8.01.

2025
Global Economy - Perception by Countries

1. Globalisation: A Chance of Broken Borders

Definition: Integration of economies, cultures, and ideas through trade, investment, and
technological advances.

Opportunities:

Free flow of goods, services, and labor.

Enhanced innovation via global exchange of ideas.

Access to new markets and diversified resources.

Challenges:

Inequality in resource distribution.

Vulnerability to global crises (e.g., pandemics, financial turmoil).

Loss of cultural identity in some regions.

2. The New Era: Signaling Structural Changes?

Key Features:

Shift from industrial to knowledge-based economies.

Rise of digitalization and AI transforming global trade dynamics.

Geopolitical shifts: Growth of emerging markets (e.g., China, India).

Impacts:

Decline in manufacturing dominance in developed economies.

Greater emphasis on services, innovation, and green technologies.

Changes in labor markets (e.g., gig economy, remote work).

3. Recession and Financial Crisis Transmission

Mechanisms of Transmission:

Interconnected financial markets spread shocks globally.

Dependence on international trade magnifies impact.

8.01.2025 1
 Capital outflows and currency depreciation in vulnerable economies.

Examples:

2008 Global Financial Crisis: Sparked by the U.S. housing market collapse, affected
Europe, Asia, and beyond.

COVID-19-induced recession: Supply chain disruptions and reduced global demand.

How Do Countries Protect Their Economies?

Monetary Policies:

Lowering interest rates to stimulate spending.

Quantitative easing to increase liquidity in markets.

Fiscal Policies:

Government stimulus packages to boost consumption and investment.

Subsidies and tax cuts for critical industries.

Trade Measures:

Tariffs and import restrictions to protect local industries.

Diversification of trade partnerships to reduce dependency.

Regulatory Responses:

Strengthening financial regulations (e.g., stress tests for banks).

Establishing sovereign wealth funds for economic stabilization.

How Does Business Respond to Challenges?

Adaptation Strategies:

Diversification: Expanding into multiple markets to reduce risk.

Innovation: Investing in technology and sustainable practices.

Agility: Flexible supply chains and business models.

Cost Management:

Streamlining operations and reducing unnecessary expenses.

Risk Mitigation:

Building financial reserves.

8.01.2025 2
 Hedging currency risks in international trade.

Collaboration:

Partnering with other firms and governments for shared resilience.

Globalization as Transmission of Inequalities

1. Asymmetric Concentration of Production and Export

Description: Global production and exports are concentrated in specific regions,
particularly in developing economies (e.g., China, Southeast Asia).

Impacts:

Over-reliance on manufacturing hubs for global supply chains.

Wage disparities between production and consuming regions.

Unequal benefits of globalization among countries.

2. Disappearance of Industry Branches in the West

Reasons:

Offshoring of manufacturing to lower-cost regions.

Deindustrialization due to automation and trade liberalization.

Consequences:

Job losses in traditional industries (e.g., steel, textiles).

Socioeconomic challenges in regions dependent on manufacturing.

Growth of the service sector as a dominant force in Western economies.

3. Imbalanced Concentration of Capital Assets and Reserves

Key Observations:

Wealth and capital reserves are unevenly distributed globally.

Developed countries and financial hubs control the majority of global assets.

Challenges:

Limited access to capital for developing economies.

Persistent wealth inequality on a global scale.

8.01.2025 3
 4. Enormous Capitalization of Banks and Investment Funds
Trends:

Rapid growth in assets under management by global investment funds and banks.

Financial power concentrated in a few large institutions.

Implications:

Heightened risk of systemic crises due to interconnectedness.

Power imbalances between financial institutions and governments.

5. Domination of Digital Technologies (Internet, 5G, AI)

Features:

Digital infrastructure underpins economic globalization.

Technologies like AI and 5G accelerate innovation and connectivity.

Inequalities:

Digital divide between developed and developing countries.

Monopoly of tech giants in controlling data and innovation.

Dependence of smaller economies on external digital solutions.

6. Energy, Ecology, and Pollution as New Factors of Development

Energy:

Shift to renewable sources driven by climate concerns and resource limitations.

Unequal access to green energy technologies.

Ecology and Pollution:

Developing countries often face higher pollution levels due to outsourced

production.

Global pressure to adopt sustainable practices unequally distributed.

New Development Models:

Focus on sustainability and circular economies as a growth paradigm.

Green technologies becoming a competitive edge for nations and companies.

Globalization as the New Problems

8.01.2025 4
 1. Economic Problems
Key Issues:

Economic recessions due to interconnected markets.

Unequilibrium in capital outflows, leading to financial instability in developing

economies.

Low economic growth dynamics and persistent unemployment in vulnerable

regions.

Examples:

Global ripple effects of the 2008 Financial Crisis.

Job losses in Western industries due to offshoring.

2. Crisis of State and Democracy

Challenges:

Budget deficits and rising public debt caused by economic globalization.

Weakening of state control over economic policies due to global financial

dependencies.

Decline in public trust in democratic institutions and governance.

Examples:

Eurozone debt crisis.

Populism and political instability in response to globalization-induced inequality.

3. Social Crisis
Key Issues:

Rising inequalities in income and access to essential services (e.g., healthcare).

Youth unemployment due to mismatches in skills and global labor market demands.

Declining standard of living in some regions.

Examples:

Protests in France over social inequalities and labor reforms.

Unequal access to healthcare during the COVID-19 pandemic.

8.01.2025 5
 4. Crisis of Human Values and Demography
Key Challenges:

Aging populations leading to economic strain on pension and healthcare systems.

Consumerism fostering individualism and eroding community values.

Migrations caused by economic disparity and climate changes, leading to social

tensions.

Examples:

Japan's demographic challenges.

Migration crises in Europe.

5. Crisis of Ecology and Energy

Environmental Issues:

Pollution and greenhouse gas emissions from industrial activities.

Global warming and climate change as byproducts of industrialization and resource

consumption.

Energy Challenges:

Over-reliance on fossil fuels and unequal access to renewable energy.

Examples:

Rising global temperatures and extreme weather events.

Pollution crises in developing industrial hubs (e.g., India, China).

Positives Created by Globalization

Economic Growth:

Increased trade, investment, and market access boost GDP growth globally.

Innovation and Technology:

Rapid spread of technologies, including digital and green solutions.

Collaboration across borders fosters innovation.

Cultural Exchange:

Enhanced understanding and appreciation of diverse cultures.

8.01.2025 6
 Improved Living Standards:

Access to a broader range of goods and services at lower prices.

Global Cooperation:

Joint efforts to address global challenges (e.g., climate change, pandemics).

Opportunities for Education and Work:

Access to global education platforms and international career opportunities.

Globalization as the Strategy Challenge

1. Nature of the US, EU, and China Conflict

Key Issues:

US: Economic and geopolitical dominance, trade wars (e.g., tariffs on Chinese
goods), and competition in technology (e.g., semiconductors, AI).

EU: Balancing trade relations with both the US and China while maintaining
autonomy in areas like green policies and technology standards.

China: Aspiration to be a global leader through initiatives like the Belt and Road
Initiative, technological advancements, and economic expansion.

Impact on Business in EU Countries:

Disruption of supply chains and increased costs due to tariffs and trade restrictions.

Pressure on EU firms to choose sides in technology standards (e.g., 5G).

Challenges in maintaining competitive exports due to geopolitical tensions and

market access restrictions.

2. Strategies Realized by Corporations

USA:

Focus on global dominance through acquisitions, mergers, and takeovers.

Emphasis on innovation in technology and services.

Building monopolies in key sectors (e.g., Big Tech, pharmaceuticals).

China:

Leveraging economies of scale to produce low-margin but high-volume goods.

Balancing quality with affordability to penetrate global markets.

8.01.2025 7
 State-supported enterprises driving international expansion.

EU:

Specializing in prestigious goods with high margins (e.g., luxury brands, automotive
industry).

Focus on quality, innovation, and sustainability in product offerings.

Branding as a key differentiator to maintain competitive edge.

3. How to Activate Growth?

Economic Strategies:

Increase high investment rates in innovation, infrastructure, and green technologies.

Develop efficient and transparent capital markets to attract investments.

Social and Human Capital:

Invest in education and skill development for a competitive workforce.

Engage communities to foster inclusive growth and social cohesion.

Corporate Strategies:

Information: Utilize big data and analytics for informed decision-making.

Pricing: Optimize pricing strategies to balance affordability and profitability.

Allocation: Ensure efficient resource allocation for maximum productivity.

Quality: Focus on delivering high-quality products and services to build brand

loyalty.

4. New Cost Factors

Environmental Costs:

Climate change and global warming increasing operational expenses (e.g.,

regulatory compliance, carbon offsets).

Pollution control measures adding to production costs.

Transition to Green Energy:

Investment in renewable energy sources (e.g., wind, solar) for sustainability.

Short-term cost increases but potential long-term advantages in energy

independence.

8.01.2025 8
 Technological Development:

Advancements in AI, robotics, and automation reducing long-term production costs.

Innovation as a key driver of competitive advantage despite initial investment costs.

The Global Environment Offers New Options

1. Foreign Location as More Choices for Business

Key Opportunities:

Expansion into new markets for sales and production.

Access to diverse labor pools with varying costs and skills.

Proximity to resources and local supply chains for efficiency.

Impacts:

Enhanced global presence and competitive advantage.

Increased complexity in managing multinational operations.

2. Data Quality and Local Conditions

Importance:

Accurate and realistic data ensures effective decision-making.

Reflects local economic, cultural, and regulatory environments.

Challenges:

Dispersion of operational targets across regions complicates consistency.

Need for real-time, high-quality data to adapt to local conditions.

3. More Assets Available in Management

Key Areas:

Personnel Engagement: Leveraging diverse talent for innovation and efficiency.

Acquisition of Capital: Accessing global financial markets for funding.

Service Procurement: Utilizing subcontracting, outsourcing, leasing, and renting to

reduce fixed costs.

Benefits:

8.01.2025 9
 Increased flexibility in resource allocation.

Reduced operational costs and risk through asset-light models.

4. More Possibilities for Optimization

Key Areas:

Prices: Dynamic pricing strategies to match local demand and market conditions.

Costs: Cost-cutting through efficient supply chains and resource use.

Wages: Competitive wage structures based on regional benchmarks.

Interest Rates: Strategic use of favorable financial markets for borrowing.

Risk Management: Diversifying operations to mitigate geopolitical and economic

risks.

Outcome:

Extended areas of choice aligned with organizational goals.

Optimization by Incremental Cash Flow (C-F)

Applications:

a) In the Country of Capital Origin:

Efficient reinvestment strategies to maximize shareholder value.

Mitigation of currency exchange risks.

b) In the Country of Operations:

Tailoring investments to local opportunities for growth.

Leveraging tax advantages and government incentives.

c) In All Areas of Individual Choices:

Holistic optimization of global operations for balanced growth.

Integration of financial, operational, and strategic planning for sustained

profitability.

Internationalisation and Its Impact on Performance

Internationalisation: Less Attractive Due to Increased Fixed Costs

Key Variable Costs:

8.01.2025 10
 Fixed costs incurred due to operational expansion in foreign markets.

Impact on profitability and pricing strategies due to added fiscal burdens.

1. Taxes
Definition:

Obligatory fiscal payments imposed on income, revenue, or transactions.

Impact:

Increased cost of operations due to varying tax regimes across countries.

Examples include corporate income tax, value-added tax (VAT), and sales tax.

2. Duty Tariffs
Definition:

Taxes paid on goods when they cross international borders.

Charged per quantity or on an ad valorem basis (percentage of value).

Impact:

Increased cost of imported goods, affecting competitiveness.

Potential trade barriers, especially in high-tariff regions.

3. Administration Fees
Definition:

Fixed payments required for administrative procedures.

Paid once per regulatory or administrative decision.

Impact:

One-time cost but can be significant for compliance with local regulations.

Examples include registration fees and customs handling charges.

4. Licenses
Definition:

Costs incurred for obtaining legal permissions to operate in a foreign country.

Impact:

8.01.2025 11
 Adds to setup costs for new ventures or expansions.

Examples include business operation licenses and sector-specific permits.

5. Royalties
Definition:

Taxes or fees paid for exploiting natural or intellectual resources.

Charged based on the quantity extracted or produced.

Impact:

Affects businesses in sectors reliant on natural resources (e.g., oil, water, tobacco).

Examples include royalties for oil drilling, alcohol production, and use of patented
technologies.

Business Strategy

Business Strategy: Continuous Process

Core Definition:

A dynamic approach aimed at achieving business goals.

Involves permanent adaptation to market changes to maintain optimal

performance.

Ensures the satisfaction of key interest groups, including shareholders, employees,

customers, and partners.

Business Strategy in the Global World

Key Characteristics:

A Professional Approach to Management:

Strategic decision-making based on data, analysis, and expertise.

Focus on aligning organizational resources with global market demands.

A Strongly Motivated Initiative:

Proactive leadership driving innovation and change.

Ensuring alignment of corporate goals with cultural and regional nuances.

The Process of Optimization by Incremental Cash Flow (C-F):

8.01.2025 12
 Continuous financial optimization to balance costs, investments, and risks.

Incremental adjustments to maximize profitability and sustainability.

Key Components of Business Strategy

Adaptability:

Responding to economic, technological, and regulatory shifts.

Flexibility to compete effectively in a dynamic global environment.

Optimization:

Focused on cost efficiency, resource allocation, and maximizing returns.

Incorporates tools like lean management, pricing strategies, and risk mitigation.

Global Integration:

Balancing local market needs with global efficiency.

Leveraging synergies across markets for competitive advantage.

Management in International Environment

A. Rules and Criteria for Investment Project Optimization

Key Role of Managers:

Application of specific rules and criteria to evaluate investment projects.

Decisions focus on optimization to maximize profitability and efficiency.

Criteria for Acceptance or Rejection:

Feasibility of achieving projected returns.

Alignment with strategic objectives.

Assessment of risks, costs, and long-term benefits.

B. Budgeting in Investment Projects

Functions of Budgeting:

Coordination: Aligning investment projects with organizational goals.

Control:

Monitoring revenues to ensure income generation.

8.01.2025 13
 Tracking cost savings to enhance efficiency.

Managing timing for optimal resource allocation.

Value Creation:

Exploiting synergies among projects for combined benefits.

Leveraging economies of scale to reduce per-unit costs.

Impact:

Budgeting ensures that resources are allocated effectively to maximize added value.

C. Net Cash Flow (NCF) as a Criterion for Value Creation

Definition:

NCF represents the difference between cash inflows and outflows over a period.

Significance:

Primary measure for assessing added value creation.

Reflects the ability to generate future cash flows under projected conditions.

Role in Decision-Making:

Ensures sustainability and financial health of projects.

Protects against unfavorable financial conditions that could disrupt projected cash
flows.

Variable Factors Affecting Foreign Projects

Key Variable Factors Differentiating Foreign Projects from Domestic

Budgets and Cash Flow (CF)

1. Projections of Demand for Goods and Services

Foreign Projects:

Demand is influenced by local market conditions, preferences, and economic cycles.

Potential for unpredicted fluctuations in demand due to cultural and social

differences.

Domestic Budget:

8.01.2025 14
 More predictable demand based on historical data and established market
knowledge.

2. Direct Costs of Labor and Materials

Foreign Projects:

Costs vary due to differences in wage levels, material availability, and regional
supply chains.

Domestic Budget:

Relatively stable and well-understood cost structures based on local norms.

3. Access to Liquidity and Currency Exchange

Foreign Projects:

Dependence on access to foreign financial markets.

Exposure to currency exchange risks affecting profitability.

Domestic Budget:

Easier access to local liquidity without exchange rate concerns.

4. Cost of Capital, Rentability, and Risk

Foreign Projects:

Higher costs of capital due to perceived risks in foreign markets.

Challenges in predicting rentability under different economic and legal conditions.

Domestic Budget:

Lower risk premiums and more stable cost of capital.

5. Fluctuation of Exchange Rates and Inflation

Foreign Projects:

Exchange rate volatility impacts revenues and costs in local currency.

Inflation in the host country affects pricing, wages, and material costs.

Domestic Budget:

Limited exposure to such fluctuations, providing stability.

6. Foreign Laws on Tax Regulations and Execution

8.01.2025 15
 Foreign Projects:

Complexity in navigating foreign tax laws and compliance requirements.

Risk of delayed or inconsistent enforcement.

Domestic Budget:

Familiarity with and predictability of local tax regulations.

7. Accounting Standards and Practices (Including Corruption)

Foreign Projects:

Need to adapt to host country's accounting standards.

Risk of corruption affecting financial practices and transparency.

Domestic Budget:

Standardized and consistent accounting practices.

8. Political, Cultural, and Social Differences

Foreign Projects:

Business operations influenced by political instability, cultural norms, and social

expectations.

Necessity for adaptation and mitigation of risks tied to non-economic factors.

Domestic Budget:

Fewer uncertainties arising from such differences.

Measuring Variable Factors

Changing Intensity:

Variable factors fluctuate over time and require continuous monitoring.

Incremental Cash Flow:

Effects are measured as marginal changes in cash flow due to specific factors.

Provides insights into how adjustments in operations or market conditions affect

profitability.

Difference Between Incremental Cash Flow (C-F) and Total Cash Flow

1. Total Cash Flow (CF)

8.01.2025 16
 Definition:

Reflects the primary assumptions of investment performance, assuming stability

over time.

Characteristics:

Represents a static view of expected revenue, costs, and profitability.

Based on initial projections that do not account for unforeseen changes or variability.

Key Focus:

Long-term outlook aligned with the project's original financial planning.

2. Incremental Cash Flow (C-F)

Definition:

Measures marginal variability in cash flows due to unexpected changes in goods,

services, or market conditions.

Characteristics:

Dynamic and reflects real-time adjustments in costs or revenues.

Captures the marginal effects on total cash flow, including both positive and
negative changes.

Impact of Cannibalisation:

Definition: When a firm's new products or operations negatively affect its existing
offerings.

Reduces project profits by diverting sales from existing markets or products.

Examples of Cannibalisation:

Skoda Cars: Czech factories producing Skoda cars reduce the market potential for
VW Passat within the EU.

Black & Decker: Overseas plants export cheaper tools, substituting the domestic
offerings of parent companies.

Cases Highlighting Marginal Effects

Agreement Between EU and Mercosur:

Lack of transparency in the agreement terms.

Unknown marginal costs and benefits for individual EU members.

8.01.2025 17
 Risks include:

Perceived arrogance of EU authorities acting without member consensus.

Potential internal conflicts undermining EU unity and stability.

Threats to long-term integrity, potentially initiating EU fragmentation.

Key Distinctions
Aspect Total Cash Flow Incremental Cash Flow

Based on primary, unchanging

Definition Captures marginal changes over time.
assumptions.

Static and consistent over the Dynamic, adapting to real-time market

Variability
investment period. changes.

Scope Comprehensive and long-term. Focused on short-term adjustments.

Original revenue projections for a Cost increases due to currency

Example
project. fluctuations.

Importance of Incremental Cash Flow (CF) Analysis

Importance of Incremental CF Analysis

Key Role:

Evaluates marginal changes in cash flow during the project lifecycle.

Helps identify and adapt to unexpected changes, ensuring better decision-making.

Significance:

Provides a dynamic perspective compared to static Total CF projections.

Highlights areas of risk, inefficiency, and potential improvements.

Challenges in Incremental CF Calculation

1. Fixed Assumptions of Variables:

Plans for all stages, including realization, exploitation, and residual value, rely on
assumptions that may not hold over time.

Variability in economic, market, or operational factors complicates accurate

forecasting.

2. Changing Variables Abroad:

8.01.2025 18
 Foreign investments face unique challenges due to:

Political, economic, and regulatory changes.

Fluctuations in demand, currency, or inflation during the project's lifecycle.

Estimating these changes is inherently difficult.

3. Variance from Planned ROI:

Actual returns may deviate due to:

Temporary losses from economic downturns.

Deficits in demand leading to underperformance.

Operational delays requiring additional support or resources.

Role of Big Data and AI in Incremental CF Analysis

Big Data:

Enables real-time monitoring of variables such as market trends, consumer behavior,

and operational performance.

AI Integration:

Predictive analytics to model potential changes and outcomes.

Dynamic adjustments to projections based on new data.

Future Benefits:

Improved accuracy and adaptability in cash flow management.

Enhanced risk mitigation through data-driven insights.

How Incremental Cash Flow (C-F) Increases Total C-F

Incremental Cash Flow (C-F) Contribution to Total Cash Flow

Sales Creation and Value Added Effects:

Incremental C-F results from additional revenues generated by new projects or

expansions.

These revenues enhance the Total C-F by creating synergies and value-added
effects rather than reducing the market potential of existing products (opposite to
cannibalisation).

8.01.2025 19
 Example: Skoda and Volkswagen (VW) Corporation
1. Skoda's Impact on VW Exports:

Expanded Exports:

Skoda's investments in diverse model production across European countries

boosted VW's exports.

Improved Market Position:

Skoda's operations strengthened VW's competitiveness within the European

Community (EC).

2. Additional Advantages for VW Parent Corporation:

Spare Parts and SKD Components:

VW benefits from exporting spare parts and Semi-Knocked Down (SKD)

components to Skoda's international production facilities.

Synergistic Effects:

Creates an integrated supply chain where VW subsidiaries contribute to overall

profitability.

3. Dependency on Offshore Manufacturers:

High-Quality Production:

Offshore manufacturers produce components and vehicles of exceptional

quality.

Competitive Edge:

Enables VW to compete effectively with top automotive brands globally.

Value Added Effects vs. Cannibalisation

Value Added Effects:

Incremental C-F creates new sales opportunities and enhances the parent
company’s market reach and profitability.

Example: Skoda generating incremental C-F that contributes positively to VW's

Total C-F through exports and parts supply.

Cannibalisation:

Occurs when a new product or project reduces sales or profitability of existing

offerings.

8.01.2025 20
 Opposite of value-added effects, leading to reduced Total C-F.

How Incremental Cash Flow (C-F) Affects Total Cash Flow (Total C-F)

1. More Options and Cost Opportunities Abroad

Case 1: HP Factory in Mexico

Land Valuation:

If land was purchased 10 years ago, its current value must be included in the project
calculation, not the historical cost.

Incremental C-F reflects the opportunity cost of the land's current market value,
which impacts the Total C-F calculation.

Case 2: Oil Companies and Petrochemicals

Real Economic Costs:

Crude oil is extracted at low costs, but converting it into petrochemicals increases
prices to market levels.

Incremental C-F accounts for opportunity costs and ensures the project generates
returns up to its productivity limits.

Effect on Total C-F:

Adds value through downstream processes, increasing profitability reflected in Total

C-F.

2. Transfer Pricing Schemes

FIAT Corporation Case:

FIAT operates factories in France, Spain, Poland, and Brazil, exchanging

components and spare parts.

By manipulating transfer prices (e.g., increasing internal costs of imported parts),

FIAT:

Decreases apparent profitability in selected subsidiaries.

Reduces tax liabilities in high-tax regions, improving consolidated financial

results.

Other Corporations:

8.01.2025 21
 Many firms set lower transfer prices for components produced in less developed
countries.

By transferring value to higher-margin markets, they enhance overall financial

performance.

Implications:

Distorted Profitability:

Transfer prices can obscure the true profitability of foreign investments.

Control Challenges:

When transferred goods lack an alternative market, manipulation is harder to

detect.

Acceptance of Projects:

Ability to use transfer pricing may become a deciding factor in outsourcing

decisions.

Conclusion:

Customers do not benefit from transfer price manipulation.

Manipulated transfer prices can distort Total C-F and investment decisions.

3. Accounting of Intangible Benefits

Qualitative Factors:

Difficult to measure in monetary terms but significantly impact investment success.

Examples:

Poland:

Better work discipline, higher quality standards, faster operations, and fewer
errors improve productivity.

Technology Adoption:

Companies improve their global competitive position by adopting or learning

technologies developed abroad.

Effect on Total C-F:

Incremental C-F reflects the intangible benefits through enhanced efficiency, brand
value, and innovation.

8.01.2025 22
 While qualitative, these benefits contribute to long-term value creation and
profitability.

Overall Impact of Incremental Cash Flow on Total C-F

1. Real-Time Adjustments:

Captures changes in costs, revenues, and operational efficiencies.

2. Synergies and Value Addition:

Reflects the benefits of expanded operations and downstream processes.

3. Transparency in Costs:

Accounts for opportunity costs and intangible benefits that improve the accuracy of
Total C-F.

4. Challenges:

Transfer price manipulation and unquantifiable intangible benefits complicate

accurate measurement.

Other External Factors Affecting Incremental Cash Flow (C-F)

8.01.2025 23
 External Factors Impacting Incremental C-F
1. Relevant After-Tax Cash Flow:

Definition:

Cash flow adjusted for taxes, reflecting the net earnings after all fiscal
obligations.

Impact:

Incremental C-F is directly affected by changes in tax rates or policies.

Tax credits, deductions, or liabilities in foreign markets can significantly alter

projected returns.

2. Rate of Currency Changes:

Definition:

Variability in exchange rates (increase or decrease) between operating and

reporting currencies.

Impact:

Affects the value of revenues, costs, and profits when converted to the parent
company’s currency.

Significant for multinational operations, where currency risk needs to be

mitigated (e.g., through hedging).

3. Expected Inflation:

Definition:

Inflation alters the purchasing power of money, affecting costs, pricing, and
returns.

Impact:

Raises the cost of inputs, wages, and operational expenses.

Can affect sales prices and demand, depending on market sensitivity.

4. Changes in Access to Liquidity and Capital:

Definition:

Availability of funds, influenced by interest rates and financial market

conditions.

Impact:

8.01.2025 24
 Higher interest rates increase borrowing costs, reducing incremental C-F.

Discount rates used for project valuation (e.g., Net Present Value - NPV) are
affected by capital market conditions.

5. Interest Subsidies by the EU and Public Funds:

Definition:

Financial incentives provided by public institutions or the EU to reduce

financing costs.

Impact:

Subsidies lower the Weighted Average Cost of Capital (WACC), improving

project profitability.

Encourages investments in specific sectors or regions by reducing financial

barriers.

6. Political and Economic Risk Compensation:

Definition:

Adjustments made to account for instability or risks in foreign markets (e.g.,

regulatory changes, geopolitical tensions).

