Business Finance and Operations: A Comprehensive Analysis

Posted on Dec 12, 2024 in Economy

Working Capital and Financial Analysis

Working capital is a key aspect of a company’s economic structure. It forces us to consider whether the company has a safety fund to enable us to meet short-term obligations. It’s calculated as:

Current Assets – Current Liabilities = Working Capital

Financial analysis reflects the balance held by the company. For a positive financial situation, the result must be positive. There are four possibilities:

  • Total equilibrium: Maximum financial stability. No debts.
  • Financial stability: Working Capital > 0 – Current assets are greater than current liabilities, indicating sufficient solvency or liquidity in the short term.
  • Short-term financial imbalance: Suspension of payments: Working Capital < 0 (negative), Current Liabilities > Current Assets. The company does not have enough solvency to meet its obligations. If the situation is addressed promptly, the company can solve the problems.
  • Total disequilibrium: Bankruptcy – Liabilities > Assets – The company has no net worth or its own resources.

Taxation of Businesses

Businesses use public goods and services. Therefore, as citizens, they pay taxes, such as Personal Income Tax (PIT) and Corporate Income Tax.

Taxes are compulsory payments made by taxpayers to the State, autonomous communities, or other local authorities. This is the main source of income.

Types of Taxes

  • Tax: Payments required by law, without the taxpayer receiving a specific benefit in return. They represent the majority of the state budget (50%).
    • Indirect tax: Taxes on consumption. Equal pay for everyone regardless of their wealth. Examples include VAT and Excise Tax.
    • Direct taxes: Taxes on the income of enterprises and individuals according to their wealth. In Spain, it is progressive (those who earn more pay more). Examples include Corporate Tax, Income Tax, and the Tax on Economic Activities (IAE).
  • Fees: Taxes paid for the use of a good or service offered by the state (e.g., trash removal, driver’s licenses).
  • Special contributions: Taxes paid by citizens who benefit from a particular public work or service (e.g., paving a street).

Taxes for Businesses

  • Corporate tax: A direct and personal tax levied on profits made by companies. It is applied to the difference between Income and Expenses (EBIT).
  • Income tax on individuals (income tax): A direct, personal, and progressive tax levied on the income of natural persons.
    • Income on which the tax applies includes:
      • Job performance
      • Return on real estate capital (rental)
      • Return on movable capital (interests of shareholders, banks, etc.)
      • Performance of economic activities
      • Economic profit and loss for the period
  • Canary Islands General Indirect Tax (IGIC): An excise tax levied on consumption, goods, and services. It has similar characteristics to VAT in the rest of Spain but with reduced fees. There are three types:
    • General IGIC
    • Reduced IGIC
    • Super-reduced IGIC

Organization and Direction of the Company

Functions of Management

The role of management is to coordinate and integrate all the resources with which the company operates. This is split into four functions:

  • Planning: Deciding in advance what you want to do in the future and how to achieve it, setting objectives.
  • Control: Verifying that objectives are being met, and if not, applying corrective measures.
  • Organization: Designing the best structure for the company. It aims to get the best available resources.
  • Direction or management of human resources: Integrating or coordinating all human components of the company.

Leadership Abilities

  • Strategic: Ability to achieve goals and objectives that lead the company to success.
  • Executive: Utilizing knowledge and discovering the talent or abilities of their subordinates.
  • Leadership: Making components of the company feel part of a common project with a sense of duty and responsibility.

Planning

Within planning, we distinguish:

  • Strategic plans: Long-term
  • Tactical plans: Medium-term
  • Operational plans: Short-term

Phases of Planning:

  1. Diagnosis of the situation
  2. Where do I want to go?
  3. What will enable us to manage?
  4. How, when, and with what resources? -> Tactical and operational objectives.
  5. Control: How are we doing?

Control Function

Verify that the decisions taken in planning are correct or are underway. If not, identify the errors that have occurred and take corrective measures.

Types of Control:

  • Prevention: Reviewing the purchase preconditions to ensure that they meet the necessary criteria (before).
  • Constant: Revising the process during its execution, applying corrective measures.
  • Corrective: Action is applied at the end (after).

Phases of Control:

  1. Setting standards or parameters of measurement.
  2. Measuring actual results from the study.
  3. Verification of results and standards.
  4. Analyzing the differences or discrepancies between them.
  5. Correction of deviations, applying corrective measures.

The Organization

This involves giving the company an internal organizational structure.

Characteristics of Organizational Structure

  • It must create a framework for coordination and interaction between different members of the company.
  • Differentiation of tasks and coordination.
  • It should have a certain stability over time, enabling it to function regularly and safely.

Formal and Informal Organization

  • Formal: Provided by the company.
  • Informal: Spontaneously generated by the relationships between members of the company (e.g., the appearance of opinion leaders).

Designing the Organizational Structure

Centralization or Decentralization

Measured by the degree of delegation in the company, or the act of trusting responsibility.

  • Centralization or concentration: The majority of a company’s decisions are made by one person or a small number of members. It is suitable in small companies or where very high personal control is necessary.
  • Decentralization: Constant delegation of responsibility and authority among all members of the organization.

Departmentalization

Companies need to be structured in divisions, or clusters of activities and people with common tasks.

Types of Departments:

  • Functional: Division by functional areas of the company (e.g., purchasing, management, marketing).
  • Territorial: Based on geographical areas.
  • Products or services: Grouping appropriate when a company has several product lines or differentiated areas (e.g., MediaMarkt, Lopes).
  • Customers or distribution channels: Grouping by type of customers (e.g., large surfaces, retailers).
  • Processes: Based on different stages of production (e.g., car manufacturing).

Different combinations of departmentalization types exist.

The Organization Chart

A tool that graphically represents the organization or organizational structure, reflecting the hierarchy and relationship between the different departments.

Relationships can be:

  • Linear or hierarchical: Define who is the boss or who has responsibility for each.
  • Staff: The company advises but does not assume responsibility for other members.

The Role of Human Resources

Human Resources management includes all tasks performed by the employer to manage the company’s staff. It encompasses:

  • Planning: Establishing or anticipating the present or future personnel needs of the company in terms of staffing. This involves description, specification, and analysis of job positions.
  • Selection and recruitment: Recruiting involves calling people who would be willing to perform a job, and selection is the process of choosing the most suitable people for the job.
  • Orientation, training, and development:
    • Orientation: Companies have integration plans for new employees or plans to facilitate the incorporation and adaptation of new employees.
    • Training: Aims to increase worker productivity. There are two types:
      • On-the-job or internal
      • Off-the-job or external
    • Development: Forms of internal training. There are two types:
      • Job rotation
      • Training, working closely with senior management
  • Pay and promotion: Determining salaries and wages, methods, and amounts. Pay scales are set by levels or groups, goals, overtime, etc. Incentives (supplements or additions to the basic wage) are also considered. Promotions refer to the possibilities of advancement within the organization.