Entrepreneur's Handbook
FINANCIAL OBJECTIVES OF THE VENTURE
It is generally thought that the expectation of a business from financial management is to maximize the company's profit. Accordingly, every decision taken will be evaluated on the basis of its contribution to the profit of the company. However, profit maximization has a number of shortcomings.
First of all, an increase in profit can mean a change in riskiness. Because the risk to bear in order to increase profits may be relatively higher. For example, it is not possible to say that the shareholders of firm Y make a better investment because the shareholders of Beta firm, which makes a profit of 10.- TL, participate in 2 units of risk, whereas the shareholders of Gama company have to risk 3 units against 11.- TL profit only because they have high profits.
Another shortcoming in the point of view that high profit is the main target is that it ignores the time value of money. The timing of profit among projects is of great importance for businesses.
While transferring resources to current assets, finance manager makes expenditures that will make it possible not to carry out periodic activities, while transferring resources to fixed assets, it makes expenses that will enable the execution of activities to be carried out not only for the current period, but for the next period or periods. Is it the right goal to maximize profits in order to bring partners to the highest prosperity when making fundraising and sourcing decisions? (Sayılgan, 2017, s.5).
Even if it is said in the first place that the main purpose of a business is to make profit, the main purpose is to maximize the market value of the firm. Of course, the interests of the entrepreneur who takes risks by taking on responsibility are prioritized, but it is to maximize the target market value, which will be in the interest of both the entrepreneur as the business owner, the shareholders and the stakeholders in the external environment of the business.
On the other hand, in order to reach the desired profit or to determine how far it is from the profit (loss) point, the costs must first be separated as variable and fixed. Then, the contribution type income statement can be prepared and answers to these questions can be found. What is meant by contribution, in simple terms, is that the sales price of the product sold first meets the variable costs (f-a) of the product and then contributes to meeting the fixed costs b/(f-a). The point at which all fixed costs are met is expressed as the breakeven point. After this stage, the part exceeding the variable costs of each sale, that is, the part of the product after meeting its variable costs, is expressed as profit. At this stage, the desired profit is added to the fixed costs and if the calculation is made on the contribution margin, the targeted figures can be determined on the sales amount and sales amount.
Is there a bankruptcy risk for a profitable business? Although the concepts of profit and bankruptcy do not seem to come together in the first place, the risk of bankruptcy is also in question for a profitable business.
Example:
Let r@ktas business show a financial situation as follows at the end of the financial period.
r@ktas business
Period End Dated 31.12.20xx
Financial Status Statement
ASSETS
I- Current Assets 16.000.-
Cash and Cash Equivalents 500.-
Commercial debts 2.500.-
Stocks 13.000.-
II- Fixed Assets 31.000.-
Plant Machinery and Devices (Net) 31.000.-
ASSETS TOTAL 47.000.-
LIABILITIES
III- Short Term Outsources 26.000.-
Bank credits 24.000.-
Trade payables 2.000.-
IV- Long Term Outsources
V- Equity 21.000.-
Capital 14.000.-
Period Profit 7.000.-
LIABILITIES TOTAL 47.000.-
As it can be understood from the financial data, the owner entrepreneur earned a net profit of 50% on the capital as a result of the activities of the business he established with a capital of TL 14,000. However, how should the situation be evaluated in terms of using funds and evaluating surplus funds?
Is there a risk of bankruptcy if this business is not a profit-making business with a very high rate of 50% on the capital?
When the financial status table is examined carefully, the first thing that strikes the eye is the machine, plant and equipment account. The business is establishing a new facility or purchasing a new machine device. The answer to the question where is the amount of profit for the period, profit is distributed among active accounts. It is either cash waiting in the safe, or a receivable waiting to be collected or stocks bought to be sold. It may also have been used in plant machinery and equipment financing.
The important point here is the maturity match between current assets that can turn into cash in less than a period and short-term liabilities that need to be paid in less than one period. In terms of financing policy, financing current assets with short term foreign resources leads to negative working capital. This business, which makes a profit due to a bank loan or commercial debt, may face a lawsuit demanding bankruptcy.
As can be seen, the liquidity status of businesses is very important. Well, if we, as an entrepreneur, consider that we cannot sell our stocks that we bought to sell for a moment, what kind of liquidity situation can we face? What would happen if the scenario worsened a little and we have a collection problem in our commercial receivables? All these questions will find the answer with the help of ratio analysis.
As can be seen, a policy that focuses on finding funds, using this fund, and executing the dividend (dividend) policies and their relations with each other, and only making a profit, may result in the bankruptcy of the company.
The importance of liquidity situation can be understood from this example. So, in terms of liquidity, what will be the situation of the company to pay its debts if it cannot sell its stocks for a moment? In a worse scenario, what will the situation be if he cannot collect his receivables? The answer to these questions can be found with the liquidity ratios, one of the types of financial statement analysis, which is the ratio analysis. Liquidity ratios are used to determine whether working capital, also called current assets, is sufficient to measure the solvency of short-term debts. (Özdemir, 1997, s.37).
The liquidity ratio is found by dividing the current assets of the company into short term liabilities. The liquidity ratio shows the status of the amount required for business activities after meeting the net working capital of the enterprise, that is, its short-term debts. This ratio is expected to be 2 in the literature.
Acid-test ratio, on the other hand, provides information about the short-term debt payment capability in case stocks cannot be sold for a moment, as mentioned before. Acid-testorant is calculated by subtracting the total of inventories from the total current assets and dividing it by the sum of short term liabilities. This ratio is expected to be 1 in the literature. Finally, in case the receivables cannot be collected, the rate that gives information about the ability of the company to pay its short-term debts is the cash rate. It is calculated by dividing the sum of liquid assets by the sum of short term liabilities. Although this rate is expected to be 0.20 in the literature, all these rates should be evaluated based on the sector averages according to the characteristics of the sector.