Business Fundamentals: Costs, Financing, and Investment Strategies

Posted on Nov 14, 2024 in Economy

Distribution Channels

A distribution channel comprises all intermediaries between producers and consumers, facilitating product movement. Channels are categorized by the number of intermediaries:

  • Short Channel: Few intermediaries operate.
  • Long Channel: Many intermediaries are involved.

Distribution Process

  • Manufacturer: Develops the product and sells to the wholesaler.
  • Wholesaler: Purchases large product quantities from the manufacturer and sells to other intermediaries.
  • Retailer: Purchases products from wholesalers and sells directly to consumers.
  • Consumer: Acquires the product for consumption.

Costs

Fixed and Variable Costs

Costs are categorized based on production volume:

  • Fixed Costs: Remain constant regardless of production volume.
  • Variable Costs: Fluctuate with production volume.

Total Cost = Fixed Cost + Variable Cost

Unit Costs

Unit costs inform production decisions.

  • Average Variable Cost: Variable cost per unit of production.
  • Average Fixed Cost: Fixed cost per unit of production.

Company Financing

Securing financial resources is crucial for expenditures and investments.

Financing Categorization

By Ownership

  • Self-financing: Resources owned by the company.
  • External Financing: Resources from third parties.

By Source

  • Internal Funding: Funds generated by company activity.
  • External Funding: Contributions from external sources.

By Duration

  • Permanent Resources: Those in Net Equity and Non-current Liabilities.
  • Short-term Resources: Those in Current Liabilities.

Self-Financing

Self-financing utilizes generated funds for expansion or continued operations.

Sources of Self-Financing

  • Profit: A portion of profits can be reinvested.
  • Depreciation: Funds allocated for replacing depreciated equipment.

Investment

Investment is the application of resources to acquire assets, enhancing profitability.

Factors Influencing Investment

  • Return: Expected profitability.
  • Risk: Potential loss.
  • Time Horizon: Duration of the investment and its impact.

Types of Investment

By Asset Class

  • Non-current Assets: Long-term assets.
  • Current Assets: Short-term assets.

By Function

  • Renewal: Replacing existing assets.
  • Strategic: Gaining a competitive advantage.
  • Growth: Expanding operations.
  • Maintenance: Preserving existing assets.

By Characteristics

  • Financial Investment: Investing in securities.
  • Investment in Productive Assets: Investing in tangible assets.

By Cash Flow Structure

  • Single Payment: One-time investment.
  • Multiple Payments: Investments spread over time.

Advantages and Disadvantages of SMEs

Advantages

  • Adaptability: Quickly adjust to demand changes.
  • Customer Relations: Closer and more personal customer relationships.
  • Simplified Management: Easier oversight and direct communication.
  • Reduced Conflict: Streamlined problem-solving.

Disadvantages

  • Limited Economies of Scale: Difficulty achieving cost reductions through large-scale production.
  • Reduced Bargaining Power: Less leverage with suppliers.

Choosing the Right Business Structure for Limited Liability

Several business structures offer limited liability:

Limited Liability Company (LLC or SRL)

  • Formation: Notary deed and registration in the commercial register.
  • Minimum Capital: €3,005.
  • Liability: Limited.
  • Governance: General Meeting of members and administrators.

Corporation (SA)

  • Formation: Similar to LLC.
  • Minimum Capital: €60,101 (25% payable upon incorporation).
  • Liability: Limited.
  • Governance: General Meeting of Shareholders and Board of Directors.

Cooperative (S. Coop)

  • Formation: Notary deed and registration in the Administrative Registry of Cooperatives.
  • Minimum Capital: Defined in statutes.
  • Liability: Limited.
  • Governance: General Assembly, Governing Council, and Auditors.

Worker-owned Company (SLL or SAL)

  • Formation: Notary deed and registration in the Administrative Registry of Industrial Societies.
  • Minimum Capital: €3,005 for SLL, €60,101 for SAL (25% payable upon incorporation).
  • Liability: Limited.
  • Governance: Similar to LLC and Corporation.
  • Ownership: Over 50% of capital must belong to workers; no partner can hold over one-third.

New Limited Company (SLNE)

  • Formation: Public deed in the commercial register (notary processes within 24 hours).
  • Minimum Capital: €3,012; maximum €120,202 (subscribed by individuals only).
  • Liability: Limited.
  • Governance: General Meeting, administrators, and directors (must be members).