Impact:

Increases required returns to justify higher risks.

Affects project feasibility and the expected incremental C-F.

Mistakes in Investments and Their Consequences

Key Mistakes Leading to Increased Losses and Deficits

1. Effects Worse Than Planned:

Definition: Investments fail to meet projected goals or generate expected returns.

Impact: Reduces profitability and erodes stakeholder confidence.

2. Delayed Investments:

Definition: Postponements in project initiation or completion.

Impact:

Increases unexpected costs, such as inflation-adjusted expenses.

8.01.2025 25
 Missed market opportunities, reducing potential returns.

3. Poor Performance, Quality, and Time Management:

Definition: Inadequate discipline in project execution.

Impact:

Lower-quality outputs and missed deadlines damage reputation and financial

viability.

4. Liquidity Deficit:

Definition: Insufficient cash flow to support ongoing operations.

Impact:

Leads to operational disruptions and inability to meet financial obligations.

5. Unprecise Contracts:

Definition: Vague or incomplete contractual terms.

Impact:

Unexpected expenses arise due to disputes or unanticipated obligations.

6. Coordination Problems:

Definition: Inefficiencies in managing tasks, teams, or resources.

Impact:

Increased operational costs and reduced project efficiency.

Consequences of Investment Mistakes

1. Fade Prospects of Profits and Bonuses:

Reduced financial performance impacts employee incentives and stakeholder

returns.

2. Conflicts and Deterioration of Labor Relations:

Poor investment outcomes lead to disputes among teams, reducing morale and
productivity.

3. Increased Stress for Managers:

Managers face heightened pressure to resolve issues, maintain operations, and

manage expectations.

8.01.2025 26
 Importance of Investment Elasticity in a Risky Climate

Key Aspects of Investment Elasticity

1. Flexible Horizon of Investment and Alternatives:

Definition:

Ability to adjust the investment timeline and explore alternative options as risks
evolve.

Impact:

Enhances responsiveness to market changes and minimizes long-term exposure

to adverse conditions.

2. Division of the Process into Sequences and Cycles:

Definition:

Breaking the investment process into manageable phases or stages.

Impact:

Allows for periodic reassessment and course corrections based on changing

conditions.

Reduces overall risk by committing resources incrementally.

3. Elastic Realisation and Sensitivity Analysis:

Definition:

Adaptable implementation strategies combined with detailed analysis of

potential risks.

Impact:

Improves decision-making by identifying vulnerabilities and preparing

contingency plans.

Supports informed responses to unforeseen challenges.

4. Reserves to Reduce Distortions:

Definition:

Maintaining financial and resource reserves to cushion against unexpected

disruptions.

Impact:

8.01.2025 27
 Increases resilience, ensuring continuity of operations and reducing the impact
of shocks.

5. Peaks of Intensity Cycles and Contractions:

Definition:

Recognizing and leveraging peak activity periods to drive performance,

followed by strategic scaling back during contractions.

Impact:

Optimizes resource utilization and prevents overextension during uncertain

times.

6. Anti-Cycle Measures by Public Institutions and Businesses:

Definition:

Counter-cyclical policies and practices to stabilize operations during economic

downturns.

Examples:

Public institutions providing subsidies, tax breaks, or financial support.

Businesses adopting cost-saving measures or diversifying operations to mitigate

risk.

Investment as an Initiative to Overcome the Business Cycle

Stages of the Business Cycle and Investment's Role

1. Startup Stages (Increasing Growth):

Characteristics:

High growth potential with focus on market entry and expansion.

Investment directed towards innovation, infrastructure, and scaling operations.

Role of Investment:

Fuels rapid growth through funding for R&D, marketing, and talent acquisition.

2. Consolidation (Stable Growth):

Characteristics:

Moderate, consistent growth as the business establishes itself in the market.

8.01.2025 28
 Role of Investment:

Focuses on improving operational efficiency and maintaining market position.

Investments may include technology upgrades or process optimization.

3. Maturity (Slowing Growth):

Characteristics:

Growth slows as the market becomes saturated.

Role of Investment:

Strategic investments in diversification or market expansion to sustain

profitability.

Emphasis on improving customer loyalty and product differentiation.

4. Decline (Negative Growth):

Characteristics:

Reduction in demand and profitability due to market saturation or competition.

Role of Investment:

Revitalization efforts through product innovation, restructuring, or rebranding.

May involve acquisitions or exploring new markets to offset losses.

Methods of Extending and Modifying the Business Cycle

1. Purchase of Customer Loyalty:

Strategies:

Loyalty programs, personalized offers, and after-sales services.

Impact:

Ensures consistent revenue and mitigates the impact of competition.

2. Product Improvement:

Strategies:

Enhancing quality, introducing new features, or addressing customer feedback.

Impact:

Sustains interest and demand, prolonging the product's lifecycle.

3. Interfering with Substitutes:

8.01.2025 29
 Strategies:

Innovating to create unique offerings that reduce the appeal of alternatives.

Impact:

Protects market share and maintains competitive advantage.

4. Promotion and Bargaining for Buyers:

Strategies:

Aggressive marketing, discounts, or bundled offers.

Impact:

Boosts short-term sales and attracts new customer segments.

5. Extending the Scale of Operations:

Strategies:

Expanding production capacity, entering new markets, or forming partnerships.

Impact:

Drives growth by increasing market reach and operational capacity.

6. Capital Engagement:

Strategies:

Raising funds through equity, debt, or reinvestment of profits.

Impact:

Provides financial resources for sustained growth and innovation.

Challenges of the Recession

Key Challenges Faced During a Recession

1. Review of New Markets and Risk Structures:

Definition:

Evaluating potential opportunities in new markets while reassessing existing

risk exposure.

Strategies:

Diversifying into less saturated or economically stable markets.

8.01.2025 30
 Conducting detailed risk assessments to mitigate potential losses.

2. Stabilisation of Sales, Operational Results, and Incomes:

Definition:

Maintaining steady performance metrics despite declining economic conditions.

Strategies:

Strengthening customer relationships and enhancing loyalty.

Offering value-driven pricing models to sustain demand.

3. Controlling Liquidity and Capital Acquisition:

Definition:

Ensuring adequate cash flow to support operations and investments.

Strategies:

Tight control over receivables and payables.

Accessing alternative financing methods, such as government subsidies or low-

interest loans.

4. Increase in Budgeting Discipline:

Definition:

Enforcing stricter financial controls to optimize resource allocation.

Strategies:

Detailed budgeting with regular reviews to avoid unnecessary expenditures.

Prioritizing essential projects and deferring less critical initiatives.

5. Reduction of Costs and Investment Programmes:

Definition:

Cutting operational expenses and scaling back on non-essential investments.

Strategies:

Streamlining operations through process optimization.

Temporary suspension of capital-intensive projects.

6. Revision of Long-Range Strategies and Expansion:

Definition:

8.01.2025 31
 Reassessing growth plans and aligning them with current economic realities.

Strategies:

Pivoting to more resilient or recession-proof industries.

Delaying expansion plans in high-risk regions.

7. Pressure for New Alliances and Restructurisation:

Definition:

Forming strategic partnerships or restructuring operations to enhance resilience.

Strategies:

Mergers and acquisitions to consolidate market position.

Organizational restructuring to improve efficiency and adaptability.

Corporate Response to Recession

Key Responses of Corporations

1. Redefinition of Long-Range Goals:

Definition:

Revising strategic objectives to align with the realities of a recessionary

environment.

Strategies:

Shifting focus to sustainable growth and recession-proof sectors.

Prioritizing short-term resilience over aggressive expansion.

2. Detailed Analysis and Management of Risks:

Definition:

Conducting in-depth evaluations of internal and external risks.

Strategies:

Identifying financial, operational, and market vulnerabilities.

Developing contingency plans and risk mitigation frameworks.

3. Comprehensive Plan of Restructuring:

Definition:

8.01.2025 32
 Overhauling organizational structures and processes to enhance efficiency.

Strategies:

Streamlining workflows, reducing redundancies, and cutting non-essential roles.

Reassessing resource allocation to focus on high-priority areas.

4. Fast Adaptation, Elastic, and Decisive Structures:

Definition:

Building agile systems to respond rapidly to market changes.

Strategies:

Implementing flexible operational models and decision-making processes.

Encouraging innovation and responsiveness within teams.

5. Activation of Assets and Savings:

Definition:

Maximizing the utility of existing resources and financial reserves.

Strategies:

Liquidating underutilized assets to free up capital.

Leveraging savings to support critical operations and investments.

6. Strategic Partnerships and Public Support:

Definition:

Collaborating with other organizations and seeking governmental assistance.

Strategies:

Forming alliances to share resources and reduce risks.

Applying for public subsidies, grants, or financial incentives to ease financial

pressures.

Strategies for Internal Business Improvements

Key Strategies for Internal Business Improvements

1. Improvement of Ability to Compete:

Tools:

8.01.2025 33
 SWOT Analysis:

Identifies Strengths, Weaknesses, Opportunities, and Threats to create

actionable strategies.

Porter’s Five Forces:

Analyzes competitive pressures such as supplier power, buyer power,

competitive rivalry, threat of substitutes, and threat of new entrants.

Outcome:

Strengthens competitive positioning and adaptability in dynamic markets.

2. Review of Market Opportunities and Strategic Alliances:

Definition:

Exploring untapped markets and forming partnerships to enhance capabilities.

Strategies:

Market segmentation to identify new customer bases.

Collaboration with complementary businesses to leverage synergies.

Impact:

Expands market reach and reduces operational risks.

3. Reduction of Costs, Labor, and Time Management:

Definition:

Streamlining operations to achieve efficiency and cost-effectiveness.

Strategies:

Automating repetitive tasks to save time and reduce labor costs.

Adopting lean management principles to eliminate waste.

Outcome:

Improved profitability and operational efficiency.

4. Avoiding Difficulties by Consolidation of Assets and Staff:

Definition:

Merging resources to ensure stability and resilience.

Strategies:

8.01.2025 34
 Combining underutilized assets to optimize use.

Retaining essential talent while restructuring non-critical roles.

Impact:

Reduces redundancies and enhances organizational focus.

5. Enforcing Strengths of Business Through Leadership and Loyalty:

Definition:

Strengthening internal culture and employee engagement.

Strategies:

Developing strong leadership programs to inspire teams.

Building employee loyalty through recognition, development, and support.

Outcome:

Higher morale, productivity, and retention rates.

6. Investment in R&D, CSR, and Sustainable Development:

Definition:

Driving innovation and aligning business with ethical and sustainable practices.

Strategies:

Allocating funds to Research and Development (R&D) for product and process
innovation.

Engaging in Corporate Social Responsibility (CSR) initiatives to enhance brand

reputation.

Incorporating sustainability into operations to meet environmental standards.

Impact:

Builds a forward-looking, socially responsible, and innovative business model.

7. Public Support:

Definition:

Leveraging government incentives and public policies to bolster business

initiatives.

Strategies:

8.01.2025 35
 Applying for subsidies, grants, and tax relief for sustainable and innovative
projects.

Outcome:

Reduces financial pressure and supports long-term growth.

Solutions for Corporate Strategies

1. Concerning Products:

Strategies:

Innovate and improve product features to meet customer needs.

Introduce sustainable and eco-friendly products to appeal to modern values.

Diversify product lines to reduce dependency on a single market segment.

2. Concerning Customers:

Strategies:

Build customer loyalty through personalized marketing and loyalty programs.

Offer competitive pricing and high-quality customer service.

Use data analytics to understand and anticipate customer behavior.

3. Concerning Business Partners:

Strategies:

Strengthen partnerships by ensuring transparent and fair collaboration.

Leverage partnerships to access new markets and resources.

Co-develop products or services to create mutual value.

4. Concerning Competitors:

Strategies:

Conduct regular competitive analysis to anticipate moves and trends.

Differentiate through unique value propositions.

Collaborate with competitors in areas where mutual benefits can be achieved

(e.g., sustainability initiatives).

5. Concerning the Corporation Itself:

Strategies:

8.01.2025 36
 Invest in internal capabilities like employee training, innovation, and
technology.

Focus on corporate social responsibility (CSR) to build a positive public image.

Improve governance and operational efficiency to enhance overall performance.

Assumptions of Financial Strategy

1. Concerning Cash Flow (CF):

When?:

Timing of cash inflows and outflows is critical to maintain liquidity and

operational stability.

Forecast future CFs for project planning and investment decisions.

2. Concerning Assets:

Who?:

Asset management involves key stakeholders like finance teams, operational

managers, and external consultants.

Ensure assets are efficiently utilized to maximize returns.

3. Concerning Liabilities:

Who?:

Responsibility for liabilities lies with financial strategists and risk managers.

Optimize debt structure to balance costs and financial flexibility.

4. Concerning Financial Performance:

How?:

Monitor key performance indicators (KPIs) like ROI, profitability, and growth.

Use financial analysis to identify areas for improvement and allocate resources
effectively.

5. Concerning Budgeting:

What?:

Budgeting involves planning for revenues, expenses, and investments.

Ensure alignment with strategic goals and regularly review budgets to adapt to
changes.

8.01.2025 37
 Conventional Steps of Financial Strategy for Corporate Development

Key Steps in Financial Strategy

1. Protection of Sales and Income through Cooperation with Key Customers:

Definition:

Building and maintaining strong relationships with major customers to ensure

stable revenue streams.

Strategies:

Long-term contracts or partnerships with key clients.

Offering tailored solutions or incentives to retain loyalty.

2. Fixed Costs and Investment Review:

Definition:

Regular evaluation of fixed costs and investment plans to identify potential

savings or inefficiencies.

Strategies:

Streamlining operations to reduce unnecessary expenses.

Prioritizing high-return investments while postponing non-essential projects.

3. Improvement of Liquidity by Shortening Business Cycles:

Definition:

Accelerating cash flow by reducing the time between production, sales, and
receivables collection.

Strategies:

Implementing efficient inventory management practices.

Encouraging prompt payments from customers with discounts or incentives.

4. Postponed Dividends and Reduced Premiums for Staff:

Definition:

Deferring dividend payouts and limiting staff bonuses during financial strain.

Impact:

Preserves cash reserves for critical operations and investments.

8.01.2025 38
 Note:

Must be communicated effectively to avoid morale issues among employees and

shareholders.

5. Enforcement of Working Capital:

Definition:

Strengthening the management of current assets and liabilities to optimize

operational efficiency.

Strategies:

Enhancing receivables collection and negotiating favorable credit terms with

suppliers.

Maintaining an adequate inventory level to avoid overstocking or shortages.

6. Reduction of Debt, Fixed Costs, and Self-Financing:

Definition:

Minimizing financial obligations and dependency on external funding.

Strategies:

Repaying high-interest debts to reduce financial strain.

Increasing reliance on internally generated funds to finance projects.

7. New Strategy for mPQ and F:

mPQ (Market, Price, Quality):

Develop a balanced approach focusing on competitive pricing, superior quality,

and targeted market strategies.

F (Finance):

Align financial policies with the corporation's development goals, ensuring

sustainable growth and risk mitigation.

Steps to Improve Financial Performance

1. Short-Term Improvements (Elastic Actions)

1. Concentration on Financial Limitations of Decisions:

Focus on decisions that directly impact cash flow and profitability.

8.01.2025 39
 Prioritize essential expenditures and delay non-critical ones.

2. Cash Management and Control (Budgeting):

Enhance monitoring of cash inflows and outflows.

Implement stricter budgeting practices to ensure liquidity.

3. Reduction of Less Productive Assets:

Identify and liquidate underutilized or non-performing assets.

Use proceeds to fund critical operations or reduce debt.

4. Revision of Cycles and Downsizing of Operations Scale:

Analyze business cycles for inefficiencies and streamline processes.

Scale down operations temporarily to match demand and conserve resources.

5. Review and Reduction of Fixed Costs:

Assess fixed costs to identify areas for savings.

Eliminate or renegotiate costs that do not contribute significantly to productivity.

6. Reduction of Non-Attractive Investment Programmes:

Suspend or terminate projects with low expected returns or strategic value.

7. Reduction of Less Productive Employment:

Optimize workforce size to align with current operational needs.

Focus on retaining high-performing staff.

8. Increase of Short-Term Liabilities:

Use short-term financing options to bridge liquidity gaps when necessary.

9. Reduction of Debentures:

Pay off high-interest debt to reduce financial strain and improve cash flow.

10. Improvement of Time Management:

Enhance productivity by optimizing work processes and prioritizing tasks.

2. Long-Term Improvements (Value Increase)

1. Permanent Improvement of Business Culture:

Foster a culture of innovation, transparency, and accountability.

8.01.2025 40
 Promote ethical practices and corporate social responsibility (CSR).

2. Investment in Technology and Modern Products:

Focus on R&D to develop cutting-edge, sustainable products.

Enhance operational efficiency through modern technologies.

3. Attractiveness of Qualities:

Maintain high standards for product and service quality to build brand loyalty.

Innovate to meet evolving market demands.

4. Creative Staff and Customer Relations:

Invest in employee development to encourage creativity and adaptability.

Build strong, trust-based relationships with customers.

5. Business Equilibrium and Ethics (CSR):

Align business practices with ethical and sustainable principles.

Balance profitability with positive contributions to society and the environment.

6. Protection of Environment and Social Values:

Implement environmentally friendly practices across operations.

Support social initiatives to strengthen community ties.

7. Sustainable Social and Eco-Development:

Integrate sustainability into long-term strategic planning.

Aim for inclusive growth that benefits all stakeholders.

Innovative Options in Long Horizon & Business Strategy Projection

Innovative Options in a Long Horizon

1. Value-Oriented Steps (Strategy mPQ):

Definition:

Aligning strategy with market (m), price (P), and quality (Q).

Steps:

Deliver competitive pricing while maintaining product quality.

Focus on market differentiation through innovation and superior service.

8.01.2025 41
 Impact:

Builds long-term brand loyalty and competitive advantage.

2. Capital Restructuration:

Definition:

Adjusting the capital structure to improve financial flexibility and efficiency.

Focus:

Optimizing the balance between fixed assets and liquid investments.

Restructuring debt to lower financing costs.

Impact:

Enables sustainable growth and improved returns on investment.

3. New Allocation of Activity:

Definition:

Redefining business operations to target high-growth areas or industries.

Strategies:

Diversify into new sectors with potential for scalability.

Reallocate resources to core competencies for maximum efficiency.

4. Outcoming from Smaller Markets:

Definition:

Exiting low-performing or marginal markets to focus on profitable regions.

Impact:

Concentrates resources on high-potential areas, improving overall returns.

5. Outsourcing or Effects of Scale:

Definition:

Leveraging third-party services or increasing operational scale to reduce costs.

Strategies:

Outsource non-core activities to specialized providers.

Expand operations to achieve economies of scale in production and distribution.

8.01.2025 42
 Projection of the Business Strategy
1. Clear Short and Long-Term Vision and Schedule:

Define actionable goals for immediate and future objectives.

Create a realistic timeline for implementation and milestones.

2. Objective Evaluation of Business Position and Performance:

Conduct SWOT analysis to assess strengths, weaknesses, opportunities, and threats.

Measure financial and operational performance against benchmarks.

3. Permanent Monitoring of Market Changes and Risk:

Establish systems for tracking market trends, customer behavior, and regulatory
updates.

Develop risk management strategies for adaptability.

4. Sequence of Investments Focused on Business Goals:

Prioritize investments that align with strategic objectives.

Balance short-term gains with long-term growth opportunities.

5. Respect for Customers:

Maintain high standards of customer service and engagement.

Actively seek feedback to refine offerings and build trust.

6. Improvement of Product Quality:

Commit to continuous innovation and quality enhancements.

Adopt modern technologies and sustainable practices to meet evolving demands.

Main Differences Among Local Business Environments

1. The Distinctness of Economic Liberalism to Ethics and Axiology

Definition:

Economic liberalism emphasizes free markets and minimal government interference,

often clashing with ethical considerations and cultural values (axiology).

Impact:

Differences in ethical standards influence business practices (e.g., labor rights,

environmental policies).

8.01.2025 43
 Cultural values shape consumer preferences and corporate strategies.

2. Asymmetry of the Financial Sector and the Real Economy

Definition:

The financial sector often grows disproportionately compared to the real economy.

Impact:

Over-reliance on financial markets can create instability.

Real economic activities, like production and trade, may be undervalued.

3. Currency Depreciation, Over-Liquidity, and Inflation

Definition:

Fluctuations in currency value and excess money supply lead to inflation and
reduced purchasing power.

Impact:

Businesses face higher costs and uncertainty in financial planning.

Currency depreciation affects import-export dynamics, favoring exporters but

harming importers.

4. Chronic Public and Private Indebtedness

Definition:

Persistent debt burdens in both public (government) and private (corporate and
household) sectors.

Impact:

Limits growth potential due to high debt servicing costs.

Increases vulnerability to financial crises.

5. Limited Confidence in Financial Reports and Information

Definition:

Discrepancies in financial transparency and reporting standards reduce trust in

business data.

Impact:

8.01.2025 44
 Investors and stakeholders may hesitate to engage without reliable information.

Regulatory inconsistencies exacerbate challenges in cross-border operations.

6. The Diluted Ideas of Globalism and Most Doctrines

Definition:

The original ideals of globalism (free trade, interconnectedness) are challenged by

protectionism, nationalism, and fragmented policies.

Impact:

Erosion of global cooperation in addressing economic and environmental issues.

Doctrinal shifts create uncertainty for multinational businesses.

7. Bi-Polarity of the Far East and the Western World

Definition:

Economic, political, and cultural divergence between the Far East (e.g., China,
ASEAN) and the Western World (e.g., US, EU).

Impact:

Competing ideologies and trade policies affect global supply chains.

Businesses must adapt to differing regulatory environments, cultural norms, and

technological standards.

Long-Term Disequilibrium in the EU

1. High Public Indebtedness

Issue:

Excessive debt levels relative to GDP and national budgets strain economies.

Impact:

Limits fiscal flexibility for public investments.

Increases dependency on external borrowing, leading to long-term economic

vulnerability.

2. EURO Zone Financial Instability – “Money Printing”

Issue:

8.01.2025 45
 Over-reliance on monetary policies such as quantitative easing to address economic
challenges.

Impact:

Risks currency devaluation and inflation.

Reduces public trust in financial stability and the Euro.

3. Dominance of Cosmopolitan Corporations Over Local and National

Interests
Issue:

Large multinational corporations prioritize global profitability over local economies.

Impact:

Weakens local businesses and industries.

Contributes to inequality and reduces national tax revenues.

4. Trade Deficit and Unfair Competition with China

Issue:

EU struggles with a significant trade imbalance due to imports from China.

Impact:

Domestic industries face unfair competition from cheaper Chinese products.

Leads to job losses and deindustrialization in affected sectors.

5. Tax Paradises, Value Migration, and Transfer Prices

Issue:

Use of tax havens and manipulated transfer pricing by corporations to minimize tax
liabilities.

Impact:

Reduces national tax revenues.

Creates economic disparities and weakens EU-wide fiscal cohesion.

6. Ineffective Regulations of Global Warming, Pollution, and Natural

Resources

8.01.2025 46
 Issue:

Challenges in implementing effective environmental regulations across member

states.

Impact:

Limited progress in addressing climate change and pollution.

Unequal burdens on member states, with some lagging in adopting green energy and
waste management.

7. Social Conflicts and Crises

Migration and Liberal Society:

Central Europe struggles with migration policies, leading to societal tensions.

Social Crises:

Countries like France face unrest over economic inequality and social reforms.

Impact:

Polarization and reduced social cohesion across member states.

Hinders unified decision-making within the EU.

Misfunctions of Science as Reasons for Unsolved Empirical Problems

1. Weakness of Scientific Verification of Research Results

Issue:

Insufficient validation and reproducibility of research findings.

Impact:

Erodes trust in scientific conclusions.

Limits practical application of research to solve real-world problems.

2. Doctrinal Approach
Key Aspects:

Ethical Relativism: Acceptance of controversial practices like child labor.

Commercialization: Turning education and health services into profit-driven

industries.

8.01.2025 47
 Corruption: Erosion of ethical standards in academic and research institutions.

Impact:

Prioritizes economic gains over ethical considerations and societal well-being.

Undermines the credibility and purpose of scientific inquiry.

3. Lack of Criticism of Politics and Ideological Correctness

Issue:

Avoidance of critical analysis of political ideologies and policies.

Examples:

"Ideology of Awakening" in Western universities: Focus on progressive activism

over empirical rigor.

"Ideology of Denial": Rejection of inconvenient truths or opposing perspectives.

Impact:

Restricts intellectual diversity and open debate.

Skews research priorities towards ideological conformity.

4. Jamming Reality in Environmental Issues

Examples:

Ecology Without Clean Food: Environmental efforts fail to address systemic issues
like food quality.

Green Energy Without Waste Reduction: Overlooked inefficiencies in

technologies (e.g., excessive energy use for air conditioning).

Impact:

Results in superficial solutions that do not address root causes.

Hampers progress toward genuine environmental sustainability.

5. Avoidance of Difficult and Embarrassing Issues

Examples:

Lack of focus on training planners for long-term strategies.

Slogans like "Europe of Two Speeds" reflect divisive and incomplete solutions.

8.01.2025 48
 Impact:

Creates gaps in knowledge and skills essential for addressing complex challenges.

Avoids confronting politically sensitive or inconvenient topics.

6. Restrictions on the Freedom of Economic Dispute

Issue:

Limited scope for open discussions and debates in economic research.

Impact:

Prevents critical analysis of existing policies and frameworks.

Stifles innovation and the development of alternative economic models.

Economic Problems Arising Directly from Economic Sciences

1. Paradigm Erosion and Collisions

Issue:

Fundamental paradigms in economics are eroding or conflicting with each other.

Examples:

Enrichment as the Purpose of Management: Prioritizing profit maximization over

broader social and environmental goals.

Money as a Source of Value: Overemphasis on monetary valuation, ignoring

intrinsic or social values.

Impact:

Reduces the scope of economic theories to address complex societal challenges.

Creates disconnect between economic practices and human well-being.

2. Simplified Theoretical Concepts

Issue:

Oversimplified theories fail to capture the complexities of real-world economics.

Examples:

Rationality: Assumes individuals always make logical, self-benefiting decisions,

ignoring behavioral biases.

8.01.2025 49
 Value Measured by Money: Neglects qualitative factors like environmental
sustainability and social welfare.

