLEXIBLE or INTERMITTENT SYSTEM OF PRODUCTION
The most important factors of this system are variability and low volume productions. It is aimed towards craft
production and batch production.

 Characteristics:
o Low volume production and high variability of products
o Differentiated products
o Low mechanization
o Medium to low fixed costs and high variable costs
This system is also based on High qualified workers and Equipment for general use.

 Organization of the factory

o Plant layout based in teamwork
o More responsibility for workers
o Less hierarchy
o Employee rotation
o Remuneration depends on qualification

2.2.3 JUST IN TIME PRODUCTION

This process rose from the need of manufacturing many types of automobiles in small batches, but under the same
production process in Toyota. It was revolutionary because it focused on the client´s real demand rather than predicting.
It was demand which pushed offer, not sideways. Therefore, JIT system begins in the client.
It is based in requests by demand and eliminates inventories/stocks.

 Characteristics:
o Efficiency and flexibility
o Manufacturing of high-quality products
o Reduce the whole production cycle
o Assure short delivery time
o Important role played by suppliers.

 Organization of the factory

o Internal organization => Job cells
o Layout => U shape
o Mechanisms to support quality => Jidoka and Poka yoke
 Mechanisms of visual control. These include Andon, Control panels, Worksheets and Kanban.

 Context: markets of low growth.

It is also based on the 5 zeros idea, which mark 5 objectives to accomplish:
1. 0 defects: eliminate economic wastes and incorporate a complete quality system management.
2. 0 faults: faults in the product involve lost time and unnecessary costs.
3. 0 paper: understanding paper as bureaucracy. Transmit the most information with the least bureaucracy.
4. 0 stocks: businesses may prefer coping with stocks costs before coping with a stock breakage. A JIT system
reduces stock levels to the minimum.
5. 0 deadlines: understanding this as cero delays, which means to shorten the time period between a client´s
demand and the moment it is satisfied.
2.2.4 PLANT LAYOUT (página 329 a -)
Functional or process layout. Fabricación de lotes de pequeño volumen de productos, pero de una variedad elevada.
Las máquinas, herramientas y personas se agrupan en Centros de Trabajo CT.

ADVANTAGES DISADVANTAGES

High use of machines Distance between functions

Machines can be easily replaced Handling wastes when transporting materials

If similar machines are close, operators can train and Flow of materials and operator´s work is difficult to
supervise themselves standardize and plan

Specific incentive system for each worker Activities are difficult to plan

Lines are not balanced, some are saturated and other

free of capacity.

Product layout

ADVANTAGES DISADVANTAGES

Few workloads in process Distance between functions

Requires less space for transport and for the temporal Handling wastes when transporting materials
storage of products

If similar machines are close, operators can train and Flow of materials and operator´s work is difficult to
 supervise themselves standardize and plan

Specific incentive system for each worker Activities are difficult to plan

Lines are not balanced, some are saturated and other

free of capacity.

Fixed layout
A plant layout in which the product stays in one place and the machinery, materials and labor are brought to that one
place. It is a appropriate when products are too large or heavy to move. It is the example of ships or airplanes, which
are normally not produced on an assembly line.
Some disadvantages include Space. The working area must be extense and requires for many people at the same time
working. Administration. Oftentimes, administrative burden is higher for fixed-position layouts.

2.2.5 PRODUCTION SYSTEMS vs PLANT LAYOUT

Project Individualized products: high cost, qualified workers, equipment for general use, difficult planning,
and control.
Plant layout: fixed.

Craft Low quantity of a great variety of products:

- Craft: more adaptability: les quantity
Batches - Batches: more uniformity, more quantity
Plant layout: functional.

Mass Standard products for mass markets; division of labor:

- Mass: more dependent on workers than machines
Continuous - Continuous: more dependent on machines than workers
Plant layout: product.

2.3 PRODUCTION PLANNING AND CONTROL

Production planning: determination of the products that are going to be produced, where, when and how.
Production control: effort to ensure that production plans or schedules are met. Usually, there are deviations.

2.3.1 DECISION MAKING ON THE PRODUCTION SYSTEM

STRATEGIC – LONG TERM OPERATIVE – SHORT TERM

Product design and Production process choice. Production process Planning and Control.

Localization – impact on competitiveness Control of efficiency

Capacity of production – impact on feasibility Control of quality

Layout of production – determines operative decisions Control of stocks

All the strategic decisions taken have an impact on the whole competitiveness of the company, an impact on the
feasibility, and help to determine the operative decisions.
2.3.2 CONTROL OF EFFICIENCY
Efficiency  Efficacy. Efficiency = level of goals achievement related to costs
(the lower the costs to achieve goals, the more efficient the system is).
Efficacy = level of goals achievement (the closer to the goals, the more
effective the system is).
Efficiency Indexes (KPIs)
A posteriori: productivity
A priori: cost analysis

2.3.3 PRODUCTIVITY
𝐺𝑜𝑜𝑑𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 (𝑢𝑛𝑖𝑡𝑠)
𝑆𝑖𝑚𝑝𝑙𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐿𝑎𝑏𝑜𝑢𝑡 (𝑜𝑛𝑒 𝑓𝑎𝑐𝑡𝑜𝑟 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑)
𝐺𝑜𝑜𝑑𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 (𝑢𝑛𝑖𝑡𝑠) ∗ 𝑝𝑟𝑖𝑐𝑒
𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝐿𝑎𝑏𝑜𝑢𝑟 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑅𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 𝑒𝑛𝑒𝑟𝑔𝑦 (𝑎𝑙𝑙 𝑓𝑎𝑐𝑡𝑜𝑟𝑠)

