Business, Technology, and Finance

DEPARTMENT OF FINANCIAL ANALYSIS

ACADEMY OF FINANCE
Dr. Vu Duc Kien

1. Introduction to business
2. Managing a business
3. Organisational and business structures
4. Introduction to business strategy
5. Introduction to risk management
6. Introduction to financial information
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Contents
7. The business’s finance function
8. Business finance
9. The professional accountant
10. Structure and regulation of the accountancy profession
11. Governance and ethics
12. Corporate governance
13. The economic environment of business and finance
14. External regulation of business
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Chapter 1: Introduction to business
 LEARNING OUTCOMES
- State the general objectives of business
- State the general objectives of strategic management and specify the strategic
management process and interrelationship between a business’s vision,
mission and strategic objectives
- Specify the nature of ethics, business ethics, sustainability and corporate
responsibility

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 TOPIC LIST
1. What is an organization?
2. What is a business?
3. Stakeholders in a business
4. What are the business’s objectives?
5. Mission, goals, plans and standards

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 1. WHAT IS AN ORGANISATION?
1.1. Introduction to organisations
Example of organisations
Profit-oriented organisations Not-for-profit organisations
- A multinational car manufacture (e.g. Ford) - A charity (e.g. UNICEF)
- A accountancy firm (e.g. KPMG) - A trade union
- A local authority
- An army
- A club

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 1.2. Why do organisations exist?
Because they:

- Overcome people’s individual limitation, whether physical or intellectual

- Let people specialize in what they do best

- Save time, because people can work together or do two aspects of a different task at
the same time

- Accumulate and share knowledge

- Let people pool their expertise

- Enable synergy: the combined output of two or more individuals working together
exceeds their individual output

In brief, organisations enable people to be more productive

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 1.3. What do organisations have in common?
Definition of organisations:

A social arrangement for the controlled performance of collective goals,

which has a boundary separating it from its environment.

• Social arrangement: individuals gathered together for a purpose

• Controlled performance: performance is monitored and adjusted

• Collective goals: goals over and above the goals of the people within it

• Boundary: distinct from its environment

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 1.4. How do organisations differ?
Organisations differ in many ways.

- Ownership: private sector and public sector

- Control: by owners, by people on their behalf, or government-sponsored regulators

- Activity: different industries such as manufacturing, healthcare, services…

- Size: small local business to multinational corporation

- Legal status: company, or unincorporated body such as club, association…

- Sources of finance: borrowing, government funding, share issues

- Technology: high use (eg. banks) or low use (eg. corner shop) of technology

- …

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 2. WHAT IS A BUSINESS?
2.1. Profit vs non-profit orientation

Profit-oriented organisation Not-for-profit organisation

Owners Public beneficiaries

Primary
objective Maximise profit/dividend/wealth Provision of goods/services

Profit Output (Goods, services)

Output of goods/services Revenue from goods/services Minimise cost of primary goal
Secondary
objective Inputs (Materials, labour, finance) Costs Inputs (Materials, labour, finance)

Revenue (taxation)

Figure 1.1: Profit-oriented and not-for-profit organisations

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- Businesses aim to make profits while for non-businesses there is a different
primary focus or objectives.

- Profit-oriented organisations are generally referred to as businesses.

- Not-for-profit organisations are frequently structured and run like a business.

They do not aim to maximise profit or the wealth of their owners, but instead are
focused on providing goods and services to their beneficiaries at minimised
costs. Example: Charities, trade unions, governmental agencies, hospitals,
schools, universities.

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2.2. Definition of a business

Business: An organisation that is oriented towards making a profit for its

owners so as to maximise their wealth and that can be regarded as an entity
separate from its owners.

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 3. Stakeholders in the business
Definition of stakeholders

Stakeholder: Literally a person or group of persons who has a stake in the

organisation. This means that they have an interest to protect in respect of
what the organisation does and how it performs.

- A company’s primary stakeholders are its shareholders.

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 3. Stakeholders in the business
- Secondary stakeholders are:

+ Directors/managers/Employees and trade unions

+ Customers

+ Suppliers

+ Lenders

+ Government and its agencies

+ The local community and the public at large

+ The natural environment

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 3.1. Natural capital, sustainability and corporate responsibility

Definitions:

- Natural capital is therefore everything that the planet provides humans and
business organisations to use in order to live.

• Renewable: such as food, air and water.

• Non-renewable: such as oil and gas

(Ethical Corporation, n.d.)

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- Sustainability:

+ The ability to 'meet the needs of the present without compromising the ability of
future generations to meet their own needs’.

+ Concerns the use of both of the following: Tangible resources (natural capital
and energy) and Intangible resources (human/intellectual capital and relationship
with stakeholders)

- Corporate responsibility concerns the organisation’s ideas and values on how

to use resources, such as natural capital, promoting the positive impacts of their
use and reducing the impact of any negative impacts.

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 3.2. UN global goal for sustainable development
- The UN established 17 Global Goals for Sustainable Development that
aim to improve the world for everyone. In 2015, world leaders signed up
to them. (Global Goals.org, 2015)

- The key sustainability Goals for business include:

§ Decent work and economic growth

§ Industry, innovation and infrastructure

§ Responsible consumption and production

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 4. What are the business’s objectives?
4.1. The hierarchy of objectives

- For a profit-oriented business, its objective is to make as much profit as

possible so as to increase shareholder wealth.