Cryptocurrencies and Inflation Targeting: Oversimplified frameworks overlook

volatility and broader macroeconomic implications.

Impact:

Leads to flawed policies and financial instability.

3. Simplified Theories and Models Distorting Reality

Issue:

Theoretical models often misrepresent real-world dynamics.

Examples:

Stock Market as a Perfect Market: Ignores information asymmetry and market

manipulation.

Valuation of Companies: Overvaluation of corporations like Apple based on

speculative market behavior rather than fundamentals.

Impact:

Misguided investment decisions and financial bubbles.

Loss of public trust in economic science.

4. Detachment of Economic Sciences from Philosophy, Ethics, and

Social Disciplines
Issue:

Economic theories increasingly operate in isolation from broader social and ethical
contexts.

Impact:

Ignores the moral and social implications of economic decisions.

Reduces interdisciplinary collaboration, limiting holistic problem-solving.

5. Subordination of Science to Ideologies, Commercialization, and

Lobbying
Issue:

Economic research often serves ideological agendas or commercial interests.

8.01.2025 50
 Examples:

Lobbying: Corporate funding influences research outcomes to favor specific

industries.

Commercialization: Profit motives compromise the objectivity of academic

research.

Impact:

Erodes public trust in economic sciences.

Stifles innovative or critical perspectives that challenge the status quo.

8.01.2025 51
 11.12.2024
Investment Intensity in Real Economy:

Drives welfare growth by laying the foundation for future consumption.

Improves material living conditions.

Role of Investment:

Resolves crises and fosters development.

Encourages optimism, creativity, and rapid economic growth.

Direct Investment:

Enhances management and product/service quality.

Risks loss of control over the business.

Unproductive Investments & Public Expenses:

Often funded by debt or public deficits (e.g., Quantitative Easing).

Provide weaker growth acceleration due to high indebtedness.

Economic Growth Through Investment:

Initiating investment leads to increased income, savings, consumption, and indirect

investments.

Financial Investment:

Focuses on redistributing wealth without creating real economic effects.

In open economies, welfare is often acquired externally (Monetaristic Doctrine).

Lessons from China and South Korea:

Their economic success over the past 60 years contrasts with the EU's crisis and the
USA's recession.

Business Development and Expansion Strategies:

A. Individual Development:
1. Enhancing Human Capital:

Focus on quality, entrepreneurship, competencies, and R&D.

11.12.2024 1
 2. Capital Accumulation:

Increase assets and productivity.

3. Business Division:

Create independent units or subsidiaries.

B. Accelerated Development via Direct Investments:

1. Methods of Expansion:

Acquisition: Purchasing independent business units (e.g., Orlen and Lotos).

Merger: Consolidating portfolios of two companies into a unified entity.

Joint Venture: Establishing a new enterprise through shared initiatives.

Partnership/Subcontracting: Collaboration between independent entities.

Temporary Cooperation Agreements: Maintaining independence while

collaborating (e.g., Japan's practice).

Direct Investments as Megatrends:

1. Early 20th Century:

Creation of large business trusts.

1913: US Federal Reserve Banks' consolidation before WWI.

2. Post-1960s:

Transformation of US Industrial Concerns into Multinational Conglomerates, led

by US Army officers post-Vietnam War.

3. 1970s - Mega-Mergers:

Formation of global corporations in the USA, Sogo Sosha in Japan, South Korea,
and WOG in Poland (oil, automotive, steel industries).

4. 1980s - Shift to Capital Holdings:

Industrial corporations divided into Capital Holdings:

Emphasis on computerization of accounting.

Creation of Profit Centres.

Adoption of the philosophy: "Small is beautiful."

5. Financialisation Era:

11.12.2024 2
 Strategic alliances accelerated capital concentration.

Eastern Europe Takeovers and offshoring to China strengthened global

corporations.

6. Since 2007 - Post-Recession Trends:

Technology Takeovers by cheap capital (Quantitative Easing).

Leveraged Buyouts by corporate raiders (e.g., Google, Microsoft, Apple, Space

businesses).

Dominance of global investment funds acting as monopolists.

Advantages for Investors in Open Economies:

1. Ease of Access:

Good information availability.

No legal barriers and easy lobbying.

Low entry and exit costs.

2. Capital Flexibility:

Easy transfer of capital in and out.

High elasticity of capital supply and demand.

3. Effective Markets and Low Costs:

Well-functioning capital markets (e.g., stock exchanges).

Low operational costs in business, labor, logistics, and restructuring.

Minimal social resistance to investment.

4. Support Systems:

Strong support from financial services.

Public assistance and privileges for investors.

Consolidation Effects in the Global Economy:

1. Massive Imports:

Industrial goods predominantly imported from the Far East.

2. Regional Production Shift:

11.12.2024 3
 Concentration of production in the Far East.

3. Decline in Western Industries:

Collapse of production and industrial capabilities in Western economies.

4. Chinese Buyouts:

Acquisition of global brands and companies by China (e.g., Pierre Cardin, Volvo,
Animex).

5. Chinese Dominance:

Control over global production, distribution, trade, and transport networks.

6. Far East Technological and Financial Dominance:

Leadership in electronics, computers, 5G technology, automotive, textiles, and tools.

Global Consolidation and Declining Efficiency:

1. Challenges of Global Consolidation:

Reduced efficiency due to large-scale consolidation.

Inability of Western firms to compete with Asian organizations' advanced

technology, organization, and economies of scale.

2. Repeated Patterns of Industry Collapse:

Consumer Electronics: Decline of Western brands from the 1990s.

Industrial Production: Loss of dominance in toys, small gadgets, sports shoes, and
ships to Asian competitors.

Home Electrical Appliances: Asian brands (Hisense, Beko, Samsung, Panasonic)

surpassing Western brands (Siemens, Bosch, Miele).

Computers & Smartphones: Decline of iconic Western brands like Motorola and
IBM.

Telecommunications & Internet Technologies: Leadership by Asia in 5G and 6G

technologies.

Automotive Industry: Struggles of Tesla, Volkswagen, and Stellantis against rising

Chinese car manufacturers.

Financial Sector: Global dominance of the 20 largest Chinese banks.

The Consolidation Process and Escalation of Economic Growth:

11.12.2024 4
 1. Impact on Global Markets:

Monopolistic dominance in goods, technology, and pricing.

Acceptance of high margins and increasing costs.

Slower production growth and stalling technological advancements.

Massive offshoring investments, shifting economic activity to other regions.

2. Unexpected Effects:

EU and Russia as economic losers in the global competition.

State dominance: Governments take on a protective role to safeguard their

economies.

Global conflicts of interest emerge as central to economic policy and strategy.

Macroeconomic Changes in Poland (1990s to Present):

1. Post-Communist Transition:

State-Owned Enterprises:

Low profitability and uncompetitive products.

Cut off from credit by foreign banks (controlling 80% of banking sector) during
hyperinflation (30-60%).

2. Privatization and Foreign Influence:

Open Economy:

Accelerated privatization driven by global leaders.

Foreign Direct Investments (FDI):

Initiated sectoral consolidation and control by foreign corporations.

3. Repolonization Initiative (2016–2023):

Reacquisition of strategic sectors, including:

Banks, refineries, electricity, gas, roads, petroleum, energy distribution, and

transport.

4. EU Integration and Regional Dynamics:

Shift toward closer EU integration.

11.12.2024 5
 Since 2023, Germany’s dominance as Europe’s strongest economy influences
Poland’s economic direction.

Problems of Foreign Direct Investments in Poland and Central Europe:

1. Political and Legal Challenges:

Political interference, protectionism, and legal obstacles.

2. Asymmetry in Engagement:

Unequal initiative, engagement, and advantages for local vs. foreign entities.

3. Cultural and Communication Barriers:

Poor cooperation, ineffective communication, and differing business cultures.

4. Workforce and Infrastructure:

Availability of professional staff and growing infrastructure but reliance on

intermediaries.

5. Underestimated Market Potential:

Consumer demand potential is often overlooked.

6. Shallow Market:

Easy to create short-term growth but lacks depth for sustained business
development.

7. Weak Institutional Support:

Weak state institutions, poor regulations, corruption, and excessive lobbying.

Main Effects of Business Acquisitions: Synergy & Scale

1. Definition of Synergy:

The combined performance of joined businesses exceeds the sum of their individual
outputs.

Formula: Synergy [A, B, C] > [A+B+C]

2. Synergy and Scale:

Synergy and scale complement each other, accelerating growth trends.

3. Types of Synergy:

Revenue Synergy:

11.12.2024 6
 Boosts sales and investment capacity.

Cost Synergy:

Reduces expenses and enhances technological development.

Return on Capital (ROC) Synergy:

Increases accumulation and business value.

4. Effects of Synergy:

Leads to extraordinary gains for the combined entity.

5. Examples:

Market Leaders Influence Preferences:

Van Melle (Mentos, Frutella): Controls manufacturing and distribution

networks.

IKEA: Utilizes forests in Bulgaria and Romania for cost efficiency and resource
control.

Targets of Business Acquisition and Consolidation:

1. Efficiency and Growth:

Achieve scale effects and minimize costs.

Increase business value and drive expansion.

2. Competitive Advantage:

Address competition and rivalry pressures.

Dominate markets through consolidation.

3. Cross-Border Operations:

Overcome barriers to operate globally.

Key Goals:

Acquire local market demand.

Gain access to technology, brands, strategic assets, and skilled staff.

4. Diversification and Risk Management:

Broaden business activity and reduce risks.

5. Internationalisation:

11.12.2024 7
 Strengthen identity, specialization, ecological practices, and business culture
globally.

6. Negative Impacts:

Drainage of local markets: Exploit resources and demand locally.

Tax Avoidance: Shift value to minimize local tax liabilities.

Mergers:
1. Definition:

A merger involves the unification of independent companies with equal standing.

Creates a new corporation by integrating activities and portfolios.

2. Modern Mergers:

Most large mergers today result in the formation of a holding PLC.

The holding structure serves as the supreme entity overseeing multiple subsidiary
companies.

B. Takeover:
1. Definition:

A firm purchases another firm as its asset, establishing control.

Parent Company: Controls the subsidiary's entire business.

Subsidiary: Becomes an asset controlled by the parent company.

2. Ownership Structure:

The parent company owns all or a majority of subsidiary stocks.

Absolute Control:

Achieved if the parent holds more than 50% of voting shares in the subsidiary.

Buyout:
1. Definition:

Acquisition of a company by purchasing all its stock on the capital market.

2. Leveraged Buyout (LBO):

Acquisition of a company by purchasing all its stock with borrowed funds.

11.12.2024 8
 Converts the acquired company into private ownership.

2. Takeover:
1. Definition and Purpose:

Initiated by expansive corporations to acquire smaller competitors.

Often results in eliminating weaker businesses.

2. Post-Takeover Scenarios:

Preserving Identity:

The acquired company remains independent but operates under full control
(e.g., Jaguar, Volvo).

Losing Identity:

The company is incorporated into the parent business as a part of its operations.

Limited Operation:

Retains its brand name but operates in a constrained capacity (e.g., Żywiec
Beer under Heineken).

Closure:

The acquired company is shut down entirely.

Institutional Forms of Parent-Subsidiary Relations:

1. Conglomerate:

A corporation unifying capital across subsidiaries.

Subsidiaries are unrelated in terms of operations and products.

2. Affiliate:

A subsidiary controlled by the board of directors of the parent company.

3. Blind Trusts:

Subsidiaries are controlled indirectly through a portfolio.

4. Pure Holding:

A corporation whose only assets are stocks of other companies.

Business Acquisition as a Management Process:

11.12.2024 9
 1. Strategic Planning:

Define the business concept, acquisition targets, engagement level, return

expectations, and risk assessment.

2. Stakeholder Considerations:

Manage interests and positions of the overtaken managers.

Gain acceptance from shareholders.

3. Unified Company Planning:

Align expectations of unified companies.

Develop projections for business value.

4. Negotiation and Execution:

Undertake negotiations or implement a defense/war strategy if contested.

Create a detailed business plan and identify potential investments.

5. Financial Implications:

Determine an effective purchase price.

Assess cash flow (CF) consequences.

Secure financing through credits and bonds.

6. Post-Acquisition Actions:

Handle divestitures (transfers and obligations).

Develop a unified corporate strategy for long-term success.

Difficulties of Mergers and Takeovers:

1. Risk and Uncertainty:

Involvement of external subjects to enforce business improvement, restructuring, or

expansion is highly risky.

Leverage effects are often mixed and uncertain.

2. Restructuring Challenges:

Requires deep organizational changes.

Can alter business identity and culture by integrating a competitor’s vision.

May involve selling parts of the acquiring company's own business.

11.12.2024 10
 3. Operational Challenges:

Critical Path Issues:

Organizational restructuring.

Technology transfer.

Maintaining credibility, proper timing, budgeting, and addressing unexpected

effects of unification.

4. Financial Impact:

Post-merger or takeover, Earnings Per Share (EPS) may drop.

Desired effects may be delayed or not immediately visible.

Main Stages of a Takeover:

1. Detailed Research:

Conduct thorough due diligence on the target company.

2. Public Disclosure:

Announce the intentions of the takeover to stakeholders and the public.

3. Negotiation Framework:

Establish the boundaries and conditions for negotiations.

4. Valuation and Pricing:

Estimate the value of the target company and determine the price to be paid.

5. Restructuring:

Plan and implement necessary organizational changes post-takeover.

6. Task Scheduling:

Develop a detailed list of tasks with a clear schedule for execution.

Preselection of New Company Targets:

1. Vision Development:

The acquiring company defines a vision for the new business, considering:

Size: Workforce, assets, liabilities, capital, and debts.

Product Range and Technology: Existing offerings and innovation potential.

11.12.2024 11
 Location: Properties, infrastructure, and communication networks.

2. Analysis of Strengths and Weaknesses:

Evaluate the target's strengths and weak points.

3. Management and Financial Review:

Assess the existing management team and operational efficiency.

Examine financial health, including:

Capital requirements.

Sources of financing and access to capital.

4. Evaluation:

Determine whether the target represents an opportunity or potential problems for

the acquiring business.

Bidding Strategy:
1. Purpose of the Attack:

Maximize shareholder wealth as the primary goal (theoretical perspective).

2. Key Considerations for Directors and Negotiators:

Long-Term Alignment:

Identify with the business goals for the long horizon.

Objective Decision-Making:

Avoid decisions driven by prestige or non-financial factors.

Focus on financial sustainability and long-term value creation (theory in

practice).

Warnings for the Attacking Company:

1. Payment Composition:

Carefully construct the payment basket, balancing positive and negative factors.

2. Key Considerations:

Conflicts of Interest: Address potential misalignments between stakeholders.

Liquidity Difficulties: Ensure adequate cash flow to manage payments.

11.12.2024 12
 Tax Implications: Evaluate the tax consequences for all parties.

Variable Asset Value: Account for fluctuations in the value of capital assets.

Seller’s Risk Tolerance: Understand and respect the level of risk the seller is willing
to accept.

Obstacles During the Negotiation Process:

1. Influence of Legal Form and Ownership:

The type of ownership and legal structure determines strategy and resistance from
interest groups.

2. Key Sources of Resistance:

Big Shareholders and Consumers: Opposition to the bid due to vested interests.

State or Local Government: Active engagement in defending strategic businesses.

Supervisory Institutions: Regulatory oversight and potential intervention.

Historical Roots:

Business achievements and regional connections influencing sentiment.

Complex Ownership Mixtures: Multiple stakeholders complicating negotiations.

3. Examples:

Orlen SA and Lotos SA: Negotiations highlighted diverse resistance sources.

Grupa Azoty SA: Faced an attempted takeover by Russia's "Akron."

Constructing a Strategy for Takeovers:

1. Key Factors to Respect:

Shareholder Structure: Understand the defending company’s ownership.

Pricing Strategy: Determine a pre-set maximum price.

Defending Board Approach: Develop a strategy for engaging with the board of
directors.

Interest Groups: Offer a comprehensive package deal to key stakeholders.

Action Plan for Opposition: Prepare steps in case the bid is resisted.

Alternatives: Consider alternative strategies and backup options.

2. Case Study – TV "NC+" Takeover (2012):

11.12.2024 13
 French Satellite TV Operator "C+" made numerous mistakes during its takeover of
Polish "N Sat".

Despite initial failures, mistakes are now forgotten, highlighting the importance of
long-term focus.

3. Conditions for Effective Action:

Transparency:

Shareholders of the defending company have a right to inspect reports and

decisions.

Ethics of Action:

Antitrust compliance.

Fair competition.

Legal protection for the attacked entity.

Cooperation Rules:

Ensure mutual benefits for all parties.

Foster partnership in execution.

Bidding Price:
1. Considerations for Bidding Price:

Quoted Share Price: The market price of the target's shares.

Valuation Metrics:

Based on net assets, earnings, and dividends.

Cash Flow (CF) Scenarios:

Projections for the combined business.

Bidding Frames:
1. Maximum Offered Price (MOP):

Calculated as the Net Present Value (NPV) of discounted future income streams.

Discount Rate:

Reflects the risk level for shareholders.

Typically higher than the prevailing share price to incentivize acceptance.

11.12.2024 14
 2. Minimum Bid Price:

Based on the restitution value of the target company's assets.

The MIX Package:

1. Payment Options for the Attacking Company:

Cash Payments: Direct payment for acquisition.

Debt Financing:

Debentures, loans, junk bonds, or high-yield, high-risk instruments.

Equity-Based Payments:

Stock or convertible loan stock.

Exchange of shares:

Preference shares: Offer fixed dividends.

Ordinary shares: Provide ownership rights and voting power.

Options:

Granting the right to purchase shares at a predetermined price.

2. Combination of Payment Forms:

A blend of cash, debt, and equity-based instruments to create a flexible offer.

3. Break-Even Point (BEP) Formula:

Used to assess the optimal combination of payment forms to balance costs, risks, and
returns for the attacking company.

Approach to the Board of the Defending Company:

1. Tone of Interaction:

Maintain an informal and friendly demeanor.

2. Gaining Support:

Build trust by gaining the board’s backing through mutual understanding.

3. Expressing Common Interests:

Highlight shared goals and align interests to foster collaboration.

4. Conflict Avoidance:

11.12.2024 15
 Actively work to avoid conflicts and misunderstandings during discussions.

Strategy of Defender:
1. Responsibility of the Board:

Protect the interests of the defending company and its shareholders at all times.

2. Preparations Before an Enquiry:

Strong Business Position and Leadership:

Ensure a solid market presence and effective leadership.

Loyal Managers:

Secure key managers on long-term contracts.

Good Relations with Shareholders:

Maintain alignment with shareholders' preferences and expectations.

Public Image Protection:

Safeguard the company’s reputation and public perception.

Technical Tools of Defense Against Takeovers:

1. Long-Term Contracts:

Secure management and personnel loyalty through long-term agreements.

2. High Gearing (Leverage):

Increase financial leverage to make the company less attractive to potential

attackers.

3. Disincentives to the Attacker:

Introduce measures that deter potential acquirers (e.g., poison pills, golden
parachutes).

4. Bad Financial Results:

Questionable strategy: Artificially poor financial performance can reduce appeal

but risks damaging shareholder confidence.

Actions Required if the Bid Offer is Opposed:

1. Board of Directors' Role:

11.12.2024 16
 Analyze the reasons "for and against" the bid.

In some cases, the board may manipulate information to influence outcomes.

Outcome may include revising the offer or withdrawing from the bid.

2. Key Stakeholder Influences:

Workers’ Unions: Play a crucial role in representing employees' interests.

Public Policy Support: Essential for foreign investment and privatization.

3. Final Decision:

Shareholders make the ultimate decision regarding the bid.

4. Negotiation Factors for Success:

Price Acceptance:

Ensure the price is acceptable to both groups of shareholders.

Managerial Cooperation:

Engage managers of both companies in the process.

Retain managers of the acquired company to lead the new business unit.

Financing Options:

Utilize cash payments or stock swaps for flexibility.

Reasonable Pricing:

Avoid an excessive premium favoring one party in the transaction.

11.12.2024 17
 4.12.2024
Risk is calculated across various domains to enhance knowledge and
ensure protection against uncertainties.

Domains and Key Risk Factors

1. Demography

Statistical life expectation: Understanding population longevity trends.

Youth unemployment: Assessing economic and social risks of joblessness among

younger generations.

2. Human Life

Stolen documents: Risk of identity theft and fraud.

Car accidents: Probability and impact of traffic-related incidents.

Fires and earthquakes: Natural and man-made disaster risks.

3. Medicine

Illness probability: Likelihood of diseases in specific populations.

Progression schemes: Forecasting the development of medical conditions.

4. Business

Stock Exchange Indexes: Risks of market volatility and financial crashes.

Inflation: Economic instability and reduced purchasing power.

Cost increases: Rising operational or production expenses.

5. Technology

Green norms: Compliance risks with environmental regulations.

Labor regulations: Risks related to employment law compliance.

Food quality: Ensuring standards in production and safety.

6. Management

Unprofessional decisions: Consequences of poor leadership or strategic errors.

Ethical conflicts: Risks arising from breaches of integrity or moral dilemmas.

4.12.2024 1
 7. Military and Defense

Principle: "If you want peace, prepare for war."

Risk involves readiness for conflict to deter aggression and maintain stability.

Risks in various domains can be compensated or rewarded through appropriate strategies,

policies, and mechanisms.

Examples of Risk Compensation and Rewards

1. Labor Cost and Operational Risk

Cheap labor costs in poorer countries help offset the high operational risks, such
as political instability or inadequate infrastructure.

2. Interest Rates and Financial Risk

High interest rates compensate creditors for taking on high financial risks,
ensuring their return on investments despite uncertainties.

3. State Policy and Banking Risk

Government policies promoting financial stability reduce the risk of bank

investments, encouraging safer banking practices.

4. Car Accidents and Insurance

Car insurance policies cover accident risks, while laws against aggressive
driving mitigate future risks and enhance road safety.

5. Stock Risk and Technical Analysis

Technical analysis helps investors identify and manage stock risks, minimizing
potential losses in volatile markets.

Risk is the probability of a specific event occurring that may negatively affect business
performance.

Risk Management
Defined as:

"The art and science of identifying, analyzing, and responding to risk factors
throughout the business in the best interest of its objectives."(American definition)

4.12.2024 2
 Key Concepts
1. Risk Symmetry Illusion

A game theory assumption that losses and opportunities are symmetric.

Reality: Risks and rewards are often asymmetric, requiring careful analysis beyond
simple assumptions.

2. Uncertainty vs. Risk

Uncertainty:

Involves situations we do not understand or cannot foresee.

Cannot be managed due to lack of clarity.

Risk:

Measurable and manageable through analysis and planning.

Examples and Applications

1. Benefits of Bankruptcy Probability

Identifying risk of bankruptcy can lead to:

Reevaluation of business models.

Streamlined operations.

New strategies for financial resilience.

2. Overspeed Emotions and Car Crashes

Psychological factors (e.g., adrenaline rush) influence decisions despite a

high probability of accidents.

Risk mitigation: Enforcement of speed limits and driver education.

Definition of Uncertainty
1. Real and Objective:

Refers to actual events or situations that may occur in the future, such as accidents
or misfortunes.

2. Previously Unforeseen:

Uncertainty arises from events that were not anticipated or predicted by individuals
or businesses.

4.12.2024 3
 3. Against Expectations and Forecasts:

It may occur contrary to expectations, even defying probability-based

predictions.

4. Impact on Business:

Can influence business performance and prospects either positively or negatively.

Differences Between Uncertainty and Risk

Aspect Uncertainty Risk

Real, objective events in the future

Nature of Events A specific form of misfortune ({1}).
({1}).

Predictability Unforeseen, not predicted ({2}). Foreseen as an abstract event ({2}).

Cannot be assigned a probability

Probability Occurs at an estimated probability ({3}).
({3}).

May have positive or negative Generally associated with negative

Consequences
outcomes ({4}). consequences or losses ({4}).

Broad, encompassing unknown Focused on measurable events within areas

Scope
areas ({4}). of uncertainty ({5}).

4.12.2024 4
 Concept: "Take the Risk" as Manipulation
1. Encouragement of Unresponsible Behavior

Phrases like "Take the risk" may lead to:

Irrational decisions and hazardous actions, such as:

Driving faster or engaging in dangerous activities (e.g., skydiving).

Selling goods without proper contracts or guarantees.

Creates a false sense of reward or necessity without guaranteeing positive

outcomes.

2. Blurred Lines Between Risk and Uncertainty

Replacing real uncertainty with abstract risk involves assuming the accident will
not occur, ignoring true probabilities.

Example: Encouraging speculative actions with high risk exposure under the guise
of potential reward.

3. Risk Without Responsibility

4.12.2024 5
 Such manipulation often leads to irresponsible risk acceptance, which may:

Increase vulnerability to unfortunate events in uncertain environments.

Promote speculative behavior that jeopardizes stability.

Counterexample: Warren Buffett's Approach

1. Avoidance of Unnecessary Risks

Warren Buffett is often cited as someone who never takes unnecessary risks.

His investment philosophy is based on:

Careful analysis.

Avoidance of speculative ventures.

A preference for calculated decisions over high-risk opportunities.

2. Responsible Management

Only irresponsible managers allow acceptance of risks that could lead to:

Financial harm.

Operational instability.

Framework for Risk Interdependence

1. Risk Premises (Przesłanki)

Foundational conditions or assumptions that set the stage for potential risks.

Examples:

Deficit of skills

Low wages in Polish companies

Short-term calculation practices

2. Risk Symptoms

Observable indicators or signs of underlying risks.

Examples:

Ineffective training

Low discipline

Staff absenteeism

4.12.2024 6
 3. Risk Causes

Root reasons for the manifestation of risk.

Examples:

Changed orders or incomplete specifications

Unattractive products

High unit costs or unaccepted prices

4. Risk Factors

Specific elements or conditions that amplify the likelihood or impact of risk.

Examples:

Time overruns

Lost contracts (e.g., for German cars)

Dropping market share

Examples of Interdependencies
1. Deficit of Skills (Premise) →

Leads to ineffective training (Symptom)

Caused by lack of investment in education (Cause)

Results in low competitivity and unattractive products (Factors).

