Enterprise management must be able to generate profits and money
Responsibility for the financial condition of the company lies with the CEO and functional directors of the company. They must be able to generate profits and money. “Igor Chugunov’s Business Consulting” is ready to help with this through their training.
What do the terms “financial condition of an enterprise” and “effective enterprise” mean?
The term “financial condition of an enterprise” means the results of an assessment of the ability of an enterprise to generate net profit, positive net cash flow, increase its market value, pay for its short-term and long-term financial liabilities in a timely manner and in full, retain its financial independence when raising borrowed capital.
The highest strategic goals of an enterprise are two goals in the short-term period of activity (up to 365 days) and one goal in the long-term period of activity (more than 365 days):
(1) the first highest strategic goal of the enterprise’s business is an optimal increase in net profit;
(2) the second highest strategic goal of the enterprise’s business is an optimal increase in positive net cash flow;
(3) the third highest strategic goal of economic activity is to increase the market value of the enterprise.
Net profit is the excess of the total income of economic activity over the total expenses of economic activity for a certain period.
Positive net cash flow is the excess of total cash receipts over total cash payments over the period of operation.
The relationship between the three highest strategic goals of the enterprise is the following: achieving the net profit goal creates the necessary condition for achieving the goal of positive net cash flow, which in the long term creates the necessary condition for increasing the market value of an enterprise by increasing its own capital.
Net profit is an indicator that the enterprise can earn, not produce and sell products, what can be done at a loss, and earn in the form of the effect of economic activity. Positive net cash flow is an indicator that the company can live on earned money, not borrowing in debts that it cannot repay, and if it takes loans, it returns them modernly and fully, having enough money to continue its economic activity. activities. The growth of the market value of the enterprise is an indicator of the increase in the wealth of its owners associated with the enterprise.
Thus, the analysis of the financial condition of the enterprise or its financial diagnostics is an analysis of the ability of the enterprise to achieve its highest strategic goals. Consequently, financial diagnostics is the determination of the reasons for the success or failure of an enterprise, positive and negative trends in the ability to generate profits and money, liquidity and financial stability, as well as the development of draft decisions to improve the financial condition of an enterprise. It is obvious that the results of financial diagnostics of an enterprise are an area of high interest for the owners of the enterprise who created the enterprise to achieve these very goals, for the general director (director) of the enterprise, who is fully responsible for achieving the goals of net profit and positive net cash flow. The “generality” of the general director is determined by the fact that he is responsible for achieving the final results of the company’s business, which are necessary for all the “joint-stock groups” of the enterprise: optimally increased net profit and optimally increased positive net cash flow.
The term “efficient enterprise” means that an enterprise simultaneously generates net income and positive net cash flow. If an entity generates net income and negative net cash flow or generates a loss and positive net cash flow or, even worse, generates loss and negative net cash flow, then such an enterprise is ineffective. An analogue of the ineffectiveness of an enterprise in the field of human health can be a serious illness that threatens to turn a person into a disabled person or kill him.
At the heart of an effective business enterprise is its ability to produce and sell to consumers the products they need, which can satisfy their needs better and faster than competitors are capable of, which is manifested in high revenue from product sales, and do it in the most economical way, which is manifested in relatively low costs. As a result, the difference between high proceeds from product sales and relatively low costs, which is a net profit, becomes large, which then materializes into a large positive net cash flow.