2.3.4 COST ANALYSIS

BREAK-EVEN POINT ANALYISIS
The volume of sales/production at which the
business covers total costs. This is also the
moment from which the company begins to
get profits. The equation is:
𝑄 = (𝑃 ∗ 𝑄) − 𝐹𝑐 + (𝑉𝐶𝑢 ∗ 𝑄)
𝐹𝐶 𝐹𝐶
𝑄 = (𝑃𝑢−𝑉𝐶𝑢) = 𝑚

𝑃𝑟𝑜𝑓𝑖𝑡 = (𝑄 − 𝑄 ∗ )𝑚
Q = units; P = price; Fc = Fixed Costs; VCu =
Variable Unitary Cost
Variable cost negotiation is usually done
towards volume (if units produced increase,
variable costs per unit will probably decrease)
ejemplo producción de cosméticos => el exterior del producto cuesta más que el interior, por lo que se pone un límite
a la producción para que no se disparen los costes variables

2.3.5 MARGIN OF SAFETY

It represents the strength of a business, as it enables us to know what the exact amount is it has gained or lost over or
below Break-Even Point.
Q = real production
Q*= Break-Even Production
m = Gross Margin (margen bruto) // 𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 = (𝑃𝑟𝑖𝑐𝑒 − 𝑉𝐶𝑢) ∗ 𝑄

2.3.6 OPERATING LEVERAGE (OL) (APALANCAMIENTO OPERATIVO) (+Gross Margin => +Leverage => +Risk)
Strategy that businesses use through debt or through fixed costs, as a lever to make profits increase. It consists in
reducing variable costs and increasing fixed so that an increment in production produces more profit.
𝐹𝑖𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 𝑄(𝑃 − 𝑉𝑐) 𝑄∗𝑚 𝑄∗𝑚
𝑂𝑝. 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 (𝑂𝐿) = = = =
𝐹𝑖𝑛𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑄(𝑃 − 𝑉𝑐) − 𝐹𝑐 𝑄 ∗ 𝑚 − 𝐹𝐶 𝑃𝑟𝑜𝑓𝑖𝑡
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Interpretation: for example, if OL = 3, an increase on the sales of 1% makes the profits to

increase by a 3%. A decrease on the sales in a 10% generates a decrease of profits by a 30%.

 Income sensitivity. OL captures a change in the operating income for a given change in sales (revenue).

 Economic risk index (operating risk).

 Compare businesses in the same sector.

 Ceteris Paribus effect; higher Fixed Costs means higher Operating Leverage, usually.
A high operating leverage might be positive when economic situation is positive as well. However, if a business depends
too much on Fixed Costs, there is a risk. Take the example of a big investment in machinery, and a recession comes
just after this. Sales will probably crash and also revenue. But, I have to pay Fixed Costs anyway.
On the other hand, if I depend more on Variable Costs, if sales collapse, there will be no more debts to pay apart from
those variable costs.
Operating Leverage also measures the relative variation of Revenue with respect to the relative unitary variation of
sales volume. Less leverage occurs when the produced quantity is higher with respect to the Break-Even point, and
when the produced quantity is nearer to the Break-Even, the company is more leveraged.
Ejercicio tipo examen en español:
Si el Apalancamiento Operativo (AO) = 2 y las ventas aumentan un 50%; el beneficio de
explotación aumentará un 2 × 50% = 100%. Si las ventas caen un 40%, el beneficio de
explotación se reducirá en un 2 × -40% = -80%

2.3.7 RELATIONSHIP BETWEEN BREAK-EVEN POINT AND OPERATING LEVERAGE

Profits

 If Q > Q* then OL > 1 ------------ More than proportional

Losses

 If Q < Q* then OL <= 0 ------------- Amplifier effect or more than proportional

o OL < -1
 Less than proportional effect -------------- (-1) < OL < 0
2.3.8 CONCLUSION ON OPERATING LEVERAGE (OL)
As variable costs decrease and they turn into fixed costs, against an increase on sales: the relative increase on profits
increases, or fixed costs are acting as a lever point which allows for benefits to increase aswell.
Moreover, an increment on fixed costs at the expense of variable, Breakeven point also rises, which means that the
business is riskier to result in loses (only if the business does not achieve to boost sales).

2.4 APPENDIX ON PRODUCTION PLANNING AND CONTROL

𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑈𝑛𝑖𝑡𝑎𝑟𝑦 𝐶𝑜𝑠𝑡 = 𝑉𝐶𝑢 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠 = 𝑉𝐶
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡𝑠 = 𝑇𝐶
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑉𝑜𝑙𝑢𝑚𝑒 =𝑄 𝑉𝐶 = 𝑉𝐶𝑢 ∗ 𝑄
𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶 = 𝐹𝐶 + 𝑉𝐶𝑢 ∗ 𝑄
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 = 𝐹𝐶

𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑎𝑟𝑦 𝐶𝑜𝑠𝑡 = 𝑇𝐶𝑢

𝐹𝐶
𝑇𝐶𝑢 = 𝐹𝐶𝑢 + 𝑉𝐶𝑢 = + 𝑉𝐶𝑢
𝑄

𝑈𝑛𝑖𝑡𝑎𝑟𝑦 𝑃𝑟𝑖𝑐𝑒 = 𝑃𝑢 𝑆𝑎𝑙𝑒𝑠 = 𝑆 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑅

𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑉𝑜𝑙𝑢𝑚𝑒 = 𝑄 𝑆 = 𝑃𝑢 ∗ 𝑄 𝑅 = 𝑆 − 𝑇𝐶

𝑅 = (𝑃𝑢 ∗ 𝑄) − (𝐹𝐶 + 𝑉𝐶𝑢 ∗ 𝑄) = (𝑃𝑢 − 𝑉𝐶𝑢) ∗ 𝑄 − 𝐹𝐶

3. FINANCE (FINANCIAL FUNCTION)
3.1 INTRODUCTION. ECONOMIC & FINANCIAL STRUCTURE
Finance area of a company refers to the collection and management of the funds (capital) used by the company. The
finance manager faces two important types of decisions: investing decisions and financing decisions.
Regarding investing: what to invest in? when to invest in? Regarding financing: how to get the money we need?
Therefore, decisions focus on:

 Investing decisions
o Allocation of capital in projects with expected return
o Projects with added value for company

 Financing decisions
o Choice of equity or debt
▪ Internal equity (self-financing: retained earnings)
▪ External equity
▪ Debt
o Financial decisions involve
▪ Selection of capital structure
▪ Decisions about dividends

• Dividends is the amount of money that BD decides to pay to shareholders.

Economic structure. Defined by the investments carried out bu the company. It represents the use of financial
resources in terms of assets and rights. What is owned.
Financial structure. Defined by the financing sources. Includes all financial resources used to carry out the
investments. What is owed.

Working capital (Fondo de maniobra): part of current assets not financed with current liabilities but with non-current
assets or equity. It measures the liquidity of an enterprise, its capacity to afront debts on the short term.
We calculate it using two formulas:
𝐹𝑀 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 [𝑪𝒂 − 𝑪𝒍]
= (𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑁𝑜𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠) − 𝑁𝑜𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 [(𝑬 + 𝑵𝑪𝒍) − 𝑵𝑪𝒂].
The higher the Working Capital, the better for the company as it can support its debt payment. If WC > 0 => Financial
Equilibrium (enterprise can pay without problems its short-term debts). If WC < 0 => Financial disequilibrium (short-
term debts exceed enterprise´s liquidity)
3.2 INVESTMENT DECISIONS
Where can the company invest its money? Any investment project should generate enough profitability to cope, at least,
with the remuneration of all the resources used by the company (WACC).
The company must evaluate potential investment opportunities. There are factors to consider:

• Interest rate => cost of money

o Interest Rate = Risk-free rate (Euribor) + Inflation + Risk Premium

• Cash flows => income expected; comes from cash inflows and outflows (EBIT)

• Time value of money => money loses value over time

• Risk

3.2.1 FINANCIAL MATHEMATICS

CAPITALIZATION DISCOUNTING

Capitalize means the equivalent in the future of an amount Discount means bring up to date. Discounting means
invested now. Future Value (FV). calculating the present value of an amount that will be received
in the future. Present Value (PV)

𝑳 = (𝟏 + 𝒊) 1
𝐴=
1+𝑖

𝑪𝒏 = 𝑪𝟎 (𝟏 + 𝒊)𝒏 1 𝐶𝑛
𝐶0 = 𝐶𝑛 ∗ 𝑛
=
(1 + 𝑖) (1 + 𝑖)𝑛

3.2.2 CASH FLOW / INVESTMENT VARIABLES

Cash Flow (n) = Inflows (n) – Outflows (n) = Cn – Pn. An investment project will be value with the following varaibles:

 Initial payment or size of the investment

 Cash inflows generated during project duration
 Cash outflows generated duting the project duration
 Durationu of the project
 Interest rate (i): price of the money, inflation, risk…
We use two methods for valuating an investment: Payback when we do not account the devaluation of money; Net
Present Value & Internal Rate of Return when we take it into account,
Payback = Payback
Valor Actual Neto (VAN) = Net Present Value (NPV)
Tasa Interna de Rentabilidad (TIR) = Internal Rate of Return (IRR)
3.2.3 PAYBACK
The payback period is obtained from the cash-flows and the initial investment of the project. It refers to the period
required for the return on an investment to repay the original investment.
In other words, it measures the time required for the cash inflows to equal the original outlay.

 It does not consider the cash flows after payback period, nor when cash flows are being generated.
 There is a Liquidity Criteria, no value creation.
3.2.4 NET PRESENT VALUE
The total present value of the same series of cash flows being generated, minus the payments necessary to carry out
the project. It is an indicator of how much value an investment or project adds to the value of the firm.

• NPV > 0 » project may be acceptable

• NPV < 0 » project must be rejected
• NPV = 0 » project is indifferent because it adds no monetary value.
 𝑛
𝐶𝐹1 𝐶𝐹2 𝐶𝐹𝑛 1
𝑁𝑃𝑉 = −𝐼 + + + = −𝐼 + ∑ 𝐶𝐹 ∗
(1 + 𝑖) (1 + 𝑖)2 (1 + 𝑖)𝑛 (1 + 𝑖)𝑡
𝑡=1

3.2.5 INTERNAL RATE OF RETURN

Rate of return that makes the present value of the investment´s cash flows equal to zero.
𝑛
𝐶𝐹𝑡
−𝐴 + ∑ 𝐶𝐹 ∗ =0
(1 + 𝐼𝑅𝑅)𝑡
𝑡=1

Being “I” the interest rate of the investment project, then the project will be evaluated:

• IRR > i » project is acceptable

• IRR < i » project must be rejected
• IRR = i » project is indifferent.

3.2.6 NPV vs IRR

We can compare projects based on

their IRR and their NPV.