2. Low Wages in Polish Companies (Premise) →

Causes staff absenteeism (Symptom)

Leads to staff being pulled away to higher-paying competitors (Cause)

Amplifies risks like time overruns and lost contracts (Factors).

3. Short-Term Calculation (Premise) →

Results in unaccepted prices or high unit costs (Symptom)

Caused by lack of focus on long-term strategies (Cause)

Contributes to dropping market share and lost contracts (Factors).

1. Risk Premises

4.12.2024 7
 Definition:Areas of specific risks that outline potential threats or vulnerabilities to a
business.

Examples:

Hazards (e.g., natural disasters).

Speculation (e.g., market volatility).

2. Risk Symptoms
Definition:Perceptible indicators suggesting that something is going wrong, reducing
the chances of business success.

Examples:

Excessive stock levels.

Lack of discipline among employees.

Absenteeism.

3. Risk Causes

A. External Risk Causes

Definition:Independent, objective occurrences beyond the business's control.

Examples:

Weather events.

Wars or geopolitical crises.

Economic downturns or financial crises.

Competition and changes in regulations.

B. Internal Risk Causes

Definition:Internal disturbances and managerial inefficiencies within the organization.

Examples:

Poor business plans and failed decisions.

Lack of teamwork or internal conflicts.

Insufficient control mechanisms.

4. Risk Factors

4.12.2024 8
 Definition:Measurable consequences of risk, often quantifiable and insurable
(szkodowość in Polish).

Examples:

Financial losses due to damages.

Increased claims for insurance coverage.

Declining productivity or profitability metrics.

Risk Framework
1. Risk-Free Projections

Definition: Projections made without accounting for potential risks.

Assumes an ideal scenario with no disruptions or uncertainties.

2. Risk Symptoms

Definition: Observable indicators suggesting that something is going wrong.

Examples:

Excessive stock levels.

Rising absenteeism.

Declining productivity.

3. Risk Causes

Internal Causes:

Arising within the organization, e.g.:

Poor management decisions.

Operational inefficiencies.

Conflicts or lack of teamwork.

External Causes:

Factors beyond the organization’s control, e.g.:

Economic crises.

Regulatory changes.

Weather or geopolitical instability.

4. Risk Expectations

4.12.2024 9
 Definition: Anticipations of potential risks based on current trends and analyses.

Involves assessing what could go wrong and planning accordingly.

5. Risk Measures of Probability

Definition: Quantifying the likelihood of risk occurrences using probability models.

Examples:

Statistical forecasting.

Scenario analysis.

6. Estimated Intensity of Risk

Definition: The degree of potential impact if a risk materializes.

Measured in terms of financial loss, operational disruption, or reputational damage.

7. Risk Loss Consequences for Business

Definition: The tangible effects of realized risks on the business.

Examples:

Financial losses.

Loss of market share.

Legal penalties or reputational harm.

Key Distinction: Uncertainty vs. Risk

Uncertainty:

A realistic and unforeseen empirical event.

Cannot be predicted or managed directly.

Risk:

An abstract assumption based on potential future events.

Adjusted using a probability ratio to reflect the likelihood of occurrence.

Qualification of Risk Intensity Creating Losses

1. Critical Risk

Definition: Risks that lead to total failure of the business.

Examples:

4.12.2024 10
 Bankruptcy.

Collapse of operations or irreparable damage.

2. Major Risk

Definition: Risks that cause significant increases in costs and delays beyond
acceptable limits.

Examples:

Project overruns.

Substantial regulatory fines.

3. Minor Risk

Definition: Risks that result in inconveniences but do not significantly disrupt

business activity.

Examples:

Temporary staff shortages.

Minor delivery delays.

Causes of Critical Risks

1. Historical Examples

Mexico Gulf Disaster:

Environmental catastrophe with immense financial and reputational

consequences for BP.

Financial Crisis 2007:

Global economic downturn caused by risky financial products, leading to

bankruptcies and market collapses.

Brexit 2018:

Political and economic uncertainties disrupting businesses across the UK and

EU.

Swiss Franc Appreciation:

Sudden currency appreciation causing financial losses, especially for borrowers

and exporters.

Volkswagen Scandal:

4.12.2024 11
 Emissions fraud leading to legal penalties, loss of consumer trust, and massive
financial repercussions.

Snow in Rome:

Unusual weather disrupting transportation and city infrastructure, highlighting

inadequate preparedness.

Kursk Submarine Disaster 2018:

Loss of life and national reputation due to military operational failures.

WTC Collapse 2001:

Terrorist attacks causing global economic, political, and psychological impacts.

Key Measures of Risk Probability

1. Risk Ratio (r)

Definition: A relative value representing the likelihood of risk.

Example:

r=15r=51 (20%)

2. Risk Probability

Formula:Risk Probability=r×100%
Risk Probability=r×100%

Example: r=51 → Risk Probability = 20%.

r=15

20%

3. Risk-Free Ratio

Formula:Risk-Free Ratio=(1−r)×100%
Risk-Free Ratio=(1−r)×100%

Example: 1−r=54 → Risk-Free Ratio = 80%.

1−r=45
80%

4. Expected Value

4.12.2024 12
 Represents the probability of occurrence of a specific outcome.

Used to calculate the weighted average of all possible outcomes.

Analytical Techniques
1. Sensitivity Analysis

Purpose: Examines how changes in related factors (e.g., inputs, variables) impact
overall performance.

Example: Analyzing how variations in interest rates affect project profitability.

2. Risk Modeling

Definition: Creation of scenarios to understand how multiple factors influence goals

or performance.

Example: Assessing the diversity of outcomes for a Coppola film's box office
performance under varying conditions.

3. Monte Carlo Simulation

Definition: A method to model the impact of a range of variables and their

distributions on main outcomes.

Process:

Input variables with random values from defined distributions.

Simulate outcomes to evaluate risks in complex processes.

Example:

Simulating project timelines with various delays:

"If the supply chain is delayed by 10 days, then the project delivery is
delayed by 20 days."

4.12.2024 13
4.12.2024 14
 Forms of Risk Exposures
1. Accounting Exposure

Definition: Arises from the need to convert foreign operations into the local
currency during accounting processes.

Factors:

Differences in accounting standards.

Depreciation methods.

Costs calculation practices.

Tax burdens.

2. Transaction Exposure

Definition: Involves the economic conditions of transactions and their effects due
to changes in currency values, impacting rentability.

Example:

Exchange rate fluctuations affecting profits on export or import transactions.

4.12.2024 15
 3. Operational Exposure

Definition: Affects future operating cash flows and the real position of a
company.

Causes:

External market changes (e.g., demand shifts, competitive dynamics).

Internal business operations (e.g., supply chain disruptions).

Example: COVID-19 Influence on Business

1. Accounting Exposure

Businesses faced challenges in revaluing foreign assets due to exchange rate

volatility caused by global economic instability.

2. Transaction Exposure

Cross-border transactions were significantly impacted as currency values

fluctuated during the pandemic, affecting profit margins.

3. Operational Exposure

Market effects:

Decline in demand for non-essential goods and services.

Supply chain disruptions leading to increased costs and delays.

Internal effects:

Temporary closures, remote work adjustments, and inefficiencies in operations.

Key Terms and Concepts

1. Individual Risk Tolerance

Definition: The accepted balance between potential losses and gains that an
individual is willing to endure.

Key Insight: Reflects personal or organizational capacity to handle risk without

significant distress.

2. Risk Aversion

Definition: The acceptance of high costs to avoid risk.

4.12.2024 16
 Examples:

Unemployment: Investing in extensive training or insurance to reduce job loss

risk.

War: Allocating substantial resources to defense and peacekeeping to avoid

conflict.

3. Individual Risk Appetite

Definition: The active seeking of risk to exploit potential benefits or opportunities.

Key Insight: Indicates a preference for pursuing risks with perceived high rewards,
such as innovative ventures or speculative investments.

4. Risk Opportunities

Definition: A combination of risk losses and risk benefits, highlighting that risks
often carry both negative and positive outcomes.

Key Insight: Effective risk management seeks to minimize

losses while maximizing opportunities.

The primary goal of risk management is to maximize business performance by addressing

potential risks in plans, projects, and operations. This involves identifying, evaluating, and
mitigating risks to ensure sustainability and resilience.

Key Goals of Risk Management

1. Continuous Monitoring of Risk Symptoms

Tools: SWOT analysis (Strengths, Weaknesses, Opportunities, Threats).

Purpose: Identify early indicators of potential risks and address them proactively.

2. Realistic and Dynamic Risk Evaluation

Regularly assess risks based on current and anticipated conditions.

Adapt evaluation methods to align with changing circumstances.

3. Active and Effective Risk Management

Implement strategies to mitigate risks before they escalate.

Ensure risk responses are effective and timely.

4. Prevention of Losses and Negative Influence

4.12.2024 17
 Take proactive measures to avoid events that could harm business operations or
reputation.

5. Minimizing Risk Potential and Negative Effects

Reduce the likelihood of risk occurrences and mitigate the impact when they
happen.

Examples of Losses for Entrepreneurs and Insurers

1. Entrepreneurial Losses

Fired wood-made restaurant in Prague:

Entrepreneur bears direct losses, including business disruption and

reconstruction costs.

Bad management and wrong decisions:

Poor leadership leads to operational inefficiencies and financial setbacks.

External dependence:

Over-reliance on suppliers or markets increases vulnerability to external shocks.

2. Insurer Losses

Mistakes or negligence:

Insurers bear financial responsibility for covered risks, such as fire or accidents.

Negative influence:

Insurers face long-term liabilities due to recurring claims or systemic risks in

insured entities.

Six Stages of the Risk Management Process

1. Risk Identification
Definition: Recognizing potential risks that may affect business operations, projects, or
goals.

Key Activities:

Identifying hazards, uncertainties, and vulnerabilities.

Categorizing risks (e.g., financial, operational, external).

4.12.2024 18
 2. Analysis of Risk Consequences Intensity
Definition: Assessing the severity of potential consequences if a risk materializes.

Key Metrics:

Critical (business failure).

Major (significant cost or time overruns).

Minor (localized inconveniences).

3. Evaluation of Risk Consequences Probability

Definition: Estimating the likelihood of a risk occurring.

Techniques:

Statistical models (e.g., risk ratios).

Scenario analysis.

Monte Carlo simulations.

4. Risk Mitigation Strategies (Łagodzenie ryzyka)

Definition: Developing measures to reduce the likelihood or impact of risks.

Key Strategies:

Avoidance: Eliminating the source of risk.

Transfer: Shifting risk to a third party (e.g., insurance).

Reduction: Implementing safeguards to minimize effects.

Acceptance: Acknowledging and preparing for residual risks.

5. Active Risk Management

Definition: Taking proactive steps to manage risks during implementation.

Examples:

Regular monitoring of risk indicators.

Adjusting strategies in response to new developments.

6. Risk Control and Documentation

Definition: Ensuring ongoing risk monitoring and maintaining comprehensive records.

4.12.2024 19
 Key Activities:

Creating detailed reports of identified risks, strategies, and outcomes.

Using documentation for future reference and compliance requirements.

Various Risk Strategies

Key Risk Strategies

1. Identification, Assessment, and Prioritization

Definition: Systematically recognizing risks, evaluating their potential impact, and

determining their importance.

Purpose: Focus resources on high-priority risks.

2. Risk Prevention

Definition: Measures taken to eliminate or reduce the likelihood of risks

occurring.

Examples:

Safety protocols.

4.12.2024 20
 Compliance with regulations.

3. Risk Avoidance

Definition: Taking actions to steer clear of risks entirely.

Example: Avoid entering high-risk markets or projects.

4. Risk Compensation

Definition: Balancing the potential negative effects of risks with measures or

benefits that offset their impact.

Example: High interest rates for risky loans compensate lenders for increased risk.

5. Risk Minimization, Monitoring, and Control

Definition: Reducing the likelihood or severity of risks and maintaining

ongoing surveillance.

Examples:

Quality checks.

Regular audits.

6. Risk Protection

Definition: Ensuring preparedness to handle risks through financial safeguards.

Methods:

Risk Insurance:

Shifts the financial burden to an insurer, creating fixed costs against

variable risk margins.

Example: Property insurance against natural disasters.

Risk Securitization:

Transfers risks to investors by packaging and selling them as financial

products.

Example: Catastrophe bonds (CAT bonds).

Remarks
1. Perception of Risk Management

Historically treated as an "easy job", but modern complexities reveal its critical and
strategic importance.

4.12.2024 21
 2. Risk Prevention and Fixed Costs

Insurance-based prevention incurs high fixed costs but provides stability compared
to variable cost marginsof potential risks.

Formula: Business Risk Evaluation

Business Risk=Matrix (Probability of Event)×(Consequences of Event)

Steps for Evaluation

1. Identify Risk Factors

List specific risk factors relevant to the business.

Examples: Market demand fluctuations, operational disruptions, regulatory changes.

2. Assess Probability (PfPf) and Consequences (CfCf)

Assign a score to each risk factor:

Probability (PfPf): Likelihood of occurrence.

Consequences (CfCf): Intensity of impact if the event occurs.

Various Strategies of Risk Mitigation/Reduction

1. Identification
Recognizing potential risks before they materialize.

2. Monitoring
Continuously observing and tracking risk indicators.

3. Avoiding Risk
Taking actions to eliminate exposure to specific risks.

4. Minimizing Risk
Reducing the likelihood or severity of risks through preventive measures.

5. Acceptance
Acknowledging a risk and preparing to deal with its consequences.

4.12.2024 22
 6. Dividing
Splitting the risk among different projects, teams, or components to minimize
concentrated impact.

7. Sharing
Distributing risks between parties, such as partnerships or joint ventures.

8. Transferring
Passing the risk to third parties, such as insurers or contractors.

9. Mobilizing/Motivating
Engaging teams or resources to actively manage risks.

10. Learning and Training

Enhancing skills and awareness to better identify, understand, and manage risks.

Combined Strategies
Definition: Employing multiple strategies simultaneously to achieve optimal
efficiency in risk management.

Purpose: Addresses risks more comprehensively by integrating methods tailored to

specific scenarios.

Active Methods of Risk Management on Capital Markets

1. Risk Pooling (Compensation)

Definition: Reducing the variance of returns by combining multiple risk factors.

Purpose: Diversification of risks across assets, industries, or portfolios to stabilize

returns.

Example: Combining investments in stocks, bonds, and real estate to mitigate market
fluctuations.

2. Risk Contingency (Limitation)

Definition: Creating reserves or safeguards to protect against potential risks.

Types:

4.12.2024 23
 Task Contingency: Addressing risks in:

Sequence: Mitigating delays in project stages.

Time: Allowing for buffer periods in schedules.

Scale: Preparing for variations in project size or scope.

Managerial Contingency: Utilizing external support to limit risks:

Subcontractors: Assigning specialized tasks to reduce operational risks.

Outsourcing: Delegating activities to third parties to manage specific risk areas.

3. Risk Sharing
Definition: Reducing risk per unit of capital by dividing it among stakeholders.

Mechanism:

Selling shares to investors to spread financial risk.

Sharing risks with subcontractors through joint contracts or partnerships.

4. Risk Trade-Off (Replacement)

Definition: Balancing or replacing risks among various variables to optimize outcomes.

Example:

Accepting higher operational risk for reduced financial risk.

Replacing market risk with liquidity risk by shifting asset classes.

Definition of ARM
Active Risk Management focuses on proactively identifying, managing, and mitigating
risks in real time to improve business resilience and operational efficiency.

Key Features of ARM

1. Focus Areas

Detailed time sequence and scheduling.

Technical factors and logistics management.

Addressing organizational issues, including:

Staffing, relationships, marketing, and R&D.

4.12.2024 24
 Continuous forecasting and ongoing process control to prevent failures.

2. Proactive Approach

Emphasizes prevention and control over reactive measures like "crying after the
failure."

Aims to detect and mitigate risks before they escalate into major problems.

Comparison: ARM vs. TQM (Total Quality Management)

1. ARM

Strength: Focuses on detailed, real-time risk management.

Weakness: Less effective in addressing long-term financial performance

deviations.

2. TQM

Strength: More efficient in reducing deviations through organizational

improvements and quality control measures.

Limitation: Lacks ARM’s focus on immediate, proactive risk handling.

Limitations of ARM
Should not be reduced by misleading practices, such as:

1. Creative Accounting: Manipulating financial statements to obscure risks.

2. Face Lifting: Superficial improvements to mask deeper problems.

3. Corporate Reports: Over-reliance on polished reports that may downplay risks.

4. Statistics and Aggregates: Using aggregated data to generalize productivity and

performance, potentially hiding specific risk areas.

Definition of Operational Risk

Operational risk refers to specific types of risks arising from daily business operations due
to human faults, errors, or attitudes. These risks impact the firm's long-term potential,
performance, and stability.

Key Causes of Operational Risk

1. Human Errors and Faults

4.12.2024 25
 Examples:

Poor organization.

Staff fluctuations.

Pilferage (employee theft).

2. Operational Inefficiencies

Examples:

Overstocking or unelastic pricing.

Non-continuous transactions leading to instability.

Production breaks and wasted resources.

3. Product and Service Quality Issues

Poor quality products leading to customer dissatisfaction.

4. Financial Instabilities

Unstable finances affecting operational continuity.

Consequences
These risks may not be directly quantifiable in costs or losses, but they:

Erode the firm’s long-term growth potential.

Impact performance and operational stability.

Reduce the company’s competitive edge over time.

Mitigation of Operational Risk

1. Better Management and Organization

Strategies:

Streamlining operations to enhance efficiency.

Reducing assets and inventories to free up capital for other purposes.

Improving transaction continuity and reducing delays.

2. Cost Reduction

Lowering interest charges, operational costs, and associated overheads through

efficient planning.

4.12.2024 26
 3. Proactive Risk Management

Identifying and addressing potential human errors and process inefficiencies early.

Systematic Approach to Operational Risk Review

1. Analysis of Time Plans and Ongoing Activities

Focus: Ensure that operational timelines are being followed and activities are
progressing as scheduled.

Purpose: Identify potential delays or inefficiencies.

2. Analysis of Planned Costs

Focus: Compare planned vs. actual costs.

Purpose: Detect budget overruns or financial mismanagement.

3. Analysis of Quality Plans

Focus: Evaluate the achievement of goals and execution of tasks according to

quality standards.

Purpose: Ensure deliverables meet expected quality benchmarks.

4. Review of Deviations

Focus: Monitor deviations in various business activities, including production,

logistics, and transactions.

Purpose: Address issues proactively to minimize operational disruptions.

5. Application of Risk Procedures

Techniques:

Checking methods to verify adherence to processes.

Testing systems and workflows for potential weaknesses.

Standardization of procedures to reduce variability.

Measuring and documenting results to identify areas for improvement.

6. Engagement of Risk Management Executives

Roles:

Vice Presidents.

4.12.2024 27
 Chief Risk Officers (CROs).

Risk Departments.

Purpose: Ensure strong leadership and accountability in risk oversight.

7. Development of Competences and Managerial Duties

Focus: Train managers in risk awareness, decision-making, and proactive problem-

solving.

Purpose: Enhance leadership capabilities to manage risks effectively.

8. Participative Management and Teamwork

Focus: Involve all stakeholders, encouraging collaboration and shared

responsibility in risk management.

Purpose: Leverage collective expertise to identify and address risks

comprehensively.

International Business and New Forms of Risk

1. Foreign Exchange Exposure

Definition:
The degree of risk a company faces due to exchange rate fluctuations, affecting
international operations.

Key Areas Impacted:

1. Cash Flows:

Risk in money transfers between countries due to volatile exchange rates.

2. Sales/Export/Import Prices:

Currency shifts affecting the pricing of goods and services, leading to

potential profit margin loss.

3. Cross-Border Expenses:

Fluctuations in costs for international supplies, labor, or logistics.

4. International Financing:

Debt and loans in foreign currencies are affected by exchange rate volatility,
altering repayment amounts.

4.12.2024 28
 2. Inter-Company Transactions
Definition:
Operations between a parent company and its international branches, which can
create additional risk dynamics.

Key Considerations:

1. Out-of-Market Effects:

Business decisions based on internal company strategies may disregard local

market conditions, potentially harming the local economy.

2. Reduced Foreign Exchange Exposure:

By consolidating currency risks internally within the company, external

exchange rate exposure may be minimized.

3. Operational Risk Replacement:

The reduction of foreign exchange exposure can lead to an increase in

operational risks, such as:

Mismanagement of inter-branch transactions.

Inefficiencies in resource allocation.

Key Considerations in Short-Term Risk Strategies

1. Interest Rates vs. Exchange Rates

Importance:

Short-term financial decisions must consider differences between nominal

interest rates and foreign exchange rate fluctuations.

Misalignment can lead to unexpected cost increases or reduced profitability.

2. Firm's Degree of Risk Aversion

Definition:

A firm's willingness to accept costs related to exposure in local currencies.

Implication:

Firms with higher risk aversion may prioritize hedging strategies or limit
exposure to volatile markets.

3. Borrowing Decisions

4.12.2024 29
 Key Factors to Consider:

Consolidated Risk Effects: Evaluate the overall risk across international

operations, including exchange rate risks.

Tax Consequences: Account for differences in tax regulations across countries.

Political Risk: Assess stability and potential policy changes in the borrowing
country.

4. Minimizing Risks and Costs via Inter-Company Financing

Definition:

Using internal funding mechanisms (e.g., loans between parent and

subsidiary) to reduce reliance on external financing.

Benefits:

Lowers transaction and interest costs.

Provides flexibility in resource allocation across regions.

5. Cooperation with International Banks

Opportunities Provided:

Access to foreign financial markets and innovative financial products.

Examples:

Bank overdrafts: Short-term liquidity support.

Cheaper credit lines: Competitive financing options.

Revolving credits: Flexible borrowing limits for working capital.

New Risks Introduced:

Dependency on external institutions.

Exposure to financial market volatility.

Foreign Exchange Exposure Translation

Foreign exchange risk can be managed by converting or analyzing assets, liabilities,
expenses, and receivables in the home currency or directly in foreign currencies.

1. Translation into Home Currency

Definition:

4.12.2024 30
 Converting foreign exchange exposure into the home currency for easier evaluation and
management.

Methods:

1. Asset and Expense Conversion

Translate monetary (cash, receivables) and non-monetary (physical goods,

commodities) assets into the home currency.

Consider denominated items like:

Gold

Oil

Other global indexes.

2. Exchange Rates Used

Current Rates: Reflect the most recent market exchange rate.

Fixed Rates: Use a predetermined rate for consistency in long-term projections.

Extrapolated/Dynamic Rates: Predict future exchange rates based

on economic trends and historical data.

3. Time and Historical Trends

Analyze historical exchange rate data to understand trends and potential future
fluctuations.

Combine methods for more accurate risk projections.

2. Analysis in Foreign Currencies

Definition:
Maintaining reports and analysis in foreign currencies for global operations or when
dealing with multiple international markets.

Example: SONY

Consolidates reports in:

US Dollars (USD)

Japanese Yen (JPY)

Euros (EUR)

Enables precise evaluation of risks and opportunities in different currency zones.

4.12.2024 31
 Specific Problems and Mistakes of Risk Management in the
International Business Environment

Key Problems and Mistakes

1. Mistakes in Assumptions of Initial Business Plans

Definition: Errors in forecasting, strategic alignment, or understanding market

conditions during the planning phase.

Impact: Leads to flawed business models and increased risk exposure.

2. Overconfidence

Examples of Overconfidence Cases:

IBM: Underestimating competition in the personal computer market.

Fujitsu: Overestimating its market position in global IT services.

Philips: Failing to adapt to competitive pricing and technology changes.

KFC (Kentucky Fried Chicken): Cultural missteps and inadequate localization

strategies in global markets.

Impact: Overconfidence often results in poor risk assessment and failure to adapt.

3. Static Projections of Business Risk

Definition: Reliance on historical data without accounting for dynamic market

changes.

Impact: Leads to outdated or irrelevant risk evaluations.

4. Ignoring Unexpected Factors in Long-Term Projections

Definition: Failure to anticipate and plan for unpredictable external influences.

Examples:

Buildings in Turkey and Japan: Ignoring earthquake risks in construction.

Impact: Unforeseen factors can derail long-term strategies and operational stability.

5. Challenges in Proving Risk-Free Rentability

Definition: Difficulty in demonstrating guaranteed returns for highly volatile or

innovative sectors.

Examples:

4.12.2024 32
 Highly Innovative Sectors: Pharmaceuticals and informatics face unpredictable
R&D outcomes and market acceptance.

Monopolies and Public Orders: Defense contracts and military sectors often
operate "out of market," complicating risk and rentability assessments.

Key Strategies to Reduce Risk in International Cash Operations

1. Pricing & Payment Policy

Establish clear and adaptable pricing structures.

Implement secure and consistent payment policies to minimize financial exposure.

2. Trade Policy

Sales and Stock Management:

Align sales and stock levels to avoid overstocking and mitigate financial strain.

Orders and Payment Conditions:

Set favorable and reliable payment terms to reduce non-payment risks.

3. Capital Sources Control

Monitor and manage capital sources effectively, including loans and equity, to
ensure liquidity and reduce risk exposure.

4. Risk Shifting and Dispersion

Shifting: Transfer financial risks to third parties (e.g., insurers).

Dispersion: Spread risks across multiple markets, currencies, or suppliers to dilute

the impact of localized issues.

5. Risk Sharing

Collaborate with partners, subcontractors, or investors to divide risks and reduce

individual exposure.

6. Insurance Policy

Use insurance to safeguard against risks such as non-payment, natural disasters,

or unexpected business disruptions.

7. Hedging and Currency Options at the Money Market

Use hedging instruments (e.g., futures and forwards) to lock in favorable exchange
rates.

4.12.2024 33
 Employ currency options to secure the right to exchange at a predetermined rate,
mitigating risks from currency fluctuations.

8. Currency Collars

Definition: Contracts that protect against currency movements beyond predefined

thresholds.

Purpose: Provide a safety net while allowing some flexibility in exchange rate
fluctuations.

9. Clearing and Barter

Definition: Forms of trade compensation where goods and services are exchanged
directly (bilateral or multilateral) without monetary transactions.

Purpose: Reduce reliance on volatile currency markets and avoid payment defaults.

Definition
Payments Netting is a mechanism in international cash management that streamlines cross-
border cash flows by consolidating multiple payments to reduce transaction volumes, costs,
and complexities. It is a key tool for managing continuous cash flow (CF) in cross-border
cooperation.

