# 4. Financial management
###### tags: `Introduction to business`

The **finance area** of a business is the set of capital that is available to and used by the enterprise.

Therefore two main decisions have to be made regarding the management of these resources. We can separate these options in two parts: the Financing and Investing decisions; how to get capital and how to invest it, respectively. These are two crucial decisions for any company.

> It is worth mentioning that the fiscal year may vary and therefore not coincide with the Calendar year.

There are two types of structures in enterprises:

- Economic structure
- It is comprised by the goods owned by the company and the rights that it has.
- It is related to the company investments.

- Financial structure
- It is comprised by the resources used by the company that were borrowed.
- It is related to debt and other liabilities.

To maximize the relation $ASSETS - (EQUITY+LIABILITIES)$ is the objective of the company. The first term of the subtraction represents the profitability of the enterprise whereas the later part of the subtraction represents the costs in which it incurs.

#TODO: difference between Equity \[Internal and External\] vs. Debt

- Internal equity: based on self-financing out of the profits that are retained by the company.

## Financial statements

### Income statement

This financial statement represents the *performance* of the business over a *specific period of time*.

#TODO: This diagram must be improved (this is a very simplified version).

SALES REVENUE
- (-) COST OF GOODS SOLD -> *GROSS PROFIT*
- (-) OPERATING EXPENSES -> **INCOME FROM OPERATIONS**
- (+/-) NON-OPERATING ITEMS -> **INCOME BEFORE TAXES**
- (-) INCOME TAXES -> **NET INCOME**

#TODO: need to explain each and every of these terms.

ONLY THINGS THAT DO NOT DEPRECIATE: BUILDINGS & LAND (this is what she said)
EVERYTHING ELSE DEPRECIATES WITH TIME

Non-operating items := things that happen in the company but are not linked to its core business.

#### Revenues

**Revenues** are received by the company for the sale of goods and services.

> Note that this is independent from the payment status; revenues occur whenever a good or service is purchased by a customer.

#### Expenses

Companies contract **expenses** when they acquire goods or services.

> Note that this is independent form the payment status; expenses occur whenever a good or service is purchased by the company to another individual or company.

### Balance sheet

The balance sheet is a financial statement that reflects *situation* of the enterprises through its *assets* at a *specific moment*. Assets are calculated roughly by adding up the equity and liabilities of the enterprise, this is a fundamental aspect to remember.

> $$ASSETS = EQUITY + LIABILITIES$$

alternatively

$$EQUITY = ASSETS - LIABILITIES$$

#TODO: (las próximas diapositivas se pueden completar con material del libro de economía de 4ESO)

#TODO: Current vs. Non-current assets

- Current -> short-term (less than 12 months)
- Non-current -> long-term (more than 12 months)

If it was originally done for more than 12 months but now only 12 or less installments are due, its respective Accounts Receivable should be transferred to the short-term part.

The same applies to liabilities.

Salaries are in the income statement, not in the Balance sheet as liabilities, because you don't actually *own* them. Salaries are not liabilities but **expenses** which are reflected in the income statement.

The loan is different from the interest rate! The loan itself is what you receive, an asset, but the interest rates are expenses, not something you get. This is a tricky question and it is very important to distinguish these concepts.

REVENUES/EXPENSES -> INCOME STATEMENT

ASSETS/LIABILITIES/EQUITY -> BALANCE SHEET

30/09/2022, hasta la diapositiva 26