3.3 THE FINANCIAL STRUCTURE

During the decision-taking in financing, the company analyzes the different financial alternatives. Business financing
consists in the collection of financial resources needed to develop the company´s activity.
The combination of all the possible financial sources is known as capital structure or financial structure.

Internal equity: self financing

Equity
External equity: equity capital
& shares
Financial structure
Long term: bonds, loans, bank
credits or leasing

Debt
Short term: accounts payable
(trade discount), short-term
loans, credits and factoring
3.3.1 INTERNAL EQUITY: SELF FINANCING
The retained profits (resources generated within the company due to its normal activity) constitute the self-financing of
the company. These are the resources generated by the company. Profits can be used in two ways:

 Self-financing: retained inside the company.

 Dividends: spread.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
• 𝑷𝒂𝒚𝒐𝒖𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡𝑠
• 𝑺𝒆𝒍𝒇 𝒇𝒊𝒏𝒂𝒏𝒄𝒊𝒏𝒈 (%) = 𝑃𝑟𝑜𝑓𝑖𝑡𝑠

For example:
Profits (net income) = 100.000€
Dividends = 75.000€ → Payout = 75.000/100.000 = 75%
Retained profits = 25.000€ → Self-Financing = 25.000/100.000 = 25%

This decisions on dividends and self-financing are taken by the Board of Committees.

3.3.2 EXTERNAL EQUITY: EQUITY CAPITAL & SHARES

At the start of a business, owners put some funding into the business to finance assets. Equity capital are the funds
raised from owners (initial capital) and further rights-issue (issue of new shares) used to finance investments.
External equity is not to be paid back to the investor at any expiring date. A share of capital can only be converted into
cash by sale or transmission.
3.3.3 EXTERNAL EQUITY: EQUITY CAPITAL & SHARES
o A share of stock is one a finite number if equal portions in the capital of a company. It entitles owners to a
proportion of distributed, non-reinvested profits known as dividends and to a possible liquidation.

EQUITY SECURITIES DEBT SECURITIES DERIVATIVE SECURITIES

Shares Banknotes Futures

- Different shares ‘value: nominal,
accounting (book), intrinsic (cash-flow)
- Rights issue (capital increase) Bonds Options

- Payment of dividends not compulsory

3.3.4 LONG-TERM EXTERNAL RESOURCES

BOND: debt security in which the authorized issuer owes the holders a debt and is obliged to repay the principal and
interest later, termed maturity.
It is really a loan in the form of a security:

 Issuer = borrower
 Bond holder = lender
 Coupon = interest
Bonds enable the issuer to finance long-term projects with external funds.
LONG TERM LOAN: company receives an amount of money which needs to be paid back at a certain time. This service
is provided at a cost: interest of the debt.
BANK CREDITS: financial institution makes available a maximum amount of money to the customer. The customer will
then borrow any amount of money under the limit, paying interests only for amount borrowed.
LEASING: process by which a firm can obtain the use of a certain fixed asset for which it must pay a series of contractual
and periodic payments to the lessor. The lessee has the right to buy the asset at the end of the period:

 Finance Leasing: covers full economic life of the asset; lessee could continue using the asset after end-of-life
at a reduced interest rate or just buy the asset at a residual price.
  Operating Leasing: covers a fractional of the full economic life of the asset with no right to buy the asset after
the end of contract. Lesser can terminate the leasing with a notification to the lessor.
3.3.5 SHORT-TERM EXTERNAL RESOURCES
ACCOUNTS PAYABLE: financing from suppliers arises when payment of goods is done some time after their reception.
Suppliers offer the company the possibility to defer the payment.
BANK FINANCING: is divided into credits and loans; and trade discounts: institution makes a note available to the
customer, before its expiring date, having previously deducted some expenses (interest rate, commission…)
FACTORING: company sells to a factoring company a credit from a customer before it expires. This factoring company
will oversee collecting its payment, assuming the risk of insolvency.

3.3.6 FINANCIAL STRUCTURE AND ITS COST

The Financial Structure is the combination of the different financial resources.
𝐸
 %𝑬𝑸𝑼𝑰𝑻𝒀 (𝑬) = (𝐸+𝐿)
𝐿
 %𝑳𝑰𝑨𝑩𝑰𝑳𝑰𝑻𝑰𝑬𝑺 (𝑳) = (𝐸+𝐿)
𝐿
 𝐼𝑛𝑑𝑒𝑏𝑡𝑛𝑒𝑠𝑠 𝑟𝑎𝑡𝑖𝑜 = 𝐸

For example:
Total Liabilities + Equity = 1000M€
Equity = 700M€
Liabilities = 300M€
%EQUITY = 70% ----- % LIABILITIES = 30% ----- Indebtness Ratio = 42,85%

All financial resources have an implicit cost (Keq) and an explicit cost (KL).
Weighted Average Capital Cost (WACC): weighted cost associated to all financial resources obtained by the company.
𝐾𝐸𝑄 ∗ 𝐸 + 𝐾𝐿 ∗ 𝐿
𝑊𝐴𝐶𝐶 = 𝐾 = 𝑠
𝐸+𝐿
WACC measures if we have enough financial resources to cover our debt.

3.4 ANALYSIS OF RETURN (ROA & ROE) AND FINANCIAL LEVERAGE

3.4.1 PERFORMANCE ANALYSIS & LEVERAGE ANALYSIS

General objective: Maximize the wealth of those who own

Maximize Value
- Maximize company´s value. the rigths over the assets

And how do we measure the value of a company? We do it using two strategies:

• Market value: economic profit; increase in the equity´s market value + dividend payment.
• Performance: accounting profit; increase in equity´s real value + dividend payment.