Types of Payments Netting

1. Bilateral Netting

Definition: Payment netting between two entities, such as a parent company and a
subsidiary or two trading partners.

Characteristics:

Limited to two parties.

Generates high cross-border flows, increasing:

Transaction costs.

Bank charges.

Commissions for currency exchanges.

Use Case: Suitable for simple, low-volume payment arrangements.

1. Multilateral Netting

4.12.2024 34
 Definition: Payment netting involving multiple entities or subsidiaries within a
group.

Characteristics:

Consolidates multiple payments into a single net transaction for each entity.

Reduces settlement costs by minimizing the number of individual cross-border

transfers.

Allows for:

Compensation of payments: Offsetting receivables and payables among

entities.

Time shifts: Adjusting payment schedules to optimize cash flow timing.

Balance transfers: Efficient allocation of funds to manage liquidity.

Use Case: Ideal for large multinational corporations with multiple subsidiaries
engaging in frequent inter-company transactions.

Risk trade-off refers to making economic choices by balancing multiple variables such
as time, cost, money, targets, and quality. It involves evaluating marginal alternative
solutions to minimize risks while considering their impact on resources and objectives.

Key Considerations in Risk Trade-Off

1. Savings vs. Risk Scale

Question: How are savings in costs, time, or capital expenses affected by the scale
of a particular risk?

Example: Sourcing cheaper materials may save costs but could introduce quality
and operational risks.

2. Risk Reduction vs. Resource Absorption

Question: How does reducing a particular risk to an acceptable limit impact the use
of capital, costs, investments, labor, and time?

Example: Allocating more resources to improve product safety might reduce risk
exposure but could increase production costs and capital demands.

Examples: Risk Trade-Off Variables in the Car Industry

1. Cheap Import of Components from China vs. Car Quality

4.12.2024 35
 Trade-Off:

Cheaper imported components lower production costs.

However, they may compromise the quality and durability of cars, leading to:

Higher warranty claims.

Reputational damage.

Consideration: Balancing cost savings against potential long-term quality and brand
risks.

2. Diesel and Petrol Cars vs. Cost of Exploitation

Trade-Off:

Diesel Cars: Lower fuel costs but higher initial purchase prices and potential
regulatory risks (e.g., emissions restrictions).

Petrol Cars: Lower upfront costs but higher fuel expenses over time.

Consideration: Evaluating short-term vs. long-term financial impacts while

factoring in evolving environmental regulations and market preferences.

Time as a Resource
Definition: Time is a costly resource comparable to labor, capital, machinery,
technology, and risk.

Key Role: Used in trade-offs as a substitute for other variables, such as:

Allocating time to improve quality instead of speeding up production.

Delaying investments to reduce risk exposure.

Impact of Time Management on Business Performance

1. Proper Time Metering

Accurate measurement of time helps in planning and executing business activities

efficiently.

Prevents wastage of time in redundant or poorly managed tasks.

2. Move Management

Timely decision-making and strategic adjustments ensure the business stays on

track.

Directly affects productivity, cost control, and goal achievement.

4.12.2024 36
 Time Efficiency
1. Personal Skills

Effective time management reflects individual abilities to prioritize and execute

tasks.

2. Organizational Quality

Efficient systems and processes optimize time utilization across teams and projects.

3. Professionalism

Demonstrates the capacity to meet deadlines, allocate resources effectively, and

maintain productivity under constraints.

Time-Based Risk Analysis and Productivity Improvement

Time plans can be used to identify and mitigate risks while optimizing productivity through
the following strategies:

1. Optimization of Time Schedule

Streamlining activities to improve overall efficiency.

2. Rearrangement of Stages

Adjusting the sequence of tasks to reduce bottlenecks and improve workflow.

3. Simplification of Tasks, Technologies, and Requirements

Reducing complexity to minimize delays and resource wastage.

4. Engagement of Additional Resources

Allocating more capital, labor, or tools to accelerate progress.

5. Identifying Critical Paths

Recognizing and prioritizing paths with the greatest impact on project completion
time.

6. Problem-Solving Initiatives

Proactively addressing issues to avoid disruption.

7. Mobilizing Subcontractors

Incentivizing early completion with premiums to ensure timely delivery.

Problem-Solving Procedures in Timing Risks

4.12.2024 37
 1. Reacting to Delays or Changes in Plans

Define protocols for addressing slack, delays, or unexpected changes.

Examples: Reallocate resources, revise schedules, or prioritize critical tasks.

2. Shortening Subsequent Stages

Identify opportunities to compress timelines by adjusting dependencies or increasing

workforce efficiency.

3. Sharing Costs and Benefits

Develop frameworks to distribute:

Potential Benefits: For achieving milestones early or improving efficiency.

Potential Costs: For delays, ensuring fair accountability among stakeholders.

Methods of Reviewing Operating Plans

1. "Bottom-Up" Method
Definition:
A review process starting from the operational level and moving upward to the
managerial level.

Key Features:

1. According to the Time of Engagement:

Tasks are reviewed based on when resources (e.g., capital, labor) are engaged.

2. According to the Process of Completion:

Progress is evaluated as tasks are completed step-by-step.

3. By Sequence of Tasks and Expenses:

Each task is assessed in order, with a focus on associated costs.

4. Respecting Engagement of Contractors:

Incorporates subcontractor contributions and ensures alignment with overall

goals.

2. "Top-Down" Method
Definition:

4.12.2024 38
 A review process led by senior managers, focusing on the
financial viability and efficiency of the plan.

Key Techniques:
a) Payback Analysis

Definition: Compares cash inflows (returns) and outflows (expenses) to determine

the time required to recover the initial investment.

Purpose: Ensure planned returns justify the investment.

b) Discounted Cash Flow (DCF)

Definition: Considers the time value of money by discounting future cash flows to
their present value.

Purpose: Evaluate long-term project profitability.

c) Internal Rate of Return (IRR)

Definition: The discount rate at which the net present value (NPV) of all cash
flows equals zero.

Purpose: Measure the project’s efficiency and compare it with other investment
options.

d) Set of Efficiency Criteria

Senior managers review the project against predefined criteria, such as cost-
efficiency, time-effectiveness, and alignment with strategic goals.

Definition
Trade-offs involve balancing a set of variables to resolve crises and minimize losses, while
considering human, financial, and operational priorities.

Key Strategies for Managing Crashes

1. Human (Managerial) Experience

Relying on experienced managers to make informed decisions under pressure.

2. Minimization of Losses

Prioritizing:

Saving lives and ensuring safety.

Reducing dangers to people and assets.

4.12.2024 39
 Minimizing financial costs associated with the crash.

3. “First In – First Out” Rules

Following logical rules to resolve issues in the order they appear or based on
urgency.

4. Limited Access to Variables

Managing constrained access to critical resources or information.

5. Cost Control

Reduction of Planned Cost Increases: Scaling down additional costs to stay within
budget.

Recognition of Fixed and Variable Costs: Differentiating between costs that can
and cannot be adjusted.

6. Alternative Loss Reduction Sequences

Evaluating alternative steps to determine the most effective order for loss
mitigation.

7. Multi-Criteria Optimization

Applying models that consider multiple factors (e.g., time, cost, safety) to find the
best solution.

8. Procedures for Rescue, Repair, and Restitution

Establishing clear steps to:

Rescue affected individuals or assets.

Repair damaged systems or structures.

Restore normal operations.

9. Corrected Cost and Performance Structures

Accepting and adapting to the revised structure of costs and performance metrics
after the crisis.

Definition and Overview

Investment payback analysis involves comparing initial expenses with generated returns (in
cash flow) over a defined time horizon to assess the feasibility and risk of investments.

Key Concepts

4.12.2024 40
 1. Payback Period (PP)

Definition: The time required to recover the initial investment through generated
cash flows.

Significance: Critical for assessing the risk tolerance and profitability timeline of
different industries.

2. Examples of Payback Periods by Industry:

US Manufacturing Companies: 5 years.

Japanese Factories: 10 years.

Computer Industry: 3 years.

McDonald’s Franchise: 12 years.

3. Factors Influencing PP Differences:

Risk Profiles: Higher-risk industries require shorter payback periods.

Capital Allocation Elasticity: Some industries face constraints in reallocating

capital, influencing longer or shorter PP requirements.

Limitations of Cash Flow Analysis

1. Exclusion of Time Value of Money (TVM)

Cash flow analysis does not account for the decreasing value of money over time.

2. Capital Fluctuations

Ignores market and currency fluctuations, which can impact actual returns.

3. Market and Trade Dynamics

Market changes and trade distortions are not reflected in static cash flow models.

Addressing Limitations
1. Discounted Cash Flow (DCF)

Definition: Adjusts cash flows to account for the time value of money, providing a
more accurate evaluation.

Purpose: Reduces inaccuracies by incorporating discount rates to reflect market

realities.

4.12.2024 41
 Challenges in Calculating Investment Return

Key Concepts
1. Interest Rate Calculation by Banks

Definition: Calculating returns on investments is clear, precise, and secure when

based on interest rate calculations by banks.

Reason: Banks use established methods, ensuring accuracy and risk coverage.

2. Challenges in Other Forms of Returns

Disputability: Non-bank returns are often imprecise and subject to interpretation.

Factors:

Involvement of multiple variables.

Uncertainty from market conditions and risk factors.

3. Compensation for Risk

Definition: All forms of risks must be compensated through risk

margins proportional to the risk estimation.

Purpose: Ensures that investors are rewarded appropriately for taking on higher
levels of risk.

Interest Rate Growth as a Function of Time and Risk Factors

1. Time Factor

Interest rates increase over time to account for the opportunity cost and time value
of money.

2. Risk Factor Estimation

Interest rates rise based on the complexity and intensity of risk.

Examples of Risk Factors:

Market volatility.

Creditworthiness.

Industry-specific risks.

IRR vs. NPV in Expressing Investment Risk

4.12.2024 42
 IRR (Internal Rate of Return) vs. NPV (Net Present Value)
1. Comparison of IRR and NPV:

IRR represents the discount rate where the NPV = 0, often interpreted as the
expected rate of return for the project.

NPV measures the absolute monetary value of the project, accounting for the time
value of money.

2. Key Relationship:

Projects with the same IRR can have different NPVs due to varying levels
of risk and factors affecting cash flows.

Risk premium factors influence these variations, requiring adjustments to ensure

accurate investment assessments.

Implications of Over-Estimated Risk

1. Investors’ Expectations:

If WACC (Weighted Average Cost of Capital) < IRR, investors expect profitability.

However, overestimating risk can lead to investors not being repaid if the project’s
returns fail to materialize.

2. Key Risks Affecting IRR and NPV:

Ignored Full Costs: Hidden or underestimated costs reduce actual returns.

Opportunity Costs: Alternative uses of capital may be overlooked, impacting

decision-making.

Price and Currency Fluctuations: Changes in prices, exchange rates, or interest

rates can affect profitability.

Contract Volume Variability: Fluctuating contract volumes introduce revenue

uncertainty.

Competitiveness Changes: Market dynamics may lower profitability.

Inflation: Erodes purchasing power, reducing the value of future cash flows.

Key Risk Factor for CF: Timing of Payments

1. Definition:

4.12.2024 43
 Delays or mismatches in cash inflows and outflows significantly impact project
viability.

Poor timing can lead to liquidity issues, even if the project is profitable in the long
term.

2. Implications for Investors and Managers:

Investors face repayment uncertainties due to delays.

Managers must ensure proper cash flow scheduling to mitigate timing risks.

Overview of Qualitative Risk Analysis

Qualitative risk analysis involves assessing non-quantifiable aspects of investments and
their indirect effects on businesses, industries, and society. This complements traditional
quantitative approaches by providing a more holistic understanding of risks and opportunities.

Key Issues in Qualitative Risk Analysis

1. Focus on Quantitative Trends

Analysts often extrapolate direct quantitative trends for metrics like:

Manufactured goods.

Sales and turnover.

Income and profit margins.

2. Overlooking Indirect Effects

Commonly ignored areas:

Side Effects:

Example: Car manufacturing affecting oil consumption and electricity

demand.

Stimulus to Other Branches:

Investments boosting related sectors like logistics or infrastructure.

Inductive Investments:

Example: Building factories triggering new housing developments or

commercial hubs.

Comfort and Quality of Life:

Enhancements from technology, products, or infrastructure improvements.

4.12.2024 44
 3. Negative Effects of Investments

Economic Structure: Distortions due to resource allocation shifts.

Trade Scale: Impacts on international trade dynamics.

Resource Utilization: Over-extraction or mismanagement of natural resources.

Employment: Automation or capital-intensive projects reducing job opportunities.

Energy and Capital Flows: Strains on energy supplies or financial systems.

Pollution: Environmental degradation resulting from industrial activities.

Recommended Methods for Qualitative Risk Analysis

1. Mapping

Visualizing relationships and impacts of investments across sectors and stakeholders.

Examples:

Influence of a manufacturing plant on local infrastructure, energy needs, and

community well-being.

2. Six Sigma Methods

Using Six Sigma tools to analyze and minimize defects in processes or systems,
ensuring better outcomes for:

Product development.

Resource utilization.

Operational efficiency.

General Problem of Risk Management

Key Issue
Traditional risk management steps often fail to lead to organizational improvements that
enhance business performance, leaving risks unaddressed despite comprehensive analysis.

Traditional Risk Management Steps

1. Financial Projections

Analysts calculate business plan projections, focusing on expected growth,

revenues, and costs.

4.12.2024 45
 2. Analysis of Financial Performance

Deviations from financial goals and benchmarks are identified and reported.

3. Risk Estimation

Risk coefficients are calculated using standard risk formulas to quantify exposure.

4. Adjustment of Financial Reports

Consolidated financial reports are corrected based on risk ratios to reflect potential
uncertainties.

Core Problem: Lack of Action Against Risk

While financial risks are identified and documented, no active measures are taken to
mitigate or address them.

This results in:

Persistent vulnerabilities.

Missed opportunities for operational and strategic improvements.

Example: Polish Shipyards and Coal Miners

1. Scenario:

These industries were heavily indebted and faced declining competitiveness.

2. Problem:

Lack of modernization and organizational reform, despite clear financial risks and
deteriorating performance.

3. Outcome:

Both industries eventually collapsed, illustrating the consequences of failing to act

on identified risks.

Risk in Neoclassical and Knowledge-Oriented Economics

Risk in Neoclassical Economics

1. Key Recommendations

Chief Risk Officer (CRO):

Employing a CRO ensures dedicated leadership in risk management.

4.12.2024 46
 Focuses on strategic identification and mitigation of risks across all business
functions.

2. Prioritizing Risk

Risk management is crucial due to the unlimited number of economic

variables that influence markets and decisions.

Neoclassical economics emphasizes predictable modeling but acknowledges the

complexity and interdependence of these variables.

Risk in Knowledge-Oriented Economics

1. Focus Areas
Analysts concentrate on internal sources of risk, which are often under the
organization’s control. Key areas include:

Operating Risk:

Risks arising from day-to-day business operations.

Behavioral Analysis:

Examining human decision-making and its impact on organizational risk.

Deviation Analysis:

Identifying and addressing deviations from expected performance or

benchmarks.

Standardization of Risk:

Developing consistent frameworks for identifying, assessing, and mitigating

risks.

Management by Organizational Improvement:

Enhancing organizational processes and structures to minimize risk exposure.

2. Approach

The focus is on systemic improvements rather than just reactive measures.

Encourages ongoing refinement of business practices to reduce risk at its source.

Recommendations for Active Risk Management

Expanded Perspective on Risk

4.12.2024 47
 1. Beyond Financial Efficiency

Risk should not be viewed solely as a factor impacting performance and financial
efficiency, as commonly done by stock market analysts.

It must also encompass operational, strategic, and systemic dimensions.

2. Comprehensive Risk Action

Strategies should include:

Reduction: Mitigating the likelihood or impact of risks.

Spreading: Distributing risks across operations or stakeholders.

Avoidance: Eliminating risk sources entirely where feasible.

Active Risk Management in Practice

1. Multidisciplinary Approach

Engineers, Managers, and Financial Experts collaborate to assess risks in all

business areas, including:

Operational processes.

Quality control.

Financial projections.

Strategic planning.

2. Evaluation of Alternatives

Risk is analyzed through comparisons of quality and options, considering various

scenarios and trade-offs.

3. Problem-Solving Mindset

When difficulties arise, the focus shifts to:

Identifying solutions for emerging issues.

Determining corrective actions to reinforce and restore planned targets.

Adjusting parameters to align with realistic goals under constrained conditions.

Risk and Quality Assurance Methods

Key Methods

4.12.2024 48
 1. Failure Mode Effect Analysis (FMEA)

Definition: A systematic approach to identifying and analyzing potential failures at

each stage of a process.

Components Analyzed:

Likelihood: Probability of failure occurring.

Severity: Impact of the failure on operations or outcomes.

Hideability: Difficulty in detecting the failure.

Purpose: Evaluates individual risks to calculate total risk and prioritize mitigation
efforts.

2. PERT (Program Evaluation and Review Techniques)

Definition: A statistical tool used for project planning and risk analysis, especially
for projects with multiple variables.

Approach:

Variables are analyzed using three scenarios:

1. Optimistic: Best-case outcomes.

2. Pessimistic: Worst-case outcomes.

3. Most Probable: Likely outcomes.

Purpose: Assists in estimating timelines and identifying risks in project schedules.

3. Risk Mapping

Definition: Visual representation of risks and their relationships across processes or

organizational areas.

Purpose:

Identifies risk hotspots.

Prioritizes risk areas for mitigation.

4. Risk Standardization

Definition: Establishing consistent criteria and procedures for identifying,

evaluating, and addressing risks.

Purpose: Ensures uniformity and reliability in risk management processes.

5. Six Sigma

4.12.2024 49
 Definition: A quality assurance methodology aimed at reducing process variability
and defects.

Connection to Risk:

Minimizes risks by improving process consistency and efficiency.

Uses tools like DMAIC (Define, Measure, Analyze, Improve, Control) to

identify and mitigate risks.

Key Strategies to Reduce Risk

1. Time Management

Definition: Managing time effectively by identifying and optimizing the critical

path in operations.

Benefits:

Reduces uncertainty by maintaining schedules.

Prevents escalation of problems by addressing delays proactively.

2. Cost Management

Definition: Controlling costs to minimize uncertainties in input, processes, and

value creation.

Techniques:

Cost Control (CC): Ensures expenses stay within budget.

Return on Investment (ROI): Measures profitability of investments.

Net Present Value (NPV): Assesses the value of cash flows over time.

Benefits:

Improves financial stability and reduces risk in resource allocation.

3. Quality Assurance

Definition: Mobilizing all resources and processes to ensure the highest product
quality.

Benefits:

Aligns organizational activities with quality goals.

Reduces risks by ensuring consistent standards and customer satisfaction.

4. Staff Training

4.12.2024 50
 Definition: Equipping staff with the necessary skills and knowledge to manage risks
effectively.

Benefits:

Enhances decision-making capabilities.

Reduces operational risks through better understanding of processes and risk

factors.

4.12.2024 51
 13.11.2024
Definition
Investment in a narrow sense of accounting concerns capital allocation in the form of fixed
assets for longer than 1 year.

Types of Investments:

1. Major Strategic Investment Programs:

Focused on long-term targets.

Creating a new face of business (modernization, rebranding, restructuring).

2. Unique Investment Projects:

Individually designed and contracted.

Selected from a set of alternatives to confirm core competencies and position on the
market.

3. Routine Investments:

Difficult for individual efficiency measurement.

Ensure business process continuity and involve repeatable transactions in:a) Specific
financial instruments (portfolio).b) Technical equipment (restitution or new
installation).

4. Minor Importance Investments:

Various equipment that may subjectively improve convenience, work comfort, and
time savings.

5. Non-Consumption Expenses:

Treated as investments in the common sense of the term.

External Effects of Investment Strategy:

Individually tailored to business goals, aspirations, and development.

Aligns with industry and capital market trends.

Follows common practices and business cycles.

Internal Effects of Investment Strategy:

13.11.2024 1
 1. Restitution and Modernization:

Renewal and upgrading of fixed assets.

2. Business Growth:

Increase in potential, operational scale, and market share through expansion.

3. R&D Programs:

Investment in research and development to foster innovation.

4. Commercial Development:

Improvement of the product/service offering, competitiveness, and employee skills.

Coordination of Investment Strategy with Budgeting:

1. Divestment Budgeting:

Sale of redundant, unproductive assets to enhance productivity, liquidity, and reduce

costs.

2. Financial Budgeting:

Projection of current inflows and outflows over time.

3. Capital Budgeting:

Management of capital acquisition and allocation (e.g., equity funds, loans, short-
term liabilities, leasing).

4. Cash Budgeting:

Monitoring current cash balances, managing surpluses, deficits, and overdraft

facilities.

Investment Management goes beyond profitability analysis. It involves the planning, analysis,
execution, and control of various investment aspects.
Key Focus Areas of Investment Management:

1. Cost, Profitability, and Risk:

Managing the impact of changes in the structure of the capital mix.

2. Productivity Increase:

Enhancing efficiency through modernization of assets.

3. Qualitative Investment Goals:

13.11.2024 2
 Digitalization.

Reduction of labor absorption.

Automation and innovations.

Increasing product attractiveness.

4. Operational Impact:

Evaluating overall influence on work processes and operating performance.

5. Supplementary Expenses:

Expenses specifically allocated to the investment process.

Green Economy Investment:

Green investments often exhibit negative profitability effects.

They are justified primarily by administrative and regulatory arguments rather than
financial metrics.

Challenges in Calculating Investment Rentability:

1. Real Sum of Engagement:

Minimum engagement value, its time deviation, and unexpected expenses related to
ambitious plans.

2. Period of Engagement:

Minimum duration of engagement and delays in project realization.

3. Cost of Capital:

Annual cost of engaged capital.

Consequences of capital mix effects and levels of indebtedness.

4. Transaction Costs:

Minimum transaction costs associated with the investment process.

5. Profit Calculation:

Calculated as the difference between income and costs.

Used to measure profitability and investment rentability.

6. Cash Net Effect:

13.11.2024 3
 The difference between cash inflow and outflow.

7. Tax Effects:

Includes forms of tax increases or reductions resulting from the investment.

8. Risk Effects:

Consideration of various risks, including individual, corporate, market, political,

financial, and currency risks.

9. Impact on Business Liquidity:

Influence on the overall liquidity position of the business.

10. Impact on Business Rentability:

Effect on the total profitability of the business.

11. Impact on Business Value:

Contribution to the overall value of the enterprise.

12. Influence on Other Business Areas:

Market position.

Employment levels.

Staff motivation.

Management and owner satisfaction.

Public perception of the business.

Determinants of Investment Project Attractiveness and Accuracy:

1. External Investment Climate:

Interest rates and their impact on borrowing costs.

Availability of capital for financing projects.

2. Adaptability and Elasticity:

Ability to adjust to structural changes in:

Market demand.

Technological advancements.

Product and service offerings.

13.11.2024 4
 3. Risk and Coordination:

Synchronization of investment projects with risk scenarios.

Consideration of expected sales versus actual revenues.

Alignment of manufacturing capacity with market demand and timelines.

4. Expense and Return Dispersion:

Focused analysis of total expenses and expected returns within the payback period.

Evaluation against the objectives of the investment programs or projects.

Example: Implications of Investment Project Realization During High Inflation

1. Increased Costs:

Higher raw material, labor, and operational costs, reducing profitability.

2. Financing Challenges:

Elevated interest rates, leading to higher borrowing costs.

3. Uncertain Revenue:

Inflation erodes consumer purchasing power, potentially lowering demand and

revenues.

4. Shortened Payback Periods:

Investments may require faster returns to mitigate inflation's impact on cash flows.

5. Strategic Adjustments:

Necessity for frequent revisions of pricing strategies and cost management to

preserve margins.

Stages of the Investment Process:

1. Creation of the Business Concept:

Establishment of the legal entity and partnerships required for the project.

2. Investment Feasibility and Business Plan:

Detailed calculation of costs and timing for expenses and expected returns.

3. Projection of Cash Flows (CF):

13.11.2024 5
 Distribution of expenses and returns, balanced by credit lines and other financial
tools.

4. Demand for Financing:

Identification of funding requirements from both external and internal sources.

5. Acquisition of Capital:

Sourcing capital from external providers and utilizing internal funds.

6. Operational Budget Execution:

Transforming the investment process into actionable operational budgets for step-by-
step implementation.

7. Coordination of Operations:

Ensuring alignment of project activities with the financial budget.

Example: Góraszka - The Biggest Shopping Centre in Warsaw

Business Concept:
Establishing Góraszka as a premier shopping destination.

Feasibility Plan:
Calculating development costs and estimating long-term returns.

Cash Flow Management:

Aligning large-scale expenditures with projected revenues through phased
implementation.

Financing Strategy:
Securing funds through a mix of external investments, loans, and internal reserves.

Execution:
Step-by-step construction and operational rollout aligned with the approved budget.

Coordination:
Monitoring progress against financial projections to ensure profitability and timely
completion.

Key Budgets in Investment Project Coordination:

1. Labor Costs Budget:

13.11.2024 6
 Covers direct labor groups, including:

Standard labor time.

Overtime costs.

Costs of subcontractors.

2. Materials Budget:

Details physical material requirements.

Includes generic costs of input materials.

3. Fixed and Indirect Costs Budget:

Includes:

Depreciation.

Interest expenses.

Administrative and departmental costs.

Overheads and subcontractor costs.

4. Financing Budget:

Statement of financing expenses, including:

Working capital engagement.

Leasing costs.

Credit interest rates.

5. Total Investment Budget:

Comprehensive coordination tool for:

Activities.

Expenses.

Timelines.

Methods of Assessment of Investment Projects

A. Quantitative Methods

Focused on investment rentability analysis using:

1. Simple Methods

13.11.2024 7
 Based on investment profitability (e.g., ROI).

2. Discounted Methods

Involving discounted return exceeding the initial investment (e.g., NPV, IRR).

B. Qualitative Methods

Crucial for long-term horizon and investment improvement, emphasizing:

Market impact:

Increase in market share and leadership position.

Quality and organization:

Higher standards in product/service quality and organizational efficiency.

Modernity and attractiveness:

Innovation in products and management practices.