- In fact, there is a hierarchy of objectives, with one primary objective and a

series of secondary objectives, which should combine to ensure the
achievement of the primary objective.

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4.1.1. Primary objective

For a business the primary objective is financial: making as much profit as possible (profit
maximisation) so as to increase the shareholder wealth.

- Profit measures how the business create value by making sure the cost of inputs is less
than the output. (Profit = Revenue – Costs)

- Shareholder wealth can only be maximised if profit is earned at an acceptable level of

risk.

- Profit cannot be pursued at any cost. Any business is subject to the laws and regulations
of the country in which it operates, and it also has social responsibilities.

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4.1.2. Secondary objective

- Secondary objectives support the primary objectives.

- Examples of secondary objectives:

- Market position.

- Product development
- Technology

- Employees and management

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 - Market position: achieve a particular market share of each market that the business
operates in, avoid reliance on a single customer for too big a proportion of total
sales, enter or leave markets when the time is right.

- Product development: Bring in new products, develop a product range.

- Technology: Improve how much is produced from the resources available, reduce
cost per unit of output, develop or exploit appropriate technology

- Employees and management: Train employees in necessary skills, create an

innovative, flexible culture, employ high quality leaders.

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 4.2. Is wealth maximisation always the primary
objectives?
4.2.1. Profit satisficing

- Decisions might be taken by managers with their own managerial

objectives in mind rather than the aim of wealth maximisation.

The owners’ the managers’

objectives VS objectives

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 4.2. Is wealth maximisation always the primary
objectives?
4.2.1. Profit satisficing

- A company's managers may choose to achieve simply a satisfactory profit, by

operating at profit and risk levels which are acceptable to shareholders, and
which provide enough profits for future investment in growth, but which are not
designed actively to maximise profit and shareholder wealth.

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4.2.2. Revenue maximisation

- A business may act to maximise revenue in order to maintain or increase

its market share, ensure survival, and discourage competition.

- Managers benefit personally from following this objective because of the

prestige of running a large company, and also because salaries and other
benefits may be higher in bigger companies than in smaller ones.

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4.2.3. Multiple objectives

- “To manage a business is to balance a variety of need and goals…The very

nature of business enterprise requires multiple objectives”. (Peter Drucker).

- Objectives are needed in eight key areas:

§ Market standing
§ Innovation
§ Productivity
§ Physical and financial resources
§ Profitability
§ Manager performance and development
§ Worker performance and attitude
§ Corporate responsibility

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4.2.4. Constraints theory

- According to Herbert Simon, decisions for some business areas are taken
without reference to the wealth objective at all. Because profit is not the
most important constraint in their business.

- Other constraints: need for good staff relations, compliance with

regulations (such as environmental protection laws), need to satisfy
customers with quality products and service -> lower profits.

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 5. Mission, goals, plans and standards
5.1. Planning and control system

Comparison of On target. No
Plans and Actual
Objectives performance with corrective
standards performance plans/standards action required

Control action? Control action?

Deviations
identified

Figure 1.2: Planning and control system

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Businesses need to direct their activities by:

- Deciding what they want to do to achieve their primary objective.

- Deciding how and when to do it and who is to do it (setting plans and

standards)

- Checking that they achieve what they want, by measuring and monitoring
what has been done and comparing it with the plan

- Taking control action to correct any deviation

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5.2. Mission

- Definition of mission: ‘The business’s basic function in society’ expressed in terms of how it
satisfies its various stakeholder. The mission is the overall direction of a business and may be very
general.

- Elements of mission:

Purpose Strategy Policies and standards of behaviour Value

What is the What does the

Why does the
operational logic of What do our people organisation believe
organisation exist
the organisation: actually do and how do to be important –
and for whose
- What do we do? they behave? what are its core
benefit?
- How do we do it? principle?

- Vision: some businesses also have a vision of the future state of the industry or business which
determines what its mission should be.

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5.2. Mission

- For instance:

+ Vision: 'being the leading provider of X by 2020’

+ Mission: 'providing high-quality environmentally-friendly X to all our customers'.

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5.3. Goals: aims and objectives

- Goal: ‘A desired end result’

- There are two types of goal:

§ Non-operational aims (qualitative goals): eg. to seek truth

§ Operational objectives (quantitative goals): eg. to increase sales volume by 10%

Specific Measurable Achievable Relevant Time-bound
SMART:

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- The purpose of setting operational objectives in a business:

‘Objectives are needed in every area where performance and results directly and vitally
affect the survival and prosperity of the business’ (Peter Drucker). Objectives in these key
areas should enable management to:

- Implement the mission

- Publicise the direction of the organisation to managers and staff

- Appraise whether decisions are valid

- Assess and control actual performance

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5.4. Plans and standards

- Plans: State what should be done to achieve the operational objectives.

Standards and targets specify a desired level of performance.

- The desired level of performance for what is done can be expressed as a

standard to be met, in terms of:
- Physical standards: units of raw material per unit produced
- Cost standards: the standard labour cost of making product X might be 4 hours at
£12 per hour = £48
- Quality standards: percentage of phone calls answered within three rings

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5.5. How are plans set?

The strategic planning process sets the overall mission, goals, plans and
standards that the business will try to achieve -> Chapter 4.

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