3.4.2 TERMINOLOGY & FORMULAS

𝑺 𝑆: 𝑆𝑎𝑙𝑒𝑠 𝑉𝑜𝑙𝑢𝑚𝑒
𝑨𝒔𝒔𝒆𝒕 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 = →{
𝑻𝑨 𝑇𝐴: 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑫 𝐷: 𝐷𝑒𝑏𝑡
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐 = →{
𝑬 𝐸: 𝐸𝑞𝑢𝑖𝑡𝑦
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑫𝒆𝒃𝒕: 𝐾𝐿 = 𝐾𝐷 = 𝐾𝑖
𝑻𝒂𝒙𝒆𝒔 = 𝑇
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑩𝒆𝒇𝒐𝒓𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝑻𝒂𝒙𝒆𝒔 = 𝑬𝑩𝑰𝑻
𝑷𝒓𝒐𝒇𝒊𝒕 𝑩𝒆𝒇𝒐𝒓𝒆 𝑻𝒂𝒙𝒆𝒔 (𝑷𝑩𝑻) = 𝐸𝐵𝐼𝑇 − (𝐾𝑖 ∗ 𝐷)
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 (𝑵𝑷) = 𝑃𝐵𝑇 − 𝑇
3.4.3 ACCONTING INDICATORS
ECONOMIC RATE OF RETURN & RETURN ON ASSETS
It measures the rate of return from the assets point of view; economic performance. It depends on the main activity
characteristics, but not on the financial structure.
𝐸𝐵𝐼𝑇 𝑆𝑎𝑙𝑒𝑠 𝐸𝐵𝐼𝑇 𝑆𝑎𝑙𝑒𝑠
We find that: 𝐸𝑅𝑅 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 ∗ 𝑆𝑎𝑙𝑒𝑠 = 𝑆𝑎𝑙𝑒𝑠 ∗ 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠.
𝐸𝐵𝐼𝑇
Return on Sales/Sales Margin: level of sales converted into earnings; 𝑆𝑎𝑙𝑒𝑠 .
𝑆𝑎𝑙𝑒𝑠
Assets Turnover: efficiency of the assets; . Indicates the monetary units of sales that can be obtained for
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
each invested monetary unit.
𝐸𝐵𝐼𝑇 𝑆𝑎𝑙𝑒𝑠
𝐸𝑅𝑅 = 𝑅𝑂𝐴 = ∗ = 𝑚𝑎𝑟𝑔𝑖𝑛 ∗ 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
ERR can be increased:

• Increasing Sales but maintaining Assets level.

• Decreasing Assets but maintaining Sales level.
FINANCIAL RATE OF RETURN & RETURN ON EQUITY
It measures the rate of return from the equity (owners or shareholders) point of view; ROE shows how well a company
uses investment funds to generate earnings growth.
Net Profit is the profit obtained once all debts and taxes have been paid.
𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 = 𝐸𝐵𝐼𝑇 − 𝐷𝑒𝑏𝑡𝑠 − 𝑇𝑎𝑥𝑒𝑠 = 𝐸𝐵𝐼𝑇 − 𝐷𝑒𝑏𝑡 ∗ 𝑖 − 𝑇𝑎𝑥𝑒𝑠 ∗ 𝐸𝐵𝑇.
Debts = Debt*I, where i is the capital cost.
Taxes = Taxes*EBT, where EBT is Earnings Before Taxes.

• FRR depends on three aspects:

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
o 𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑺𝒂𝒍𝒆𝒔 = 𝑆𝑎𝑙𝑒𝑠

𝑆𝑎𝑙𝑒𝑠
o 𝑨𝒔𝒔𝒆𝒕 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
o 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑳𝒆𝒗𝒆𝒓𝒂𝒈𝒆 = 𝐸𝑞𝑢𝑖𝑡𝑦

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
𝐹𝑅𝑅 = 𝑅𝑂𝐸 = .
𝐸𝑞𝑢𝑖𝑡𝑦

𝐷𝑒𝑏𝑡
Moreover, the quotient 𝐸𝑞𝑢𝑖𝑡𝑦 is very important because of three reasons:

 When ERR > Ki, then the higher will earnings be for the owners.
 When ERR <Ki, then the lower will earnings be for owners, but it also depends on the debt level.

3.4.4 RELATIONSHIP BETWEEN ROA & ROE

FINANCIAL LEVERAGE
If we need to calculate the Return on Equity before taxes, then we may use the following formula.
𝐷
𝑹𝑶𝑬 = 𝑅𝑂𝐴 + 𝐸 (𝑅𝑂𝐴 − 𝐾𝑖) Where (𝑹𝑶𝑨 − 𝑲𝒊) = Financial Leverage (FL) and 𝑲𝒊 = cost of the debt.