Technological advancements:

Improved manufacturing processes and convenience.

Cost and resource savings:

Efficient use of labor, energy, and materials.

Environmental impact:

Reduction in pollution and waste.

Procedure of Investment Rentability Analysis

Steps in Investment Rentability Analysis:

1. Fundamental Analysis:

Examination of the business, market, and industry (branch) fundamentals.

2. Projection of Expenses and Returns:

Comparing input (expenses) and output (returns) at the same moment in time.

3. Assumptions and Evaluation Criteria:

Selection of key assumptions and criteria for investment assessment.

4. Defining Marginal Effectiveness Requirements:

Setting minimum acceptable levels of investment effectiveness.

13.11.2024 8
 5. Performance Measurement:

Evaluation of investment performance across selected scenarios.

6. Risk Estimation:

Determination of the marginally acceptable deviation in returns as a measure of risk.

A well-designed and trustworthy analysis can identify potential improvements in investment

rentability.

1. Definition of the Target:

Clearly specify the objectives of the analysis and desired improvements.

2. Critical Analysis of Data:

Assess the quality, accuracy, and relevance of data used in decision-making.

3. Preparation of Business Plan and Cash Flow (CF):

Develop a detailed business plan and accurate cash flow projections for the
investment project.

4. Capital Acquisition and Cost Estimation:

Secure the required capital and evaluate its associated costs.

5. Budgeting of Investment Variables Over Time:

Distribute investment variables (expenses and returns) across the timeline

effectively.

6. Execution and Budget Control:

Implement the investment plan and continuously monitor the budget to ensure
alignment with objectives.

13.11.2024 9
13.11.2024 10
13.11.2024 11
 1. Time Value of Capital:

Refers to the impact of the interest rate per year on capital engagement.

Higher interest rates increase the cost of capital and reduce the net returns on investments
over time.

2. Time Value of Money:

Reflects the effect of short-term factors on the value of money, including:

Inflation: Reduces purchasing power over time.

Exchange Rates: Influence the value of money in international transactions.

Terms of Trade: Affect cash flow transformation and the ability to convert
receivables into liquid assets efficiently.

13.11.2024 12
 Definition:
Rentability, or Return on Investment (ROI), evaluates the efficiency of an investment by
relating returns to the initial capital invested.

ROI Formula:
ROI=Annual Net Profit / Average Capital Invested

Annual Net Profit: Total profit generated by the investment in a year.

Average Capital Invested: Average value of capital engaged during the investment
period.

1. Declared ROI:

The expected or projected ROI based on initial calculations and assumptions.

2. Real ROI:

The actual ROI achieved after accounting for unforeseen factors, market conditions,
and deviations from the plan.

13.11.2024 13
13.11.2024 14
 The Non-Discounted Payback Period (PP) is a traditional method used by management to
calculate the time required to recover the initial investment from cash inflows.

13.11.2024 15
 Typically applied for short- to medium-term investments.

It assumes that risk increases with a longer time horizon, making it less effective for
long-term risk control.

Weaknesses of Non-Discounted Payback Period:

1. No Consideration for Time Value of Money:

Without discounting techniques, it fails to account for the diminishing value of

future cash flows.

2. Ignores Returns Beyond Payback Period:

Any cash inflows received after the payback period are excluded from the
evaluation.

3. Limited Risk Control:

Ineffective for analyzing long-term investments or projects with higher uncertainty.

1. Non-Discounted Payback Period:

Acceptance Criterion:

The project can be accepted if the payback period is not longer than the acceptable
time established by management.

13.11.2024 16
 2. Discounted Payback Period:

Definition:

Cash flows are discounted (adjusted for the time value of money) before calculating
the payback period.

This method addresses the limitations of the traditional payback period by considering
the time value of money, providing a more accurate evaluation of long-term projects.

Comparison:

Non-Discounted Payback Period: Simpler but ignores the time value of money and
post-payback cash flows.

Discounted Payback Period: More accurate as it incorporates the time value of money
but is slightly more complex to compute.

Net Present Value (NPV): The present value of future net returns from an investment,
discounted at the cost of capital rate.

Net Cash Flow (NCF):

Equals cash inflows minus cash outflows for each period.

Includes adjustments for initial investment and ongoing costs.

Discount Rate (Cost of Capital):

Used to account for the time value of money, reflecting the opportunity cost of
investment.

Importance of NPV:

A positive NPV indicates that the project is expected to generate value above the cost of
capital and should be considered for acceptance.

A negative NPV suggests the project may not be financially viable.

13.11.2024 17
 Conditions for Reliable NPV Calculation:

1. Realistic Forecasting:

Cash inflows and outflows must be based on accurate and realistic projections.

2. Appropriate Cost of Capital:

The discount rate (cost of capital) must reflect the true opportunity cost and risks of
the investment.

3. Stability of External Conditions:

The project should not be susceptible to unacceptable risks, such as:

Significant drops in demand.

Unstable pricing or cost fluctuations.

Regulatory changes that could negatively impact the project.

Example: Electrical Cars Market

Challenges for NPV Calculation:

Numerous undefined variables, including:

Unpredictable demand for electric vehicles (EVs).

13.11.2024 18
 Fluctuations in battery and raw material prices.

Potential changes in government subsidies or environmental regulations.

Impact on NPV:

These variables can lead to inaccuracies in forecasting cash flows, making the
calculated NPV less reliable.

Key Simplifications and Their Implications:

1. Fixed Discount Rate:

Using a constant discount rate for the entire calculation period ignores potential
changes in market conditions, inflation, and risk levels over time.

This may lead to inaccurate NPV results, especially for long-term projects.

2. Linear Assumption of Net Cash Flow (NCF):

Assuming cash flows are uniform over time oversimplifies the reality of fluctuating
revenues and expenses.

Real cash flows are often irregular, influenced by seasonal variations, market trends,
and operational disruptions.

3. Replacement of NCF with "Incomes – Costs":

13.11.2024 19
 Simplifying NCF to a basic subtraction of incomes and costs ignores important
adjustments like working capital changes, taxes, and non-cash items.

This approach lacks precision in capturing the true financial impact.

4. Using "Profit and Depreciation" Instead of NCF:

Treating "Profit + Depreciation" as a proxy for NCF excludes other cash flow
elements such as capital expenditures and changes in working capital.

This oversimplification can distort the assessment of an investment's cash-generating

ability.

Influence of Discount Rate Formula on NPV

The discount rate directly impacts the present value of future cash flows in the NPV
calculation. Here's how different factors affect the discount rate and, consequently, the NPV:

1. Credit Interest:

Higher credit interest rates increase the discount rate, lowering NPV.

Reflects the cost of borrowed funds and financial risk.

2. Internal Rate of Return (IRR):

When IRR is used as the discount rate, projects with an NPV ≥ 0 are considered
acceptable.

It emphasizes profitability but may not fully consider external factors like capital
cost fluctuations.

3. Dividend Ratio:

A higher dividend payout increases the cost of equity, raising the discount rate and
reducing NPV.

4. Weighted Average Cost of Capital (WACC):

WACC accounts for both equity and debt costs.

Projects with a high proportion of expensive equity or debt lead to a higher WACC,
reducing NPV.

5. Market Cost of Capital:

Reflects the opportunity cost of investment in the market.

Variations in market rates directly influence the NPV.

6. Variable Exchange Rates:

13.11.2024 20
 Exchange rate fluctuations affect cash flows in foreign investments.

Leads to uncertainty in the discount rate and can significantly impact NPV.

7. Income Tax Rates:

Higher tax rates reduce net cash flows, necessitating an adjusted (higher) discount
rate to maintain investment viability.

2. Consequences of Fixed-Value Discount Rates

If the discount rate is treated as a fixed value over the analysis period, the following issues
arise:

1. Lack of Sensitivity to Changes:

Ignores variations in market conditions, inflation, or interest rates.

Leads to inaccurate NPV results, especially in volatile environments.

2. Inaccurate Risk Assessment:

A fixed discount rate fails to account for increasing risks over time in long-term
projects.

3. Undervalued or Overvalued NPV:

Static rates can overstate the value of stable cash flows or understate the impact of
volatile cash flows.

4. Currency Exchange Risks:

Fixed rates do not adjust for exchange rate fluctuations, increasing the potential for
misjudgment in international projects.

5. Missed Strategic Adjustments:

Dynamic rates allow managers to adjust investment decisions based on evolving

financial conditions, which a fixed rate does not accommodate.

Influence of Discount Factor on NPV

a. High Level of Discount Factor (Cost of Capital):

Impact:

Higher discount rates reduce the present value of future cash flows.

Projects with longer time horizons are especially sensitive, as distant cash flows are
heavily discounted.

13.11.2024 21
 Result:

Higher discount factors often lead to negative or reduced NPV, making projects
appear less attractive.

b. Fixed Discount Factor Against Variable Risk:

Impact:

Using a fixed discount rate ignores fluctuations in project risks (e.g., market
volatility, operational changes).

As risks increase, a fixed rate underestimates the cost of capital, making NPV over-
optimistic.

Result:

Fails to capture dynamic risk, leading to flawed investment decisions.

2. Interaction Between NPV and Other Factors

a. Low and High Levels of New Investment:

Low Level of Investment:

Lower initial expenses result in a faster payback period and a higher NPV, assuming
cash flows remain constant.

High Level of Investment:

Increased initial costs can lead to a lower NPV unless accompanied by

proportionately higher returns.

b. Low and High Levels of Depreciation:

Low Depreciation:

Results in higher taxable income, increasing tax expenses and reducing net cash
flows, which lowers NPV.

High Depreciation:

Reduces taxable income and tax liability, boosting net cash flows and increasing
NPV.

3. Capital Value of a Company in Sale (Privatization) When NPV < 0

Implications of NPV < 0:

13.11.2024 22
 A negative NPV indicates that the project or company is not generating sufficient
returns to cover its cost of capital.

In a privatization scenario, the company's valuation must reflect its inability to

generate positive cash flows.

Capital Value of the Company:

Determined based on:

The net asset value (NAV): Book value of tangible and intangible assets minus
liabilities.

The liquidation value: Estimated proceeds if the company's assets were sold
off.

The strategic value: Potential future synergies or cost reductions for the buyer.

Outcome:

With NPV < 0, the sale price is likely to be lower, reflecting the company's inability
to meet expected returns. Buyers might also demand higher risk premiums or
contingent adjustments in pricing.

Weak companies can improve NPV in substantial rate by manipulating reports, accounts, and
assumptions.
Fixed variables are possible to apply only, when business conditions are stable (not risky).

13.11.2024 23
13.11.2024 24
13.11.2024 25
 Key Points About IRR:

1. Accuracy Considerations:

Accuracy decreases if the interpolation error exceeds 1%.

Profits generated after the analysis period are not included in the calculation.

Results may vary significantly when variables such as prices, costs, interest rates,
currency exchange rates, or tax rates are unstable.

2. Definition and Features:

IRR is the simplest and most widely used discounted cash flow method.

Represents the speed of capital multiplication or the annual rate of return on

investment capital.

Considers the average value over the entire analysis period.

Useful for comparing the profitability of alternative investment projects.

3. Acceptance Criterion:

If IRR > WACC (Weighted Average Cost of Capital), the project is potentially
attractive as it is expected to generate returns higher than its cost of capital.

Strengths of IRR:

Intuitive and easy to interpret for managers.

Accounts for the time value of money.

Facilitates comparison between projects of varying sizes or durations.

Weaknesses of IRR:

Ignores cash flows beyond the analysis period.

Assumes reinvestment of intermediate cash flows at the IRR itself, which may not be
realistic.

Results can be unreliable in highly variable environments or when multiple IRRs exist
(non-conventional cash flows).

13.11.2024 26
 IRR is compared with a marginal accepted Rate of Return and CC
Key Challenges in Investment Analysis:

1. Uncertainty in Variables:

Variables such as n (number of periods), r (rate), and CF (cash flow)

Difficult to predict.

Often non-linear and unstable.

2. Instability in Cost of Capital:

Influenced by factors like:

Fluctuations in bank interest rates.

Exchange rate volatility.

3. Liquidity Tensions:

Risk of insufficient liquidity can affect the ability to fund the project and maintain
operations.

4. Mismatch Between Assumptions and Reality:

Differences between forecasted and actual conditions introduce significant risk.

13.11.2024 27
 5. Investment Cost Risk:

Deviation between the forecasted cost of investment and the actual cost incurred.

6. Return Risk:

Difference between the forecasted return and the realized return from the
investment.

7. Horizon and Payback Period Risk:

Discrepancy between the planned duration of the investment and the actual
timeline for completion or payback.

Key Characteristics of Foreign Investments:

1. Motivations and Interests:

Foreign investments often stem from diverse objectives, such as market expansion,
resource access, or competitive positioning.

2. High Costs and Time Requirements:

Entering foreign markets involves significant financial and time investments,

especially for due diligence, market research, and infrastructure setup.

3. Entry Barriers:

Direct Barriers: Tariffs, quotas, and licensing requirements.

Indirect Barriers: Cultural differences, bureaucratic challenges, and informal

business practices.

4. Diverse Regulations and Environments:

Local laws, tax systems, labor regulations, and varying cultural and business norms
can complicate operations.

5. International Capital Flow Factors:

Influenced by global economic trends, trade agreements, and geopolitical

considerations.

Key Factors Affecting Foreign Investments:

1. Exchange Rates:

Currency fluctuations can impact the cost of investment and returns in the home
country.

13.11.2024 28
 2. Risks:

Includes political, economic, operational, and currency risks that vary across
regions.

3. Local Advantages and Disadvantages:

May include lower production costs, proximity to resources, or trade incentives,

balanced against infrastructure gaps or legal complexities.

4. Profit Transfers:

Profit repatriation may be affected by:

Transfer Pricing: Adjusting prices of goods or services traded between

subsidiaries to optimize tax liabilities.

Restrictions on capital movement imposed by host countries.

Stages of the Business Cycle and Investment Initiatives:

1. Start-Up Stage (Increasing Growth):

Investments focus on market entry, product launch, and brand awareness.

Aim to capture early adopters and establish a foothold in the market.

2. Consolidation Stage (Stable Growth):

Emphasis on efficiency and scaling operations.

Investments in automation, logistics, and customer retention strategies.

3. Maturity Stage (Slowing Growth):

Focus on product diversification and expanding into new markets.

Leverage investments in innovation to maintain competitiveness.

4. Decline Stage (Negative Growth):

Investments shift to cost reduction, restructuring, and exploring exit

strategies or business reinvention.

Strategies to Extend, Modify, or Change Business Cycle Stages:

1. Loyalty of Purchasers:

Build long-term customer relationships through loyalty programs, personalized

offers, and consistent quality.

2. Product Improvement:

13.11.2024 29
 Invest in R&D to enhance product features, introduce sustainable designs, or
address customer feedback.

3. Interfering with Substitutes:

Differentiate from competitors by emphasizing unique selling points (USPs) or

offering better value propositions.

4. Promotions and Bargaining for Buyers:

Use targeted promotions, discounts, and bundling strategies to attract and retain
customers.

5. Extending Operations and Capital Engagement:

Expand into new markets, introduce complementary products, or invest in

technology and infrastructureto boost efficiency and reach.

Key Aspects of Investment Elasticity:

1. Flexible Investment Horizon and Alternatives:

Adaptable timelines allow for adjustments in response to unexpected risks or

opportunities.

Exploring multiple investment alternatives provides a fallback strategy.

2. Division into Sequences and Cycles:

Breaking the investment process into manageable stages enables better monitoring
and control.

Reduces the impact of disruptions by focusing on shorter, achievable milestones.

3. Elastic Realization and Sensitivity Analysis:

Elastic implementation ensures adaptability to changing conditions.

Sensitivity analysis identifies critical variables and prepares for potential deviations.

4. Reserves to Mitigate Distortions:

Maintaining financial, material, or time reserves acts as a buffer against unforeseen

challenges.

Helps sustain operations during market or operational shocks.

5. Peaks of Intensity and Contractions:

Starting contractions during high-intensity cycles prevents overextension.

13.11.2024 30
 Balances resource allocation and avoids investment fatigue.

6. Anti-Cycle Measures:

Governments and public institutions can implement counter-cyclical policies, such

as:

Interest rate adjustments.

Fiscal stimulus or subsidies.

Businesses can adopt practices like cost optimization, diversification, or market

hedging to stabilize operations.

Professional investment budgeting is a structured approach to managing business investment

programs by steering cash flows (CF) and financial instruments to achieve investment
goals.
Key Components of Professional Investment Budgeting:

1. Selection of Attractive Markets, Branches, and Projects (3x Power):

Focus on high-potential opportunities for growth and profitability.

Emphasize industries and projects aligned with strategic business objectives.

2. Utilization of the Cheapest Sources of Capital (WACC):

Minimize the Weighted Average Cost of Capital (WACC) by:

Balancing equity and debt effectively.

Leveraging low-cost financing options.

3. Earnings and ROI Control:

Regular monitoring of:

Operational earnings to ensure profitability.

Expenses to maintain efficiency.

Return on Investment (ROI) to validate investment effectiveness.

4. Leverage and Indebtedness Control:

Maintain an optimal debt-to-equity ratio to avoid over-leverage.

Ensure sustainability and reduce financial risk.

5. Increase in Asset Productivity:

13.11.2024 31
 Enhance the efficiency of existing assets to maximize returns.

Invest in technologies or processes that drive productivity gains.

6. Cash Flow and Schedule Discipline:

Adhere strictly to the planned CF projections and investment timelines.

Align cash inflows and outflows to prevent liquidity constraints.

Common Mistakes in Investment Management and Their Effects:

1. Deviations from Plans:

Effect: Actual results fall short of projections, leading to unmet goals and reduced
performance.

2. Delays in Investment:

Effect:

Increased unexpected costs.

Reduced effectiveness of planned strategies.

3. Decline in Performance, Quality, and Discipline:

Effect: Poor execution impacts product/service quality, timelines, and operational

efficiency.

4. Liquidity and Operating Deficits:

Effect: Financial instability disrupts daily operations and reduces flexibility to

handle risks.

5. Unplanned Expenses:

Effect: Contractors or stakeholders may demand additional costs, creating budget

overruns.

6. Coordination Issues:

Effect: Poor communication and workflow disrupt investment execution and cause
inefficiencies.

Consequences of Poor Investment Management:

1. Financial Outcomes:

Fade prospects for profits and bonuses due to higher costs and lower returns.

13.11.2024 32
 2. Workplace Dynamics:

Conflicts arise between teams and management due to unmet expectations.

Deterioration of labor conditions impacts employee morale and productivity.

3. Increased Managerial Stress:

Poor outcomes amplify stress for managers, reducing decision-making effectiveness

and long-term focus.

13.11.2024 33
 6.11.2024
Dispute about CM is concentrated on the Cost of Capital.Is it right?
CC - Synonym of cost of financing: a) A cost paid for the temporary use of capital by
entrepreneurs to investors per year,

b) A form of an investment premium (in %).

Entrepreneurs are obliged to pay interest for the use of capital, and simultaneously, they are
entitled to all benefits of capital productivity.
CC interferes with open market alternative investments.

Cost of Capital (CC): How it works?

1. Definition:
CC is a form of interest paid annually to capital owners, investors, or borrowers. It serves
as a reward, return, dividend, or percentage.

2. Obligation:
The beneficiary of the capital (e.g., entrepreneur or business) is required to pay the CC
yearly.

3. Surplus:
Any surplus generated over the CC belongs to the beneficiary. This surplus is the profit
after covering the cost of using the capital.

4. Nature:

CC: Predetermined and fixed.

Surplus: Unknown and variable, as it depends on the capital's productivity and

business outcomes.

5. Factors Influencing CC:

CC is influenced by the selection of capital sources (e.g., equity vs. debt) and the
structure of business liabilities.

6. Real Cost of Capital (Real CC):

Indicates the minimum rate of capital rentability (ROC) required for the business to
justify its use of capital. This rate ensures the capital generates returns above its cost.

6.11.2024 1
 Capital Management can be analyzed and optimized through various lenses, considering the
interests of individual corporations, capital markets, and diverse stakeholders.

1. Perspectives of Individual Corporations:

Cost of Capital (CC):Efficient management of CC is crucial for maintaining
profitability and ensuring sustainable growth.

Rentability:Evaluating the return on capital to measure how effectively financial

resources are being utilized.

Performance:Optimizing operational and financial metrics to achieve higher efficiency

and competitiveness.

2. Capital Markets Growth (Regional Focus):

Analyzing capital management within the context of market expansion and economic
development in specific regions:

USA: Focus on innovation, high-growth sectors, and advanced financial markets.

Germany: Emphasis on industrial efficiency and long-term stability.

Poland: Transitioning economy with opportunities for growth and integration into
global markets.

3. Interests and Expectations of Various Groups:

Shareholders and External Investors (S. EX):Expect consistent returns, dividend
payments, and long-term capital appreciation.

Banks and Creditors:Prioritize timely repayment of loans and maintenance of a healthy

credit profile by businesses.

Public Interests:

Support for broader economic development.

Encouragement of capital allocation to sectors that drive innovation, sustainability,

and societal progress.

The interests of various groups involved in capital management are shaped by different
motivations and challenges. Below is a detailed breakdown:

6.11.2024 2
 1. Investors: Seeking Attractive Locations for Capital
Primary Motivation:Investors prioritize regions offering the most favorable conditions
for returns, including lower interest rates and stable regulatory environments.

Key Question:How do the lowest interest rates affect the location of investments?

Lower interest rates reduce borrowing costs and encourage capital allocation in
countries with high-growth potential.

However, excessively low rates might signal economic instability or insufficient

returns, deterring long-term investments.

2. Owners of Capital: Expecting the Highest Premium for Investments

Primary Motivation:Owners of capital demand high returns to compensate for the risks
associated with their investments.

Key Question:Why are global corporations beginning to avoid investments in China?

Rising labor costs and geopolitical risks.

Increased regulatory scrutiny and the unpredictability of state policies.

Concerns about supply chain resilience post-COVID-19 and over-dependence on

Chinese manufacturing.

3. Entrepreneurs: Maximizing Spreads Between Rentability and CC at

Risk
Primary Motivation:Entrepreneurs aim to optimize the profitability of projects while
managing the cost of capital and associated risks.

Higher spreads between return on capital and CC signal stronger business

performance.

Volatile markets or rising CC can challenge this optimization.

4. Managers: Managing Inflows, Outflows, and Capital Cycles

Primary Motivation:Managers are responsible for maintaining liquidity by ensuring
efficient cash inflows and minimizing cash outflows to manage capital cycles.

Key Question:Why are some Japanese factories escaping from EU countries?

High energy costs and labor shortages in Europe.

Stricter environmental regulations increasing production costs.

6.11.2024 3
 Preference for relocating to countries with more favorable trade agreements and cost
advantages.

5. Analysts: Observing Business Activity and Capital Productivity

Primary Motivation:Analysts focus on evaluating capital productivity in relation to
interest rate trends and associated risks.

Rising interest rates increase CC and can deter new investments.

Analysts also consider macroeconomic factors such as inflation, currency stability,

and geopolitical risks.

6. Public Institutions: Focused on Taxable Revenues

Primary Motivation:Governments prioritize maximizing taxable revenues rather than
long-term tax rationalization strategies like discounted efficiency.

Key Question:What challenges arise in state policy against global corporations?

Global corporations may exploit tax loopholes, reducing local tax revenues.

Imposing stricter regulations or taxes can lead to capital flight or reduced foreign
direct investment (FDI).

Balancing the need for tax income with maintaining a favorable business
environment is an ongoing challenge.

Cost of Capital (CC) as the Foundation of Financial Decisions:

Financial decisions revolve around capital, which is viewed through the lens of its cost.
The Cost of Capital represents the expense incurred by the business to obtain funds,
making it a critical factor in corporate strategy.

Capital Mix and Its Impact on CC:

Each financing decision alters the Capital Mix (proportion of debt, equity, and other
sources of funding).

As the mix evolves, the individual cost of each component influences the overall
CC, demanding careful management.

CC and Its Effects on Rentability Metrics:

CC plays a central role in Corporate Management by directly impacting key financial
performance indicators such as:

6.11.2024 4
 ROC (Return on Capital)

ROE (Return on Equity)

ROI (Return on Investment)

IRR (Internal Rate of Return)

NPV (Net Present Value)

These metrics shape investor decisions and perceptions of a company's performance.

Leverage and Cost of Capital Optimization:

Theoretically, when other factors remain constant, businesses strive to reduce CC to

enhance the leverage effect.

Lower CC allows for higher profitability and more favorable financial outcomes,
making CC minimization a priority.

Capital Market Tendencies and Business Value:

Trends in the capital market, such as interest rate fluctuations or changes in investor
risk preferences, influence the structure of financing and the cost of obtaining
capital.

These shifts ultimately affect business value and its ability to attract further
investment.

Capital acquisition serves as a critical function for businesses, with specific targets aimed at
ensuring stability, growth, and operational efficiency. These targets include:

1. Financing Internal Operations and Trade:

Ensuring smooth day-to-day operations.

Covering working capital requirements like inventory, accounts payable, and

receivables.

2. Financing Corporate Investments:

Supporting long-term growth by funding:

Expansion projects, such as new facilities or infrastructure.

Research and development (R&D) to foster innovation.

Acquisitions or strategic alliances.

3. Attracting Shareholders:

Offering equity-based capital to bring in investors who:

6.11.2024 5
 Provide funding in exchange for ownership stakes.

Support long-term growth with aligned interests.

4. Sharing Financing with Business Partners:

Forming joint ventures or strategic partnerships where risks and capital needs are
shared between parties.

Reducing the burden of financing while leveraging collective strengths.

5. Stabilizing Capital with Long-Term Credits:

Securing stability through long-term loans or bonds to finance large-scale projects or

ensure steady cash flow over time.

6. Balancing Liquidity with Bank Overdrafts:

Managing short-term cash flow gaps by utilizing bank overdrafts or other short-term
credit facilities to maintain liquidity.

Four Arguments for Capital Management in the Company

1. Information and Analysis for Strategic Decisions:

Capital management provides vital insights into:

Costs of Financing: Understanding interest rates, cost of equity, and overall

Cost of Capital (CC).

Rentability: Assessing profitability metrics like ROI, ROE, and ROC.

Risk Assessment: Evaluating financial and operational risks tied to capital

decisions.

