1.1. The system of corporate financial management

A model enterprise will be used from now on.

Production of services

This example intends to show how products and services are produced. Regardless of the financing, Apples are purchased. These apples must be stored and then fed into production. It is important to mention that the desired products are produced with the appropriate input of labour and machines. The produced apple juice has to be stored in some form, i.e., either in large barrels or bottles. In order to decide on the type of storage, it is essential to know to whom – and this addresses the third point – the apple juice will ultimately be sold to. This third area represents the connection to the sales markets.

Risk

Indirectly, it is worth mentioning something that will be discussed later in chapter 5.2: the taken with this activity.

Fritz Durster GmbH can basically procure apples on national and international markets. But it could also buy its own land where apples are grown in plantations. This would make it less dependent on market prices for apples, but at the same time production costs arise. There are both advantages and disadvantages to these two basic systems. In one case, the company will be affected by highly volatile on the procurement markets, whereas in the other case the pure will play a role, thus decoupling to a certain extent from fluctuating market prices. This is associated with varying degrees of risk, because do not always change to the same extent or in the same direction as in procurement markets.

An equally varied risk is presented by the . The company’s objective may be to supply primarily natural persons using their own shops, probably at higher prices than the other alternatives, but also with higher costs. However, it could also be possible to supply a number of large food chains, which, although they purchase large quantities, have a high power in price discussions. Additionally, there is the possibility of concentrating only on individual, clear segments, e.g. catering. On the one hand, these specialised markets can be addressed in a better way. On the other hand, there will also be a greater dependence on this market segment.

To sum up, there are already various risks, which will also have corresponding financial consequences.

Company

But what exactly is a company? The company should represent the described This company can of course carry out its activities in individually defined areas, i.e., in factories or plants. Our central purpose in this book is to finance this company.

Cash flows

Financing primarily has something to do with . It is therefore a question of what actually happens to cash flows in the production of services as outlined above. We find that money only flows into the company when the apple juice is sold – no matter to whom. And the money flowing back to the company can be used, for example, to pay workers, energy costs, rents as well as to purchase apples that can be used as raw materials for producing goods. This means that the money actually keeps this production of goods and services going and is intended to ensure the functioning of the company. The impressive thing is – if this cycle works – that the inflowing amount of money is at least as high as the outflowing amount of money.

However, one factor still needs to be taken into account, namely the .

Subsidy

The state or local authorities may intervene in a way that is positive for the company, for example by granting These may consist in the availability of capital from local authorities in order to guarantee a certain orientation, a certain performance of the company. This means, for example, that a certain is made, which would not otherwise have been made under market economy conditions. However, the influence within the framework of a subsidy could also go as far as selecting a specific for the provision of services, i.e., that certain funds are made available so that this provision of services takes place in municipality A and not in municipality B. It is also possible that this capital does not flow directly as money, but rather „indirectly“, i.e., that no specific amount of money is made available, but rather an object (e.g., a piece of land) that saves the company the outflow of money. These and many other possibilities are rather exceptional cases and will not be considered in more detail in the further discus4sion. They lead, in one way or another, away from the pure because there are higher-level considerations (e.g., social) in this context.

While subsidies only play a role in special cases and occasionally, outflows of financial resources to the state through taxes play a role that company has to expect.

Taxes

The issue of is further dealt with in a very limited and rudimentary manner. However, it should be noted that taxes can have a significant impact on financial decisions.

Summary

If it is now summarised that the financial model of Fritz Durster GmbH is very closely related to cash flows and that the state must also be taken into account, then the following first basic model would be described.

This simple cycle can probably no longer work if the company needs a new apple press, for example, because the old one can no longer be used. The purchase of this new machine requires relatively high financial resources, so that in the cycle described above there may not be enough resources available to purchase it. Therefore, it will be necessary that money flows into the company from outside – and not just by sales.

External financing

This is the case for People from outside the company „pump“ money into the company in special financing acts and not, as in the past, by purchasing apple juice. For the natural or legal persons who provide external capital, it applies – as in the rest of the process – that a return is expected. The expected return will vary depending on the legal status or the risk taken by the investor, the agreed duration of the commitment, etc.

Basic model

Thus, from the simple , the following can be stated:

A company is understood to be the institutional legal entity in which the services are provided.