• If 𝐷𝑒𝑏𝑡 = 0 ⟶ 𝑅𝑂𝐸 = 𝑅𝑂𝐴

𝐷𝑒𝑏𝑡
• If 𝐷𝑒𝑏𝑡 > 0 ⟶ 𝐷/𝐸 = 𝐸𝑞𝑢𝑖𝑡𝑦 > 0
o If 𝐹𝐿 > 0 ⟶ 𝑅𝑂𝐸 > 𝑅𝑂𝐴 ⟶ 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒
o If 𝐹𝐿 < 0 ⟶ 𝑅𝑂𝐸 < 𝑅𝑂𝐴 ⟶ 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒

3.5 ANNEX – FINANCIAL STATEMENTS

3.5.1 UNTANGLING THE COST OF ASSETS
Imagine you buy a van for delivering your products. What is the actual cost for your business? Price paid: 20.000€. This
quantity represents an investment, and 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 ≠ 𝐶𝑜𝑠𝑡. The Cost of Assets is divided into two categories:
  Operating Cost (depreciation and amortization)
o Value at the end of the period: 17.000€
 Cost of capital (financial)
o Interest of debt
50% financed by bank loan (8% interest rate)
50% financed by equity (12% opportunity cost)
COST OF THE ASSET DURING THE PERIOD: (20.000 − 17.000) + (10.000 ∗ 0,08) + (10.000 ∗ 0,12) = 5.000€

3.5.2 RELATION WITH FINANCIAL STATEMENTS

There are three main financial statements.
 Income statement (Profit & Loss): summary of the results of the firm´s activity over a period:
o 𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 − 𝑇𝑎𝑥𝑒𝑠

 Balance sheet (financial position): list of the firm´s assets & liabilities at a given point in time.

 Cash flow statement: summarize of the changes in a firm´s cash position over a period (cash inflows &
outflows). There are three activities from which firms obtain and use cash.
o Operating activities, Investing activities, Financing activities

3.5.3 BALANCE STATEMENT – ASSETS

Assets are goods and rights owned by the enterprise that can be transformed on cash if needed.

 Non-Current Assets (Fixed): enterprise´s long-term investments that will not be realized within the accounting
year (more than one year); permanent investments of the Enterprise not aimed to be sold.
o Intangible assets: resources that have no physical presence and a long-term value for the business
(e.g.: patents, copyrights, IT applications…)
o Tangible assets: resources that have a finite monetary value and usually a physical form (e.g.:
installments, plant, machinery…)
o Financial assets: liquid assets that get their value from a contractual right or ownership claim (e.g.:
cash, stocks, bonds, mutual funds, and bank deposits).
 Current assets:
o Inventories: all raw materials, work-in-progress, finished goods that a company accumulates.
o Account receivables: outstanding invoices, or the money clients owe the company
o Short term financial investments: market securities or temporary investments in 3rd party firms.
o Cash: money owned in cash or firm´s bank account.

Tangible Physical (tangible) goods.

Non-current
assets
Intangible Intangible goods
(fixed
assets)
Financial 3rd party shares, bonds, etc.
ASSETS
Short or Mid-term assets
Liquid assets
Current
assets
Cash Maximum liquidity assets
equivalents
3.5.4 BALANCE STATEMENT – LIABILITIES
Sums of money which Enterprise owes.

 Non-current liabilities (long-term): refers to the financial obligations of a company that are not expected to
be settled within one year (long-term loan, bonds, etc.)

 Current liabilities (short-term): refers to financial obligations of a company that are expected to be settled
within one year (short-term loan, accounts payable to suppliers, taxes not yeat paid, etc.)

3.5.5 BALANCE STATEMENT – EQUITY

Value that would be returned to a company´s shareholders if all the assets were liquidated and all company´s debts
were paid off.

 Issued capital: represents that part of an authorized capital, which a company can sell through shares.
Provided by the shareholders.

 Reserves: profits not transformed into dividens are used by the company to self-finance its operations.
Reserves are also called “internal equity” as they are generated inside the enterprise, in opposition to “external
equity” provided by shareholders.
 Other funds: profits/loses pending of application.

Issued capital Shareholder´s funds

Equity
Reserves and other Auto generated funds (profits)
TOTAL funds
LIABILITIES
Non-current Financial instruments to be paid back in more than 1 year
Liabilities
Current Financial instruments to be paid back in less than 1 year

3.5.6 PROFIT & LOSS ACCOUNTS

+ Sales (revenue, income, net income)
- Operational Expenses (raw/elaborated materials, labor, rents, general expenses)
-------------------------------------------------------------------------------------------------------------
= EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization)
- Depreciations and Amortizations
-------------------------------------------------------------------------------------------------------------
= EBIT (Earnings Before Interest and Taxes – “Operating Profit”)
- Interest (FINEX – Cost of debt or Financial Expenses)
-------------------------------------------------------------------------------------------------------------
= EBT (Earnings Before Taxes – “Pre-tax Profit”)
- Taxes
-------------------------------------------------------------------------------------------------------------
= NET PROFIT

The P&L account or income statement reflects the results of the

company´s activity over a period, usually a year.
Revenue generated by sales of goods and services
All costs the firm incurred on (operating and financial)
Taxes.
4. MARKETING (COMMERCIAL FUNCTION)
4.1 ROLE OF MARKETING IN THE COMPANY
Marketing: process of planning and executing the conception, pricing, promotion and distribution of ideas, goods, and
services to create exchanges that satisfy individual and organizational objectives.

 The exchange concept is crucial: process by which two or more people give and receive something of value.
Traditionally, marketing was associated with sales. Now we understand that marketing is:

 Search and know what the market is demanding and try to persuade enterprises to produce and offer those
goods and services that satisfy the current demand.

4.1.1 COMMERCIAL BEHAVIOUR

SALES MARKETING

ORIENTATION Internal - What I know to do. To the customer – Customer´s wants

and needs

PURPOSE To persuade the customers to To persuade the business to satisfy

buy muy product. the customer´s wants needs.

TERM Short term: immediate reaction Mid-long term: analysis of threats and
at demand changes. opportunities. Strategic marketing.