Indebtedness Levels: Monitoring debt ratios to ensure financial stability.

Ownership Structure: Balancing equity and debt to align with shareholder

expectations.

2. Criterion for Financial Decision Selection:

Capital management establishes clear criteria to guide financial decisions,

including:

Choosing between equity and debt financing.

Prioritizing projects based on expected returns and risk.

Allocating resources to maximize value creation.

6.11.2024 6
 3. Encouragement for Optimal Investment Timing and Location:

Capital management identifies the where and when to invest, ensuring:

Maximum Return on Capital (ROC) and profitability.

Minimum Cost of Capital (CC) by leveraging market opportunities, tax

benefits, or favorable interest rates.

4. Discipline in Investment Projects Management:

Ensures accountability and structured evaluation of:

Investment Proposals: Aligning them with strategic objectives and financial

health.

Performance Monitoring: Tracking project outcomes against planned metrics.

Resource Allocation: Preventing over-investment or inefficient use of funds.

1. Value of Capital Acquired:

The scale of capital influences negotiation power and the terms of financing.

2. Negotiable Interest Rate:

Interest rates depend on:

Market Benchmarks: Rates like LIBOR, FIBOR, EURIBOR.

Negotiation Skills: Tailored agreements between borrower and lender.

3. Situation of Borrower/Debtor/Investor:
A company’s credit history, experience, and reputation significantly affect borrowing
conditions.

4. Purpose of Capital Engagement:

Funds may be used for:

Expansion, R&D, or operational continuity.

Different purposes often demand varying financing structures.

5. Period of Engagement:

6.11.2024 7
 Long-term capital incurs lower annual costs but locks funds, while short-term financing
is more flexible but often costlier.

6. Costs of Alternatives and Origin of Capital:

Evaluating opportunity costs and whether capital originates from equity, debt, or
retained earnings.

7. Form of Capital:
Cash, loans, credit lines, equity, or liabilities all impact the overall cost and risk
profile.

8. Branch of Investment:
Industries with higher risks (e.g., tech startups) often face higher costs of capital
compared to stable sectors (e.g., utilities).

9. Conditions of Capital Transfer and Repayment:

Terms of transfer, repayment schedules, and prepayment penalties influence total
financing costs.

10. Currency Exchange and Risks:

Fluctuations in exchange rates and related risks are significant for multinational
investments.

11. Taxation and Alternative Sources Taxation:

Tax policies on interest payments, capital gains, and dividend distribution directly affect
financing decisions.

12. Risks Related to Investment:

Market, operational, and political risks elevate the cost of capital, as lenders demand
higher returns to compensate.

13. Security, Insurance, and Guarantees:

Collateral and guarantees reduce lenders’ risk, often lowering borrowing costs.

14. Market Stability:

Supply-demand dynamics in capital markets affect availability and terms of financing.

6.11.2024 8
 Expansion of Operations Requires a Capital Increase
Growing Corporations in the Open Economy:

Absorb capital by diversifying internal and external sources.

Utilize a Capital Mix as a combination of long- and short-term debt and equity.

Follow a “step-by-step” time sequence, referring to the engagement of capital through

operations and acquisition on the Capital Market.

Capital Mix and Its Role:

The Capital Mix represents the relationships between the acquisition of financing and:

Market Price of Capital

Cost of Capital for the Enterprise

Structure of Financing

Rentability of Capital

Key Insight:
These relationships are nonlinear and optimized to align with corporate growth and market
dynamics.

Capital acquisition is not a standardized process but evolves as a marginal effect of business
choices. It requires a strategic approach to securing external sources of capital, which can
be classified as follows:

A. External Sources of Short-Term Liabilities (Below One Year):

1. Commercial Obligations:

The dominant source of short-term financing.

2. Letters of Credit:

Widely used as a secure and popular discounting instrument to facilitate trade.

3. Commercial Bonds:

Liquid, quasi-money instruments providing short-term flexibility.

4. Bank Overdraft Limits:

6.11.2024 9
 An elastic source of financing, offering immediate liquidity for operational needs.

5. Leasing:

Replaces long-term financing with short-term liabilities, enabling flexibility.

Balance Sheet Impact:

Shortens the asset-liability duration gap.

Improves liquidity but increases short-term liabilities, potentially impacting

financial stability.

B. External Sources of Long-Term Financing (Over One Year):

1. Credits and Loans:

Often tied to specific projects and require structured repayment plans.

2. Debt Instruments:

Bonds and other securities issued to raise long-term capital.

3. Equity Capital:

Consists of ordinary shares, retained profits, and reserves, offering stability

without repayment obligations.

4. Preference Shares:

Considered a quasi-loan due to fixed dividends, blending characteristics of equity

and debt.

Case Example: Chinese Companies' Strategy

Chinese companies have historically reduced reliance on long-term financing to
minimize financial risks.

By replacing long-term liabilities with short-term obligations, they:

Accelerate capital circulation.

Reduce interest costs while maintaining operational flexibility.

Potentially increase financial risks due to frequent refinancing needs.

B. Internal Sources of Capital Creation

Internal capital creation is a cornerstone of efficient operations, enabling companies to
generate their own financing. Key forms include:

6.11.2024 10
 1. Net Profit Accumulated (Retained Earnings):
Profits reinvested into the business instead of distributed as dividends.

Acts as a stable source of capital for future investments and operations.

2. Divestments (Sales of Assets):

Selling underutilized or non-core assets to free up capital for reinvestment.

Boosts liquidity and realigns business focus on core activities.

3. Reserves Pillow (Temporary Funds):

Maintaining reserves provides a financial cushion during downturns or for seizing
unexpected opportunities.

Can serve as working capital or support operational needs.

4. Leverage by Buy-and-Sell Strategies:

Includes trade transactions, mergers, and takeovers to enhance value creation.

Strategic acquisitions or sales can generate significant capital through synergistic gains or
asset liquidation.

Cost of Amortization:
Depreciation and amortization expenses can affect the value of assets and profit
calculations:

1. When amortization in books exceeds real depreciation:

The difference diminishes asset values in financial statements.

Profit is reduced artificially, but this creates higher fixed costs that can be
absorbed over time.

This approach can provide tax benefits or financial maneuvering flexibility.

Cryptocurrencies (e.g., Bitcoin): Speculation or Investment?

Speculation:

Cryptocurrencies are often traded for short-term gains, driven by volatile price
movements.

Speculative activities dominate in markets where regulatory frameworks are weak or

absent.

6.11.2024 11
 Investment:

Some companies and individuals treat cryptocurrencies as digital assets for long-
term portfolio diversification.

As an investment, Bitcoin can act as a hedge against inflation or currency

devaluation, though high volatility presents risks.

Who Finances Foreign Banks in Poland?

Foreign banks operating in Poland are funded through multiple sources, each presenting
distinct implications for the local and national economy:

1. Foreign Shareholders:
Foreign parent companies or investors provide capital to support the operations of their
Polish subsidiaries.

This capital typically comes in the form of equity injections or long-term loans from the
parent company.

2. Market Deposits / Local Savings of Citizens:

A significant portion of funding is sourced from local deposits, i.e., the savings and term
deposits of Polish citizens and businesses.

These deposits are used by foreign banks to issue loans, making them a critical
component of their capital base.

3. Internal Accumulation of Profits:

Profits generated by foreign banks in Poland are often reinvested to fund operations or
expand market presence.

However, some of these profits may be repatriated to parent companies, reducing local
reinvestment.

Concerns: Loss of Control Over the Banking System

Dependence on foreign ownership in the banking sector is seen by some as a threat to
national sovereignty.

Limited control over the sector could expose the economy to decisions made by foreign
entities that prioritize their global interests over local stability.

Key Dilemmas in Capital Management

6.11.2024 12
 1. Cost of Capital vs. Rentability of Capital:

The balance between the Cost of Capital (CC) and the Return on Capital
(ROC) is crucial.

Condition: ROC > CC to ensure profitability and sustainability.

2. Rentability of Capital as a Limit for CC Acceptance:

Capital costs must not exceed the expected returns. When CC > ROC, projects or
financing strategies become unsustainable.

3. Credibility and Indebtedness Ratio:

Indicates the capacity for external financing and impacts interest rates and
borrowing terms.

Higher indebtedness reduces a bank's credibility, leading to higher financing costs.

4. Internal Accumulation Limitation:

Defined by the formula:EBIT – [CC + Tax + Risk]

The availability of retained earnings is restricted by rising costs of capital, taxation,

and operational risks, limiting reinvestment potential.

Indicators of Capital Structure Optimization

(Increase, changes in structure, divestments):

1. Structure of Capital

2. Financial Risk Ratio

3. Leverage Ratio

4. Indebtedness Ratio

Key Question:
All these indicators are measured in the same way but interpreted differently.
Formula:
= (Total Liabilities / Equity Capital) %

Interests of Stakeholders:
1. Banks:

6.11.2024 13
 Focus on the Indebtedness Ratio to evaluate the company's creditworthiness.

Prefer lower leverage and risk ratios to minimize default risks on loans.

2. Investors:

Interested in the Leverage Ratio to determine the balance between risk and return.

Look for a healthy mix of debt and equity to maximize profitability without
excessive risk.

3. Executives:

Monitor all indicators to optimize capital structure for operational efficiency.

Aim to achieve sustainable growth while maintaining financial flexibility and

minimizing financing costs.

Market Cost of Capital (CC):

The Market CC represents the market price for specific sources of capital and reflects
broader, external factors such as:

1. Supply and Demand:

Capital markets respond to changes in availability (supply) and the need for
financing (demand).

Higher demand or lower supply drives up the cost of capital.

2. Capital Efficiency in Specific Markets:

Markets with higher capital productivity typically offer lower costs of financing due
to greater investor confidence.

Inefficient markets or underdeveloped financial systems may result in higher costs.

3. Risk Levels:

Higher perceived risks, whether political, economic, or market-related, lead to

increased capital costs as investors demand greater compensation.

Individual Cost of Capital (Individual CC):

The Individual CC refers to the cost of capital as applied to a specific business, considering
unique circumstances and local risks. It provides a more tailored reflection of financing
conditions:

1. Local Circumstances:

6.11.2024 14
 Factors like local market conditions, regulatory environment, and interest rates
directly influence the cost.

2. Individual Risks of the Business:

Includes company-specific elements such as:

Financial health and creditworthiness.

Business sector and industry risk.

Past performance and future growth potential.

Comparison of Market and Individual Cost of Equity

Market CC Individual CC

Refers to Market Return on Equity (ROE): Refers to the value of dividend:

- Real value of equity capital corrected by additional

- Announced dividend, paid per share.
costs:

CC from Official Base corrected by/sensitive

- Cost of Emission License
to:

- Rates of Exchange. - Cost of Auditor’s Report

- Currency Depreciation. - Individual Risk Premium

- Local Inflation. - Issuing of Prospectus

- Capital Gain Tax. - Promotion of Emission

- Shares Distribution

- Guarantee of Purchase

= Net Issue Receipts

Very high Fixed Cost of Entrance

Summary:
Market CC reflects general economic and market-wide factors, including dividends,
exchange rates, and inflation.

Individual CC focuses on the specific costs borne by a company, such as issuance, risk
premiums, and compliance, making it more relevant for equity-based decisions.

Comparison of Market and Individual Cost of Credit

6.11.2024 15
 Market Cost of Bank Credit Individual Cost of Bank Credit

Libor, Euribor, Fibor as the Nominal Interest Rate Credit Interest must be corrected by:

+ Bank Provision - Provision for engagement

+ Risk Compensation ± Currency risk compensation

± Conditions of repayment

Average Interest on Total Credit The Value of the Credit Includes:

+ Credit Insurance - Costs of insurance

+ Exchange Fee - Costs of bank guarantees

Examples: Credit for cars - Notary & Agency Fees

- Agreement conditions

- Forms of repayment

= Net Credit Receipt

Two Forms of Individual Cost of Capital (CC):

1. Nominal CC:

Based on current market terms, reflecting present-day interest rates and

conditions.

Characteristics:

Simple and easy to calculate.

Often used for external analysis to provide an overview of financing costs.

2. Real CC:

Based on book value, adjusted by accountants to provide more precise and objective
data.

Characteristics:

Relies on historical financial information, which might not reflect current

conditions (outdated or unactual).

Primarily used for internal analysis and strategic planning.

Can sometimes be used in creative accounting to manipulate financial

outcomes.

What Is "Creative Accounting"?

6.11.2024 16
 Definition:
Creative accounting refers to manipulating financial records and accounting methods
within the limits of regulations to present a more favorable picture of a company's financial
health or performance than what actually exists.

Key Characteristics of Creative Accounting:

1. Legal but Misleading:

It stays within the bounds of accounting laws but exploits loopholes or ambiguities.

2. Techniques:

Adjusting Depreciation Rates: To reduce expenses artificially.

Overstating Revenues: Recognizing sales earlier than they are realized.

Underreporting Liabilities: Hiding or delaying debt recognition.

Revaluing Assets: Overestimating the value of assets to inflate the balance sheet.

3. Purpose:

To attract investors by inflating profits or minimizing costs.

To meet loan covenants or reduce tax liabilities.

To stabilize earnings or maintain stock prices.

4. Risks:

While not necessarily illegal, creative accounting can lead to ethical concerns,
reduced credibility, and potential legal issues if it misleads stakeholders.

Comparing Nominal CC and Real CC is challenging without accounting for key variables,
as both are influenced by external and internal economic factors. These variables include:

Key Variables:
1. Inflation:

Erodes the purchasing power of money, affecting the real value of capital costs.

High inflation increases nominal CC but may overstate the true cost when adjusted
for real terms.

2. Currency Depreciation:

6.11.2024 17
 A depreciation of a currency reduces its value against other currencies,
impacting foreign capital costs.

For example, US dollar depreciation can weaken the Polish zloty, raising the cost of
imports and affecting exchange rates.

3. Currency Risk:

Fluctuations in exchange rates introduce risks for companies dealing in multiple

currencies.

Real CC must account for hedging or adjustments to mitigate such risks.

4. Rate of Exchange:

Exchange rates directly impact international borrowing costs and the affordability of
foreign investments.

A weaker local currency raises the nominal CC of foreign debt.

5. Local Market Interest Rates:

Differences in local rates affect the cost of borrowing domestically versus

internationally.

Higher local rates increase both nominal and real CC for businesses relying on
domestic funding.

6. Cash Flow and Balance Sheet Metrics:

Cash Flow: Strong cash flow reduces dependency on external financing, lowering
CC.

Balance of Payment/Trade:

Trade deficits (more imports than exports) weaken the local currency and raise
CC.

Surpluses strengthen the currency, potentially lowering CC.

Example: Impact of US Dollar Depreciation on the Polish Zloty

Depreciation of USD:Weakens the zloty, leading to higher costs for Polish businesses
that:

Import goods priced in USD.

Borrow in USD, as repayment amounts rise in zloty terms.

Experience reduced purchasing power on global markets.

6.11.2024 18
 Effect on Other Currencies:

A weaker zloty influences its exchange rate with other currencies, increasing
uncertainty and costs for multi-currency transactions.

6.11.2024 19
 Macroeconomic and Simplified Approach:
The Cost of Capital (CC) is directly related to the Interest Rate in broad economic
terms.

Key Insight:

Significant differences between CC and the interest rate can indicate:

Capital Market Imbalance: Inefficient allocation of resources, lack of

liquidity, or speculative bubbles.

Economic Crisis: Increased uncertainty driving up risk premiums.

Market Inefficiency: Mispricing of capital due to regulatory, structural, or

geopolitical factors.

2. Limitation of the Simplified Approach:

This simplification does not apply in specific cases involving businesses such as
investors and borrowers, where nuanced factors must be considered:

Investor Perspective: Capital costs are influenced by risk premiums, expected

returns, and alternative investment opportunities.

Borrower Perspective: The CC depends on creditworthiness, project risks, and

local financial conditions.

3. Capital Management in Chinese Businesses:

Chinese business strategies provide a distinct model of capital management, emphasizing
efficiency and scalability:

6.11.2024 20
 Low-Profit Margin:

Focus on maintaining competitive pricing to dominate markets.

Largest-Scale Operations:

Achieving economies of scale to maximize output and reduce unit costs.

Fastest Capital Circulation:

Prioritizing rapid turnover of capital to enhance liquidity and maintain operational

efficiency.

Minimal Capital Engagement:

Reducing long-term financial commitments by leveraging short-term financing and

internal resources.

Controlling Marginal Effects:

Monitoring incremental costs and returns for all capital components to maximize
profitability and efficiency.

Theoretical Perspective:
In theory, capital is treated as a perfectly elastic supply and demand system, adapting to
global financing opportunities. Key assumptions include:

1. Global Accessibility:

Capital flows freely without restrictions, reflecting availability from diverse global
sources.

2. Neutrality in Financing Decisions:

Financing decisions disregard:

Demand Origin Discrimination: All borrowers are treated equally.

Nationality of Capital: No bias against the origin of funds.

Corruption and Privileges: The system assumes fairness and transparency.

Tax Havens: These are not considered distortions in the capital allocation
process.

Practical Perspective:
In reality, Cost of Capital (CC) reflects the complexities of personalized and institutionalized
practices, driven by specific conditions:

6.11.2024 21
 1. Individualized Access to Capital:

Borrowers’ ability to access financing depends on:

Creditworthiness and financial history.

Relationships with capital suppliers (banks, investors).

2. Credit Policies of Banks and Capital Groups:

Decisions on lending and investment are influenced by:

Bank-specific credit policies and risk tolerance.

Preferences of capital groups and financial institutions.

3. Fixed Costs and Public Insurance:

Fixed administrative costs and mandatory public insurance premiums add to the
overall CC.

4. Risk Compensation:

CC incorporates premiums for risks such as:

Market volatility.

Political and regulatory uncertainty.

5. Subjective Perception of Market Trends:

Investors and institutions often base decisions on perceptions (S.Ex.), influenced

by:

Speculative market trends.

Short-term economic forecasts.

6. Influence of State Policy, Taxes, and Corruption:

Taxes: Policies can incentivize or discourage certain types of capital flows.

Capital Connections and Lobbying: Established networks often dictate access to

favorable financing.

Corruption: Undermines fairness and inflates CC for less privileged borrowers.

Marginal Consequences of Growing Investment Amount Over the Long

Horizon
The relationship between Capital Rentability, Cost of Capital (CC), and Risk presents
certain theoretical rules:

6.11.2024 22
 Theoretical Rules:
1. Risk Increases Over Time and Scale of Engagement:

As investments grow, risk (market, operational, financial) naturally increases due to

greater exposure to uncertainties.

2. Constant Capital Rentability with Growing Risk Leads to Lower CC:

If rentability (profitability) remains stable, businesses are expected to seek lower

CC to compensate for the growing risk.

3. Rising Capital Rentability in High-Risk Conditions Leads to Reduced Total Equity

Capital:

High profitability in risky conditions may incentivize businesses to reduce equity

capital reliance, leveraging debt financing for higher returns due to the "risk-return
tradeoff."

Question: Why Are These Rules Not Confirmed by Microsoft and Tesla?

Unlimited Access to Cost-Free or Low-Cost Capital:

1. Microsoft and Tesla’s Exceptional Financial Position:

These companies have unparalleled access to capital markets, including:

Retained Earnings: Huge internal reserves minimize dependence on external

funding.

Equity Issuance: Strong investor demand allows them to issue shares with
minimal dilution concerns.

Debt Financing: High creditworthiness ensures borrowing at favorable rates.

2. Capital Markets Perception:

Microsoft and Tesla are perceived as low-risk investments despite their scale and
engagement in high-growth projects.

Their innovative leadership and market dominance allow investors to tolerate higher
risks in exchange for potentially massive returns.

3. Cost-Free Capital Through Brand and Market Leadership:

Both companies effectively tap into cost-free capital:

Microsoft: Software and cloud service subscriptions generate steady, upfront

cash flows.

6.11.2024 23
 Tesla: Advance payments for vehicles and services (e.g., preorders) act as zero-
cost funding.

6.11.2024 24
 How Does Tax Policy Affect the Cost of Capital (CC)?
Tax policy plays a significant role in determining the Cost of Capital (CC) by influencing
the net returns on investments and the cost of financing.

1. Tax Components Affecting CC

1. Income Tax:

Higher income tax rates reduce the net profitability of investments, increasing the
perceived cost of equity.

2. Corporate Tax:

Taxes levied on corporate profits affect the availability of retained earnings for
reinvestment, impacting internal financing costs.

3. Tax on Interest:

Interest payments are often tax-deductible, reducing the effective cost of debt and
creating a Tax Shield Effect.

4. Tax on Dividends:

Taxes on dividends reduce shareholder returns, increasing the cost of equity as

investors demand higher pre-tax returns to compensate.

2. Tax Shield Effect

6.11.2024 25
 Definition:The Tax Shield Effect arises when companies use tax-deductible expenses
(e.g., interest payments or leasing costs) to lower their taxable income, thereby reducing
their effective tax burden.

Examples of Tax-Deductible Capital Costs:

Credit Interest: Reduces taxable income by treating interest payments as expenses.

Leasing Costs: Allows companies to use assets without the upfront capital
expenditure while benefiting from tax-deductible lease payments.

3. Methods to Optimize CC Through Tax Policy

1. Tax Benefits:

Governments may offer tax incentives (e.g., R&D tax credits) to reduce the CC for
investments in specific sectors or projects.

2. Tax Havens:

Relocating business operations or profits to low-tax jurisdictions minimizes tax

burdens, reducing CC.

Example: Using holding companies in tax-favorable locations.

3. Tax Allowances:

Deductions for specific expenses or capital reinvestment lower taxable income and
reduce financing costs.

4. Tax Holidays:

Temporary exemptions from taxes incentivize investment and lower CC in the short
term.

5. Transfer of Profits and Migration of Values:

Through transfer pricing, companies shift profits to jurisdictions with lower taxes,
reducing the global tax burden and effective CC.

4. Challenges and Ethical Concerns

Tax Avoidance vs. Tax Evasion:

While legal tax optimization reduces CC, excessive use of tax havens or profit
transfers can lead to reputational risks and regulatory scrutiny.

Impact on Public Revenue:

6.11.2024 26
 Aggressive tax strategies reduce government revenue, leading to criticism and
potential policy changes.

Conclusion: Cost of Capital (CC) vs. Capital Rentability (ROC)

To maximize Capital Rentability (ROC), businesses must strategically manage various
factors.

1. Maximization of Capital Rentability (ROC)

1. Maximization of Profitability of Sales:

Focus on increasing revenue while controlling costs.

Higher margins directly improve returns on invested capital.

2. Maximization of Capital Turnover:

Faster circulation of capital enhances efficiency and reduces dependency on external

funding.

3. Reduction of Cost of Capital (CC):

Lower financing costs (debt or equity) lead to higher profitability.

4. Increase in Cost-Free Capital Engagement:

Leverage cost-free sources such as trade credit, advance payments, and retained
earnings.

6.11.2024 27
 Management Principle: CC < RRR + Risk
Required Rate of Return (RRR): The minimum return investors expect from their
investment.

Risk Ratio (R): Compensation for the inherent risks associated with the capital
investment.

Condition:
For sustainable financial growth, CC must remain below RRR + Risk to ensure
profitability.

Implications for Key Financial Metrics

Lower CC Leads To:

Higher ROE (Return on Equity): Greater returns for equity investors.

Higher NPV (Net Present Value): More profitable investments and projects.

Higher EVA (Economic Value Added): Greater wealth creation beyond the cost of
capital.

Shareholder Benefits:

Lower CC provides similar advantages to reducing costs of wages, materials, and

energy.

It enhances shareholder rewards through higher profitability, dividends, and stock

price appreciation.

Conclusion for Management:

Effectively managing CC and ensuring it stays below RRR + Risk is essential for:

Maximizing profitability.

Improving financial metrics.

Delivering higher rewards to shareholders.

Excessive Capital and Borrowing in US and EU Corporations vs.

Chinese Corporations

Comparison of Borrowing Practices:

1. US and EU Corporations:

6.11.2024 28
 Excessive Borrowing:

Reliance on heavy borrowings results in over-leveraged balance sheets.

Capital Management Trends:

Increase in Liquidity:

Surplus Net Cash Flow (Net CF) from operations, often leading to
inefficient capital allocation.

Increase in Capital Expenditures:

Overinvestment in projects with diminishing returns.

Increase in WACC (Weighted Average Cost of Capital):

Higher debt and equity costs due to perceived financial risks.

Decrease in Capital Rentability:

Lower Return on Capital (ROC) as profits struggle to outpace financing

costs.

Increase in Financial Risk and Indebtedness Ratio:

Higher debt-to-equity ratios elevate vulnerability to market shocks.

Difficulties in Capital Acquisition:

Investors demand higher risk premiums, and banks tighten lending

conditions.

2. Chinese Corporations:

Conservative Borrowing and Capital Management:

Operate on a low-profit margin model with minimal capital engagement.

Focus on high liquidity and rapid capital turnover, reducing dependency on

excessive borrowing.

Unwanted Internal Effects in US and EU Corporations:

1. High Profits with Lower Financial Discipline:

Surplus liquidity can lead to complacency in cost management, causing:

Increased expenses on non-essential activities.

Higher losses and waste due to inefficient operations.

6.11.2024 29
 2. Public Redistribution and Quantitative Easing (QE):

Governments' monetary policies (e.g., QE) inject liquidity into the economy,
reducing borrowing costs.

However, excessive liquidity can fuel:

Asset bubbles and speculative investments.

Reduced pressure on corporations to maintain discipline in capital allocation.

3. Inefficiency and Ineffectiveness:

Misallocation of capital toward low-return projects.

Increased waste, losses, and operational inefficiencies.

Key Takeaways:
US and EU Corporations:

Excessive borrowings result in high liquidity, increased risk, and reduced

profitability.

Public policies like QE amplify liquidity but can reduce financial discipline.

Chinese Corporations:

Emphasize capital efficiency, lower WACC, and minimal capital engagement to

mitigate risks and ensure sustainability.

Dividend and Its Impact on CC:

Overpaid Dividend as Overpaid CC:

Paying maximum dividends beyond a market-accepted level leads to:

Unwanted cash outflows.

Reduced reinvestment capacity for future growth.

Management Principle:

Do not prioritize maximizing dividends if it compromises the company's

operational and financial stability.

