Core Business Finance and Management Principles

Posted on Oct 2, 2025 in Business Administration and Innovation Management

Investment Appraisal Methods

Payback Period

The Payback Period is the time required for the cumulative cash inflows from an investment to equal the initial outlay. This method is particularly useful in unstable economies and high-risk sectors. Generally, investments with a shorter payback period are preferred.

Net Present Value (NPV)

NPV is the present value of all expected future cash flows from an investment, discounted at a specific interest rate, minus the initial investment cost. An investment is considered advisable when its NPV is greater than zero.

Internal Rate of Return (IRR)

The IRR is the discount rate that makes the Net Present Value (NPV) of an investment equal to zero. In other words, it is the interest rate at which the present value of cash flows equals the initial investment. While it is considered a very accurate method, its calculation can be complex.

Business Taxation Fundamentals

Common Business Taxes

  • For Individuals/Sole Proprietors: Income Tax, VAT, Municipal Taxes.
  • For Corporations: Corporation Tax, VAT, Tax on Economic Activities (IAE) for revenues over €1 million, Municipal Taxes.

Elements of Tax Liability

Key components in calculating tax include: the tax event, taxable person, accrual period, exemptions, tax obligations, tax base, deductions, net tax base, tax rate, and final tax liability.

Value Added Tax (VAT) Rates

  • Super-Reduced Rate: Applies to essential staples, cultural and academic items, medical devices, and social housing.
  • Reduced Rate: Applies to food products, sanitary products (e.g., pads), animal health products, non-social housing, florists, and transportation services.
  • Standard Rate: Applies to the general supply of goods and services that are not exempt and do not fall under the reduced rates.

Equivalence Surcharge

This is a special VAT regime for retailers. When purchasing goods, they pay a surcharge on top of the standard VAT. In return, they are relieved of most formal VAT obligations, such as filing settlements and keeping detailed records.

Employee Remuneration

Employee remuneration is determined by collective agreements or individual employment contracts.

Types of Remuneration

  • By Form: Cash and in-kind (benefits).
  • By Composition: Fixed, variable, or mixed.

Components of Salary

  • Base Salary: The fixed core payment.
  • Salary Complements: Additional payments based on personal factors, job role, quantity of work, or payments with a frequency greater than one month.

Non-Wage Remuneration

These are payments not subject to social security contributions, such as healthcare services, training, compensation, and expense allowances.

The Product Life Cycle

  1. Introduction (Launch)

    Characterized by low sales volume and high investment in marketing to build product awareness. Profitability is low or negative.

  2. Growth

    Sales increase significantly. Investment is focused on product improvement as competition begins to emerge.

  3. Maturity

    Sales stabilize with slow growth. Competition is intense, and production costs are typically lower. The primary goal is to maintain market share.

  4. Decline

    The product becomes obsolete, and demand falls. The objective is to exit the market efficiently, unless the product can be updated or repositioned.

Inventory Management

Inventory management is the process of establishing a balance between provisioning costs, storage costs, and sales policies.

Key Concepts

  • Minimum and Maximum Stock: The lowest and highest levels of inventory to be kept.
  • Safety Stock: Extra inventory held to prevent stockouts.
  • Stockout: A situation where an item is out of stock.
  • Reorder Point: The inventory level that triggers a new order.
  • Replenishment Period: The time it takes to receive a new order.
  • Economic Order Quantity (EOQ): The optimal order quantity that minimizes total inventory costs.

Inventory Valuation Methods

  • Weighted Average Price (WAP)

    This method applies a homogeneous value to all stock units, calculated from the weighted average cost of all items in inventory. It is suitable for non-perishable products.

  • First-In, First-Out (FIFO)

    Assumes that the first goods purchased are the first ones sold. Goods leave the warehouse in the same order they entered and are valued at their original cost. This is ideal for perishable or fashion items.

  • Last-In, First-Out (LIFO)

    Assumes that the most recently purchased goods are the first ones sold. This method is typically used for long-lasting products.