EXCHANGE PROCESSES IN THE MARKET

SALES ORIENTATION => Sales is a one-way process. A company delivers goods and services to a customer.
MARKETING ORIENTATION => Sales is a two-way process. A company delivers goods and services to a customer,
and a customer delivers demand information to a company.
MARKETING BEYOND BUSINESS AREA
Marketing is not only focused on business activities, but is also applied to no-profit motivations, and activities associated
to beneficial ideas and behaviors for society.

 Social Marketing seeks to develop and integrate marketing concepts with other approaches to influence
behaviors that benefit individuals and communities for the greater social good.

4.1.2 MARKETING MANAGEMENT PROCESS

STRATEGIC Analysis Market Research: identification of customers´ needs.

MARKETING System

OPERATIVE Action Marketing Mix creation to satisfy the target market.

MARKETING System
Combination of the 4 controllable variables (4P´s): Product, Price, Place, Promotion.

STRATEGIC MARKETING
• Analysis of the current situation of the company´s products and understanding the customer´s needs.
• Selecting and analyzing a target market.

• Identifying the threats and opportunities which combined with resources and capabilities of the company, may
create a competitive advantage.

• Four phases of SM:

o Analysis of the situation: market, competitors, environment, internal
o Diagnostic of the situation: SWOT analysis
o Definition of marketing objective(s)
o Formulation of strategy
OPERATIVE MARKETING
• Creating and maintaining a marketing mix to satisfy the target market.
• Product, Place, Promotion and Price strategies must be developed and coordinated in a way that the target
market is satisfied and the firm makes profit.

• Three phases of OM:

o Define Marketing Mix
▪ Identify commercial objectives
▪ Define activities to achieve them (4Ps)
▪ Establish marketing budget
o Execution of the Marketing Mix strategy
o Control and assessment

4.1.3 MARKETING CLAIMS TO KNOW

• Current and potential market demand
o Agents and competitors
▪ Prescription or consumer motivator.
• Buyers and buying process
o Needs => Notoriety => Interested => Success => Fidelity

4.2 MARKET SEGMENTATION AND POSITIONING OF THE PRODUCT

Market segmentation is the process of identifying smaller markets that exist within a larger one, market segments with
homogeneous behavior.
It helps marketers tailor marketing mixes for the people in the target segment. It also requires knowledge of potential
consumer wants and behavior, or changes in the makeup of the market, and what rivals are doing.

4.2.1 MARKET SEGMENTATION CRITERIA

MASS CONSUMPTION MARKET

Geographical
National, international, regional…Different areas (coast or no coast).

Demographical
Age, sex, family size, income level, professional activity…

Psicographical & Purchasing behaviour

Psicographical: social level, personality, lifestyle…
Purchasing behavior: way of purchasing (regular, temporary…)
Type of usage of product: low, medium, high

Why do we segment markets?

1. Better identification of the market needs that are not being satisfied.
2. Better adjustment between offer and demand.
3. Better identification of competitors.
4.2.2 MARKET SEGMENTATION STRATEGIES

UNDIFFERENTIATED (MASS WIDE DIFFERENTIATED DIFFERENTIATED CONCENTRATED

STRATEGY) (MULTISEGMENT) (NICHE MARKETING

A single product and marketing Product is aimed at two or more specific Product and marketing-mix are aimed at a
strategy is aimed to appeal the segments. single segment.
whole market.

A single marketing mix is offered Distinct products and services with separate
to the total market. marketing-mix strategies.

4.2.3 POSITIONING THE PRODUCT AND SERVICE

Positioning: technique in which marketers try to create and image or identity for a product, brand or company in the
perception of the target market.

 Phase 1. Marketing Manager. Marketing-mix strategy to position the product in the mind of the customer.
 Phase 2. Customer. Creation of a perception of the product.
A successful positioning strategy is usually based on a competitive advantage for the company. Moreover,
positioning can be based on several things:

• Product characteristics
• Product benefits
• User characteristics
• Placing and comparing it relative to another product
• In terms of price-quality relationship
4.2.4 MARKET´S DEMAND ANALYSIS AND FORECAST
Measuring and quantifying the real demand, identifying the variables affecting it and forecasting future demand.

 Qualitative methods include Pilot markets, Delphi technique, Purchasing intention surveys…
 Quantitative methods include Rule-based forecasting, Neural networks, Data mining, Causal models…

Demand is the volume of sales of a certain product for a specific group of customers at a
set time and place, given some conditions and a marketing program.

Therefore, demand can be quantified from different dimensions: product, time, consumer group and place.
ELASTICITY OF DEMAND
One principal objective of demand analysis is forecasting and measuring the variations in demand, due to changes in
other factors related to it; mainly marketing-mix variables.

𝛥𝐷 (𝐷2 − 𝐷1 )
% 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝐷 𝐷1
𝜀𝐷 = = =
% 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 𝑡ℎ𝑒 𝑓𝑎𝑐𝑡𝑜𝑟 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑒𝑑 ∆𝐹 (𝐹2 − 𝐹1 )
𝐹 𝐹1
When using absolute values of elasticity, then:
▪ |Elasticity| > 1 => Demand is elastic (sensitive to factor changes)
▪ |Elasticity| = 1 => Demand is Unit elastic
▪ |Elasticity| < 1 => Demand is inelastic (not sensitive to factor changes)
4.3 MARKETING MIX DECISIONS: PRODUCT, PRICE, PROMOTION AND PLACE
4.3.1 PRODUCT
Bundle of tangible and intangible attributes that may satisfy customer wants and is received in exchange of a payment.
The basic (core or generic) product is less than the total product people buy.
Customers also buy product benefits (quality, design, packaging, size, quantity, post-sale service, image…)
Factors that affect customer satisfaction include:

• Tangible factors: physical and technical factors of the product or service.