2. Required Cost of Equity Capital:

Definition:The Cost of Equity Capital represents the minimum rate of
return investors require to buy or hold the company’s stock.

6.11.2024 30
 Key Characteristics:

Serves as the baseline for decision-making on investment projects and dividend

payouts.

Ensures shareholder satisfaction while maintaining financial sustainability.

Implication:

Dividends and equity returns must be aligned with investor expectations to prevent
capital flight.

3. CC for Foreign Activities:

Weighted Average Cost of Capital (WACC):

In international operations, CC is influenced by the weighted average of the

Required Rates of Return (RRR) demanded by investors in different regions.

The dominating or most costly foreign investors set the baseline for CC
calculations.

Reference to CAPM Model:

The Capital Asset Pricing Model (CAPM) is applied to determine the RRR based
on:

Risk-Free Rate: The minimum return in a risk-free environment.

Market Risk Premium: Additional return required to compensate for market

risk.

Beta Coefficient: A measure of the firm's sensitivity to market volatility.

Key Consideration:

In foreign markets, CC must account for country-specific risks such as currency

fluctuations, political instability, and regulatory differences.

Conclusion for Management:

1. Dividend Policy:

Avoid overpaying dividends to maintain sufficient cash reserves for reinvestment

and risk management.

Balance shareholder rewards with the firm’s long-term financial goals.

2. Cost of Equity Capital:

6.11.2024 31
 Ensure returns meet or exceed the required rate to attract and retain investors.

3. Foreign Activity:

Align CC calculations with the demands of foreign investors, prioritizing the most
costly regions to accurately reflect global risk and return dynamics.

Optimal Leverage: Balancing Debt Financing and Corporate Goals

1. Theoretical Understanding of Optimal Leverage

Optimal leverage refers to achieving the ideal balance of debt and equity to maximize the
following:

Corporate Performance:
Leverage enhances performance by lowering the Weighted Average Cost of Capital
(WACC).

Business Growth:
Debt financing provides access to funds for expansion without immediate equity dilution.

Shareholders’ Value:
Increased leverage can boost Return on Equity (ROE) when the cost of debt is lower than
the Return on Assets (ROA).

2. Key Advantages of Debt Financing

1. Tax Shield Effect:

Interest payments on debt are tax-deductible, reducing the effective tax burden and
improving after-tax profitability.

2. Capital Cost Efficiency:

Debt often costs less than equity because it is less risky for lenders than for
shareholders.

3. Preservation of Ownership:

Using debt instead of equity prevents dilution of ownership stakes for existing
shareholders.

3. Practical Considerations for Optimal Leverage

In real-world scenarios, creating an optimal capital structure requires addressing complex
operational and financial effects, such as:

6.11.2024 32
 1. Corporate Taxation Policy:

Leverage decisions must align with tax regulations to maximize tax shields and
avoid penalties.

2. Investment Benefits:

Financing must support projects with higher returns than the cost of debt to ensure
profitability.

3. Shareholders' Individual Taxation:

Dividend payouts and capital gains must respect individual taxation rules,
influencing shareholder returns.

4. International Value Transfers:

Companies often use transfer pricing, profit shifting, and dividend distribution to
optimize tax efficiency.

5. Tax Havens:

Leveraging jurisdictions with low tax rates to house certain operations can reduce
the overall tax burden, though it may attract scrutiny.

4. Complexity in Practice
Optimal leverage is more nuanced in practice, as it requires evaluating:

1. Business-Specific Factors:

Industry norms, operating risks, and asset structures.

Cyclical or volatile industries may benefit from lower leverage to manage risk.

2. Financial Effects:

Increased debt may improve short-term growth but raise long-term financial risk.

High leverage increases financial distress costs and reduces flexibility in

downturns.

3. Macroeconomic Conditions:

Interest rate fluctuations and regulatory changes impact the cost and availability of
debt financing.

6.11.2024 33
 30.10.2024
Financial Goals of Corporations
Classical theories of Financial Goals of Corporation

Models of Business Goals and their limitations

Behavioral Approach to the Goals of Corporation

External Equilibrium of Business,

Short-Term Goals as a Compromise of Interests

Medium Term Goals as a Balance with the Markets of Products, Labour and Capital

Long-Term goals as a Balance between Corporate

Role of Goals for Business and Humans

Indicate the direction of development.

Coordinate targets, assets, activities and time,

Mobilize the Staff, shareholders, and Capital,

Balance of the aspirations of interest groups and reality,

Goals play a central role in the Management System,

assigning Business Models, Strategy & Budgeting.

Syndrome of Christopher Columbus

Without clear goals, managers are blind, and strategy

unclear.

Questions:
What is the power of development and added value?
Whose goals are realized by the business unit?
What are your goals?

30.10.2024 1
 Classical Theories of Business Goals
are concentrated on a rise of capital value by
Factors creating value

High revenues, pricing and high absorbtion of Capital,

Intensive exploitation of labor and resources,

Benefits of monopolistic position and know-how dominance (medicals, cosmetics, Hi

Tech. brands,),

Speculation

Degradation of an environment as a cost free factor.

Classical Models of Financial Goals

Maximisation of profits (good for speculation, gambling),

30.10.2024 2
 Minimalisation of Costs (daughter companies, affiliates)

Maximisation of cash flows in favor of capital owners, (Models of Property Rent),

Maximisation of Business Ratios (IRR, NPV, EVA, MVA, CAPM ) (Models for
„Financial Industry”, S.Ex Players).

Maximization of shareholders wealth, (Models of Portfolio Management, Dividend

Policy, Inv. Founds, ),

Maximization of corporation value (book value, market value, capital value etc.)
(Models for Industrial Sector),

Maximization of Profitability
+ Encourage to increase Surplus (Gain),

+ Depends on few variables (agregates):

Profit = Income - Cost (Fixed + Variable)

30.10.2024 3
 + Can be developed by the Du-Pont Model
- Ideological provenience
- Contains profit and loss accounts limitations
- Depends on accounting data (not Cash-Flow)
- Limited to the period of a fiscal year
- Ignores development (investments),
- Ignores external factors, ethics and good relations,
Ignores satisfaction of customers & ECO.

Maximisation of Net Cash Flow (NPV)

Model based on yearly financial flows,

Helps to overcome accounting discipline by C-F

Usefull instrument of portfolio management,

Usefull for operational management, and planning,

Ignores long term investments,

Ignores most groups of interest,

Simplifies influence of most variables,

Accepts higher costs for increase of NCF,

Increase of Business Value

+ affirmation of Corporate Interests
-ignorance of Human Capital and some groups of interest.

Forms of Business Value

Market Value (Portfolio of Equity).

Capital Value (NPV )

Economic Value Added (EVA= IRR –WACC)

Book Value ( Equity – Borrowings)

30.10.2024 4
 Conventional sense of business value:
– Transaction Value
– Restitution Value
– Liquidation Value
– Insurance Value
– Transfer Value

A weakness of goals based on the Value Added

Driven by capital factors, portfolio structure and risk,

Extrapolations based on historical datas,

Risk of fixed assumptions (rates of exchange, interests, marigins, etc.),

Calculation by unperfect algorythms (exmples: NPV, EVA),

Ignorance of operating performance and potential, market benchmarks and comparisons

with others,

Evaluation depends on the experience of planners.

A weakness of goals based on the ValueSME and „Start- Ups” Mixture of Human and
Business Goals

Self-employment and proprietorship in Family Business as the style of life,

Heritage, pride and aspirations of handicraft,

Development of unique quality skills and art,

Social mission of being productive and confidential carrying good relations with
customers,

Succession as a way to overcome a life cycle of small business,

Transition from individual proprietorship to the form of corporation.

Absorption of public funds and state support.

Forms of Financial Goals in Practice

30.10.2024 5
 1. Set of Synthetic Indicators, Ratios and Coefficients (ROE, ROI, IRR, Growth Ratios,
Profit, Business Output, Productivity, Cost limits, Investments Value, Dividend, Export, Cost
of Capital) for Financial Sector.
2. Projection of Consolidated Financial Reports of a parent corporation and its subsidiaries
for the coming financial year,
3. IT Matrices as agregating Budgeting Targets by computer programs - Who, What, When,
How ?

System of Goals in Corporation:

1. External Favourable Factors
Expectations of Market Demand, Aspirations in Mission and Vision, Indications for
Cooperation and Competition

2. Individually selected Goals as a Leverage of Value

Worldwide class attractivity of products,

Leading Position in the market segment,

30.10.2024 6
 benefits of Fast Growing Markets,

Human creativity and social relations, etc,

3. State Support or Bariers Interfering Business

Pulic Support for R &D, interest, promotion,

Public orders and investment programs,

Legal regulations, taxes, and protectionism

Political influence, lobbing.

Behavioral Approach to the Business Goals

A Corporation is not alone and must respect customers and various groups of interest.
Neoclassical Economy:
Added value is generated by Financial Capital, so Companies enlarge the capital employed
for better performance.
Behavioral Economy:
The behavioral approach concerns human engagement, human anomalies, and social
phenomena. Finally, it means, that Labour Productivity, Motivation and Creativity are the
factors of Added Value.
Recommended for managers who manage humans not deciding about the amount of capital
employed

30.10.2024 7
30.10.2024 8
 Mixture of Corporate Goals:
Traditional Factors:

Financial output, risk control, market share,

Concentration of scale and diversity of products,

Globalisation Factors:

Superiority Areas of Dominance (Monopolies),

Security, Elasticity, Mobility (Financial Funds),

Behavioral Factors:

Leadership,

Credibility, Trustability, Networking,

Supreme Technology, Creativity and Innovations,

Culture of Organisation,

Brand Identification,

30.10.2024 9
 Proffesionalism of Management & Staff

Behavioral Models of Corporate Goals ( JK):

1. For Short Horizon Goals: A Compromise of Interests: expressed by various groups
involved in the Corporation.
2. Medium Horizon Goals:
a). Internal Equilibrium between Operational and
Corporate Performance,
b) External equilibrium concerning its products market,
financial market and labor market.
3. The Model of Long Range goals:
as Equilibrium between goals nad aspirations.

30.10.2024 10
 Ad. 1. The Short Term Goals as a Compromise with the Interests Grups:

The Corporation as the autonomous entity and: (means the Executives act in its name),

Customers,

Shareholders (owners),

Workers (and Workers Unions),

Creditors and Banks,

Suppliers of services and resources, outsourcing units,

Cooperating companies, sales agents, subcontractors,

Local ans state Government, Neighbours, lobbyists, e.g.

Global players, mass-media, auditors, rating agencies, etc..

Particular Importance of Public Authority as investor, regulator, supervisor, customer,

supporter

Confrontation of Goals of Interest Groups in a Short Time

may generate conflicts of interest ( even strikes).

can lead to suboptimal solutions,

Conclusion:

Good cooperation with the Interest Groups leads to synergy and accelerates business
prosperity.

Nowadays, too much public institutions in the Economy not support business, bud create
barriers, bureaucracy and costs.

Medium Horizon Goals as the External Equilibrium

1. Concerns about the product market are expressed by stable market share and participation
in technological progress.
2. concerning Financial Market is exppressed by easy access to capital and low-interest
financing close to bank overdrafts,
3. concerning the Labour Market (and assets), is expressed by productivity, low fluctuation,
average wages plus premium for loyality. s, e.g.

30.10.2024 11
 Long Term Goals of Corporation Successfully fulfill the long-term corporate development by
adequate growth and division of EBIT considering the market trends.
Corporate growth means an increase of quantitative effects
Corporate development means an increase of performance shared with market position,
competencies of staff, technology, quality of products, and conditions of work.
Long-term, strategic equilibrium means:

the business employs opportunities to reach long-term goals.

„Three American Leverages” Achievement of goals is easier when:

Involves the potential of business development

(Power of the Business)

Shift to the most promising, creative and demanding branches (Power of the Branch)

Expand to the most promising segments of the market (Power of the Market)

30.10.2024 12
 Examples: Hi-Tech Industry, Telecommunication, Aerospace Industry, Biochemical industry,

Six Areas of Business Goals and simultaneously, six criterions of business diagnosis and
comparisons of business units performance:
1. Value of Enterprise (book, market, capital value )
2. Satisfactory Performance (Return On Capital, ROE, ROI)
3. Increase of Business Potential presented by structure of assets,
4. Improvement of Solid Financial Base and accepted financial risk
expressed by structure of capital,
5. Scale of Investments, which expresses a business expansion,
6. Market Share (of the offered goods and services).

Types of Financial Targets :

1. Operational financial decisions

concern current operational and commercial activity,

affect incomes and costs, liquidity, structure of current assets and current liabilities in
frames of a present year.

2. Investment decisions,

increase of fixed assets intending to enlarge of business potential

affests financial condition of business unit for a long time,

3. Divestment decisions,

sale out of unwanted fixed assets to improve productivity of assets ,

improvement of short liquidity and fixed costs reduction,

4. Capital structure decisions,

concern resources of capital,

affect structure of financing expressed in balance sheet report

5. Restructuration decisions

concern allocation of capital and improvement of business

organization

30.10.2024 13
 affect structure of ownership ,

The sequence of Business Decisions:

1. Engagement value (minimum engagement value)

2. Period of engagement (minimum period of engagement)

3. Cost of capital engaged p.a.

4. Cost of transaction (minimum cost of transaction)

5. Calculation of Profit (or Loss) as a difference between income and costs (and
profitability)

6. Cash net effect as a difference between inflow and flow of money

7. Tax effects (forms of increase and reduction of tax payments)

8. Risk effects (individual, corporate, market, political, financial, currency, etc.)

9. Influence on total business liquidity

10. Influence for total business rentability

11. Influence for overall business value

12. Influence for other areas affecting business, like market position, competitiveness,
motivations of staff, satisfaction of management and owners, general opinion about
business.

30.10.2024 14
 23.10.2024
Models of Corporate Financial Management:
Elementary Model:

Simple equation where total revenues minus total costs equal gain.

Descriptive Model:

Calculates remaining revenue after covering variable costs, depreciation, and taxes
to allocate towards fixed costs, dividends, and investments.

Decisive Model (EBIT-focused):

Central focus on EBIT, accounting for interest, tax, dividends, investments,

bonuses, and reserves.

Matrix Architecture Model:

Integrated approach using a matrix structure to optimize product offerings, regions,

pricing, costs, and revenues (Example: Lidl).

Income Statement Components:

A breakdown of performance-affecting variables in the income statement, with an
emphasis on how unit price, quantity, and fixed costs impact profitability.

5. Break-Even Point (BEP) Analysis:

Traditional BEP Calculation:

Formula: mPQ=F, where mPQ equals fixed costs when G (gain) is zero.

mPQ=F

Strategic BEP Ratio Calculation:

Extended to include targeted profit (G): mPQ=F+G.

mPQ=F+G

Strategies for Optimizing Marginal Profit (mPQ):

Cost-Effective Sourcing: Control costs in materials and labor.

Competitive Pricing: Avoid undervaluing; remain competitive.

23.10.2024 1
 Production and Sales Expansion: Balance production and sales while optimizing
purchasing and sales capacities.

Approaches to Fixed Cost (F) Rationalization:

Avoid cost-cutting as a primary focus.

Emphasize cost-saving methods, quality improvements, and early investments.

Include investment in personnel and advanced technology to boost productivity.

Financial Planning of Corporate Performance:

Strategic balancing of long-term aspirations, corporate goals, and current financial
performance through Top-Downand Bottom-Up models.

Corporate Decision-Making Framework:

Decisions impacting performance:

Goal Setting: Define and align strategies.

Investment: Affects financial condition, asset expansion, and business potential.

Divestment: Enhances productivity and liquidity.

Capital Structure: Balances financing cost and risk.

Value Distribution: Allocates to dividends, salaries, taxes, and reserves.

Restructuring: Mergers and takeovers to improve organizational efficiency.

Management Roles in Corporate Finance:

Defined roles focusing on specific financial responsibilities, from CEO oversight to
operational divisions managing profit centers.

Steps in Financial Performance Planning:

EBIT Calculation for Future Projections:

Determine target EBIT based on profit goals, required returns, and operational costs.

Fixed Cost Budgeting:

Use inflation indexing or branching indexes to project fixed costs, considering

factors like labor and operational cost changes.

Detailed EBIT and Fixed Cost Calculations:

23.10.2024 2
 EBIT Projections:

Breakdown of EBIT components: investment costs, dividends, interest, taxes, and

bonuses.

Fixed Costs:

Calculations through extrapolation, multiplication with inflation indices, and

combined methods for more complex projections.

Operational Planning Using Matrices:

Disaggregate variables in m, P, Q matrices to forecast sales quantity and manage
resources effectively, balancing production capacities, financing, and market needs.

Income Statement Projection (Pro Forma Reports):

Pro forma reporting integrates all financial variables to forecast for the next fiscal year,
including operational gains, fixed costs, and income margins.

Financial Ratios:
Key ratios used for tracking corporate performance:

mR: Margin ratio

fR: Fixed cost ratio

gR: Gain ratio

vR: Variable cost ratio

BEP: Break-even point as a performance metric.

Performance Control via Deviation Measurement:

Monitoring deviations between actual results and planned performance to inform future
adjustments.

Types of Corporate Decisions creating Organisation:

1. Sellection of Goals and an adaptation of the strategy

hiring and training of competent Staff

2. Investment decisions for expansion and development

affect the financial condition of the business for a long time,

23.10.2024 3
 increase of assets intending to enlarge of business potential

3. Divestment decisions

fixed assets sold out to improve productivity, liquidity and fixed costs

4. Capital structure decisions

concern cost of capital, liquidity and financial risk,

affect structure of financing expressed in balance sheet report,

5. Decisions concerning the division of Added Value

Dividend, Accumulation, Salary, Reserves and Tax Policy)
6. Restructuration, Mergers and Takeovers

improvement of business organization and concern allocation of capital affect structure

of ownership,

Managers’ engagement in Corporate Finance focuses on the corporate goals and

internal equilibrium
❑ follows the procedures and duties of managers
❑ activates internal potential
❑ reduces internal conflicts

1. CEO - responsible for goals, top executives, performance,

sales policy, development, strategy, restructuration,
2. Risk Management & Controlling responsible for –information,
barriers, distortions, variability, deviations,
3. Department of Corporate Management focused on Profit,
Tax, Dividend, Reserves, Bonuses, Depreciation (EBIT),
4. Department of Administration- focused on HR, fixed costs,
accounting, IT, and improvement of the organization
5. Operation Divisions –focused on profit centers,
Sales, Logistics, Service, vP, m, G,
6. Department of Investments – design, technology, innovations,
7. Treasury Department - Capital Acquisition, CC, WACC,

23.10.2024 4
 8. Cash Management- Cash Flow, financial cycles, payments.
Planning of Financial Performance by „Pro Forma” Reports is like a crossword
consisting of all financial variables

Process of the Corporate Performance Planning for the Consecutive Financial Year
1. Financial analysis of the performance,
2. Analysis of trends of the market demand,
3. Coordination with the long-range strategy,
4. Corrections of Investment Plans,
5. Estimation of the required EBIT,
6. Projection of Financial Performance F and G, Q, and unit prices.

Process of the Corporate Performance Planning for the Consecutive Financial Year
1. Financial analysis of the performance,
2. Analysis of trends of the market demand,
3. Coordination with the long-range strategy,
4. Corrections of Investment Plans,

23.10.2024 5
 5. Estimation of the required EBIT,
6. Projection of Financial Performance F and G,
Q, and unit prices.

23.10.2024 6
23.10.2024 7
23.10.2024 8
23.10.2024 9
23.10.2024 10
23.10.2024 11
23.10.2024 12
23.10.2024 13
23.10.2024 14
23.10.2024 15
23.10.2024 16
 16.10.2024

Operating Equilibrium
Equilibrium can be understood as an optimal structure that mobilises all operational
potential with a corporate performance ballanced by CF, required investment and acceptable
risk (satisfied, accepted prices and a profitable, modern factory).

External Equilibrium: Aligning corporate performance with strategic goals.

Internal Equilibrium: Balancing operations with corporate performance.

Objective: Achieve an optimal structure that utilizes all operational potential, factoring
in cash flow (CF), necessary investments, and acceptable risk.

Balancing Approaches
Bottom-Up Model: Aggregating current operations.

Top-Down Model: Corporate goals drive current operations.

Example of Imbalance: VW, Stellantis, Tesla – due to inefficient operations.

Role of the CFO

Objective: Enhance alignment between total operations and corporate goals, focusing on
capital, liquidity, revenues, expenses, assets, and obligations.

Financial Models Evolution

16.10.2024 1
 Elementary Models: Simple revenue-cost calculations.

Descriptive Models: Include fixed costs, dividends, investments, reserves, and cash.

Decisive Models: More comprehensive, including EBIT, interest, tax, dividend, etc.

Applicative Models: IT programs aggregating various financial metrics (e.g., Lidl’s

model).

Financial Reporting Types

Corporate Performance: reported by the yearly financial statements of:

Ballance Sheet

Cash Flows Report

Income Statement (Profit and Loss Accounts).

1. Traditional Financial Reporting: Aggregates data from primary operations.

2. IT-Based Financial Reporting: Utilizes data matrices for detailed, accurate reporting.

3. Pro Forma Financial Reporting: Projection-based, used for financial planning.

16.10.2024 2
 Equilibrium Model Variables
Model of Equilibrium between Operations and Corporate Performance as The Matrix of SIX
VARIABLES (inspired the SONY Management Game)

P (Price): Unit price matrix, considering currency and exchange rates.

Q (Quantity): Transactions by assortments.

F (Fixed Costs): Costs by cost centers.

G (Gain): Profit centers.

V (Variable Ratio) and m (Marginal Ratio): Other financial ratios.

16.10.2024 3
 Income Statement Factors
Objective: Reflect total annual financial performance.

Example Factors: Revenues, costs, taxes, quantities, etc.

16.10.2024 4
16.10.2024 5
 Example Exercises
Shipyard: Calculates profitability based on vessel production and fixed/variable costs.

Bakery: Daily performance based on bread production, price per unit, and fixed/variable
costs.

Break-Even Point (BEP)

Definition: Total revenues equal total costs.

Equations:

When PQ=vPQ+mPQ=F: G (gain) is zero.

PQ=vPQ+mPQ=F

Used to determine units required to cover fixed costs.

Strategies for Maximizing mPQmPQ (Margin Per Quantity)

16.10.2024 6
 Materials and Labor Purchase: Optimize low prices.

Sales Strategy: Avoid low prices to remain competitive.

Production Strategy: Balance resource purchases, production, and sales to optimize

output.

Strategies for Fixed Cost Management

Investment Control: Ensure efficient cost management.

Cost Savings: Reduce expenses across various forms.

Effective Investment: Focus on personnel, quality assurance, R&D, and tech

advancements.

16.10.2024 7
16.10.2024 8
16.10.2024 9
 Strategic BEP Ratio Application
Methods: Traditional calculation and strategic BEP calculation for profit goals.

BEP Interpretation: Evaluates operational equilibrium and business performance under

different scenarios.

16.10.2024 10
16.10.2024 11
16.10.2024 12
16.10.2024 13
16.10.2024 14
16.10.2024 15
16.10.2024 16
 2.10.2024
Risks as a Measure of Business Environment:
1. Internal Law, ethics, customs - Freedom of Business.

2. Accounting, Technology, Organisation - Business Standards.

3. Offshore operations, communication, Transport Costs - Business Infrastructure.

4. Currency exchange, Banking services - Financial Cost.

5. Customers, Labour, management quality - Material Cost.

6. Competition, quality, Orders Acquisition - Market Risk.

7. Tax Paradises, Protection, Nationalism - Political Risk.

Reserves for Risk Protection

Strategies of Risk Reduction

Specifics of Financial Environment:

Economic Growth, Financial Markets, Stock Exchange.

State Policy, Financial Stability, Public Debt.

Activity of Foreign Banks & Investment Funds.

Access to Capital (Interest rates).

Currency depreciation, inflation.

Phenomenon of Cryptocurrencies.

Real Economy Sector.

Focus on the International Business Environment:

1. Global Competition: Expansion, Local Domination, lost Equilibrium.

Effects: Market Polarization Conflicts, Trade Wars.

2. Open Economies: International regulations, external influence.

Effects: Power Concentration, Indebtedness, Protectionism.

2.10.2024 1
 3. Real Economy Sectors: Hi-Tech, Industry, Energy, Raw Materials, Wastes.

Effects: Collapse of Industry and Agriculture, Food Quality, Imported Goods.

4. Financial Sector: Erosion of Money, Overvaluation, Big Banks.

Effects: Financial Instability, Cryptocurrencies, Inflation.

5. Hi-Tech Development: Digitalization, Internet, 5G, AI, Big Data.

Effects: Management in real-time, Social Media, NGO.

6. Ideologies: Corpo Liberalism, Green Economy, Neo Collectivism.

Effects: Dominance of UE and Governments, Democracy, Demography, Crisis,

Consumerism, Migrations.

Forms of Evaluation and Exam:

1. Written Exam (60 minutes, 100% grade):

Characteristics of selected categories – 3 questions.

Explanation of general problems – 3 questions.

2. Individual Activity for Premium Grades:

Optional presentations (10-15 min.).

Participation in discussions.

Global Business Environment Overview

Economic Dynamics:

Global Competition and Expansion: Effects include trade conflicts and market
polarization.

Open Economies: Issues like protectionism and power concentration.

Financial Sector Challenges: Includes inflation, cryptocurrency, financial

instability.

Technological Advances: Digitalization and AI impacting management.

Ideological Influences: Corpo-liberalism, Green Economy, Neo-collectivism.

Domestic Financial Environment:

2.10.2024 2
 Growth, foreign investments, currency stability, inflation, and cryptocurrency
presence.

Comparative Business Environment Factors

1. Economic growth patterns and sectoral crises.

2. Scale of global market openness.

3. Monetary policy impacts, inflation rates, currency alternatives.

4. Major socio-economic challenges (e.g., demographics, energy deficit).

Risk Management as a Key Factor

Risk Categories: Internal laws, ethics, technology, labor quality, and market volatility.

Risk Mitigation Strategies: Developing policies to reduce exposure to risks.

The Role of Ideology in Business Decisions

Management Variance: Due to cultural, ethical, and ideological factors.

Subjective Influences: Goals, values, and experiences shape individual and corporate
decisions.

2.10.2024 3