Financial Management
Chapter 1
Introduction
•Businesses exist because they satisfy human needs.
•Human needs can be classified as physiological needs,
safety needs, social needs, esteem needs and self-
actualisation needs.
•Most human needs are satisfied by various industries,
see p4-5
•Organisations must grow over time either
organically (increasing operations due to
increase in market share). This is known as
market penetration.
•Or by means of a merging with similar firm
(increase market share or removing a
competitor.)
•Or by an acquisitions (taking over).
Introduction
•Other forms of growth may be by:
•Market expansion, marketing firms products in
new markets.
•Product expansion, introducing more products
or services.
•Diversification, introducing new products in new
markets.
The operating environment of the firm
•No firm operates in a vacuum- a producer or
retailer of goods or services.
•Some firms market to end consumer, other to
other businesses.
•A firm operates within the parameters of an
industry, with the threat of competition.
•A firm operates within the confines of the
national economy.
Operating environment (cont.)
•The economy expands and contracts as
economic activity increases and decreases.
•Periods of rapid growth are followed by periods
of economic decline.
•Periods of growth –declining interest rates,
consumers optimistic, disposable income
increase, tax reduction, more businesses open,
increase in cash and credit sales and more jobs
Operating environment (cont.)
•Economic decline –interest rates increase,
consumers pessimistic, tax increase, people lose jobs
and consumers postpone purchases because their
disposable income is decreasing.