• Intangible factors: psychological factors such as brand, design, packaging or quality.
BRAND
Name, term, design, symbol or other features that identify goods or services as distinct from others. Any brand contains
a name (component of the brand which can be said) and logo (design, symbol, graph and distinctive colors).

 Manufacturer brand
o Corporate / Unique Brand. For example, Garnier.
o Multi-brand
▪ Individual. For example, Fructis (Garnier)
▪ Family
▪ Umbrella. For example, DOVE.
▪ Secondary

 Dealers brand
o Wholesaler or retailer. For example, Hacendado – Mercadona.
DESIGN
Appropriate combination of physical appearance, color, shape and “ease of use”. There are two perspectives.
Esthetical (beauty of the product) and Functional (ease of use).
PACKAGING
Design and production of the container or wrapper of a product. It also includes the label. Its characteristics are:

• Protecting the content and facilitating transportation.

• Compulsory label with certain information.
• Make a product more convenient or attractive.
QUALITY
It measures if the product satisfies the customer´s needs. It depends on intrinsic characteristics of the product, and
the expectation of the consumers about the product.
PRODUCT LINE
A Range of Products (assortment or variety of products) is an offer composed of product lines and individual products.
Characteristics of a product line include:
• Extent of the range of products (number of lines).
• Depth (number of products x line)
• Length (total number of individual products)
• Consistency (relationship between the lines)
Product strategies include:

• Wide – add more product lines

• Depth – extend the product line components
• Length – incorporate product variations
PRODUCT LIFE CYCLE
The product life cycle can apply to
a product category, to a product
from or to a brand.

4.3.2 PRICE
Marketing-mix element that sets the amount of money the seller seeks from the buyer in exchange for the product (fair
pricing-value marketing)
Why is it so important?
• Influences the demand
• Reinforces the image of the product
• Needs to be compatible with the other marketing mix strategies
Pricing objectives need to be in line with marketing objectives and with the rest of the company’s objectives:

• Maximizing Profit
• Maximizing Sales
• Achieving a certain Market Share
APPROACHES TO PRICING
Competition approach => demand approach => cost approach (cost-plus pricing–markup, full cost, direct cost and BEP)
4.3.3 PROMOTION
Communication is the process of influencing others´ behaviour by sharing ideas, information or feelings with them.
Marketer´s efforts to communicate with target audiences are called promotion.

 Objectives: gain attention, teach, remind, persuade and reassure.

ADVERTISING
Any paid form on non-personal communication through mass media about a product by an identified sponsor. It is
directed through media such magazines, direct mail, TV, billboards, newspapers, Web…
 Objectives
o Transmit information. Informative advertising.
o Persuade. Persuasive advertising.

 Advertising management decisions

o Defining the target audience
o Defining advertising objectives
o Deciding on the message and how to communicate it
o Selecting the advertising media
o Setting the advertising budget
o Deciding about when to advertise
o Evaluate advertising effectiveness
SALES PROMOTION
Any activity that offers an incentive for a limited period to induce a desired response from target customers, company
salespeople or intermediaries.

 Sales promotion adds value to the product => the incentives it offers ordinarily do not come with the product.

 Sales Promotion decisions

o Defining the promotion objectives
o Selecting the type of promotion
o Developing the promotion program
o Advertising the promotion plan
o Evaluating the results
PUBLIC RELATIONS & DIRECT MARKETING
 Public Relations
o It is communication to build and maintain a favorable image of a firm, maintain the goodwill of its many
stockholders, and explain its goals and purposes (Relations with the media, sponsorship...).

 Direct marketing
o It is an interactive system of marketing that uses one or more advertising media to affect a specific
measurable response or transaction at any location.
Direct marketers use media such as the telephone, internet, or direct mail to induce measurable responses.
PERSONAL SELLING
Person-to-person process by which the seller learns about the prospective buyer´s wants and seeks to satisfy them by
making a sale.

 Personal selling decisions

o Planning the size of the sales force
o Establishing a remuneration policy
o Assigning the objectives for each group
o Fixing selling quotas
o Recruiting and organizing the team
  Managing the sales force and evaluating its efficiency
o Leadership and motivation
4.3.4 PLACE
DISTRIBUTION
The objective of distribution is getting the product to customers where and when they want it.

 A distribution channel is the series of interdependent firms that facilitate transfer of title to a product as it moves
from producer to final buyer.
 An intermediary is a person or a firm in a distribution channel, such as a wholesaler or retailer, that operates
between the producer and the final buyer.
There are two types of distribution: physical distribution (logistics) and distribution channels.
TYPES OF DISTRIBUTION CHANNELS
 Direct distribution channels
o The producer sells directly to the final buyer

 Indirect distribution channels

o The producer entrusts some distribution tasks to independent intermediaries
▪ Merchandise agents & brokers
• Intermediaries that bring buyers and sellers together and that are paid a commission
for their services.
▪ Wholesalers

• Firms that sell to intermediaries or to other organizational buyers but do not sell to
ultimate customers.
▪ Retailers

• Firms that sell consumer goods or services directly to final consumers for their personal
or household use.
DISTRIBUTION STRATEGIES
 Intensive distribution

 Selective distribution
 Exclusive distribution