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Lecture notes, cheat sheets
Commercial activity. Finance and business (lecture notes)
Directory / Lecture notes, cheat sheets Table of contents (expand) LECTURE No. 6. Finance and business 1. The importance of finance in the activities of an entrepreneur Finance represent funds, their distribution, their use, cash income, the scope of monetary relations between participants in business and entrepreneurial activity. An entrepreneur or businessman must have a good idea and plan the amount of financial resources that is necessary for a business operation, determine possible sources of financing, control cash receipts and their expenditure. With incorrect and poor-quality management of financial resources in the process of entrepreneurial activity, the business may end in failure or bankruptcy. An entrepreneur must master the art of financial analysis, knowledge of accounting and control. This knowledge helps to determine the right strategy, which makes it possible to provide the company with financial stability and get more profit. In order to start a business, an entrepreneur must have start-up capital. Funds are needed to purchase a company office, production premises, warehouses, production equipment, purchase material resources and raw materials. The firm or company must be registered and formalized. This also requires money. A lot of time passes from the start of production of a product to its sale, during which the entrepreneur is obliged to pay for the labor of workers and personnel, their training and business trips. If the firm already exists and operates, it needs working capital, which is used to pay for current expenses: energy, services, materials, raw materials, storage and transportation of goods, promotions. After making a profit, the funds are used to pay taxes, pay for loans and investments. Depending on the timing of the needs of entrepreneurs in financial resources, there are two types of needs: short-term and long-term. Short-term financial resources are intended for current expenses, while long-term financial resources are needed for the acquisition of funds necessary for production. 2. Sources of business financing Financing It is a way to provide business with money. After defining the goals and direction of business activities, the main issue becomes the issue of financing operations. It is necessary to estimate the amount of funds and identify possible sources of their receipt. There are internal and external sources of cash flow. Internal sources - these are the sources of cash receipts, which are formed at the expense of the results of entrepreneurial activity. This may be income from the sale of products, the sale of property. Gross profit is divided into two types of financing: 1) reimbursement of production costs; 2) residual (net) profit. Reimbursement of production costs is related financing, since the funds are allocated to certain areas of expenditure. Residual profit is the profit that remains in the firm after taxes are paid. Net income is used by the entrepreneur to pay for various expenses in the firm, except for expenses. Cash from the residual income is used to develop the business, to pay dividends, and to reward employees of the company. To internal sources financing includes investments of the founders of the company in the authorized capital, as well as funds received after the sale of the company's shares, the sale of the company's property, and the receipt of rent for the lease of property. External sources are divided into two groups: 1) debt financing; 2) gratuitous financing. Grant financing is the representation of funds in the form of gratuitous charitable donations, assistance, subsidies. Debt financing is borrowed capital. Borrowed capital includes: 1) short-term credits and loans; 2) long-term credits and loans; 3) accounts payable. Short-term loans and borrowings are intended to finance current assets. Long-term loans serve as a source of financing for a part of current and non-current assets. Accounts payable may arise in the process of settlements in purchase and sale transactions, settlements on promissory notes, in the distribution of finances between employees of the company. Accounts payable means the need to attract funds from other organizations or individuals into the turnover of the company. Credit has a close connection with such a form of economic relations as loan capital. Loan capital is an independent part of economic capital, which functions in the form of cash in the field of entrepreneurial activity. A loan is temporary money received on credit with the obligation to repay it. If the lender has property guarantees for the repayment of the loan, then the loan is called secured. A loan is unsecured if it is issued against a written commitment or verbal assurance that is not supported by property guarantees. Exist mortgage loan - mortgage loan. This loan is the most common form of secured loan. Its essence is that the firm, upon receipt of debt funds, guarantees the creditor to repay the debt, taking into account interest. In the event that the company cannot repay the debt, the creditor has the right to recover the property of the company in his favor. In the process of developing credit relations, new economic structures have emerged, among which banks play a special role. A bank loan is the most convenient form of financial services. This form has the ability to flexibly meet the needs of the borrower and, unlike the securities market with their standardized terms, is able to adapt the conditions and terms of obtaining a loan to the circumstances of the borrower. The classification of bank loans is divided by: purpose, terms, methods of repayment, security, types of interest rates. By purpose, bank loans are divided into several groups: 1) industrial loans: provided for the purchase of material and production resources at the beginning of the development of the production of a firm or company; 2) consumer loans: provided to individual individuals to meet the emerging needs for the purchase of housing, apartment renovation and other needs; 3) agricultural loans: provided to various economic organizations engaged in agricultural activities (tillage, harvesting, etc.); 4) mortgage loans: are provided to organizations or individuals on the security of their real estate for the acquisition, reconstruction or construction of housing. According to the terms of use, bank loans are divided into urgent and on-call (on demand). According to the methods of repayment, bank loans are divided into loans repaid in installments and loans repaid at a time. According to the security, bank loans are divided into secured and unsecured. A secured loan is collateral that must meet certain requirements. These include: the value of the collateral must be sufficient to compensate the bank for the amount under the agreement, including interest and possible costs; registration of documents for obtaining a pledge should not exceed 150 days from the moment of realization of pledge rights necessary for the bank. An unsecured loan is unsecured or the collateral received does not meet the required requirements. According to the types of interest rates, bank loans are divided into loans with a floating interest rate and a fixed interest rate. A floating interest rate is an interest rate that has a variable amount. A fixed interest rate implies a certain rate, which does not imply the right to change its value. Trade Credit is a commercial loan, which consists in the fact that an entrepreneur buys a product, postponing its payment. By purchasing goods, the entrepreneur enters into an agreement with the seller, according to which he undertakes to return to him the cost of the purchased goods, including interest on the loan, within the specified time. Most often, trade credit is used by wholesale buyers of goods. Such a transaction as a trade credit is mutually beneficial for the merchant and the buyer, since the buyer has the opportunity to purchase goods with a lack of necessary funds, and the merchant has the opportunity to sell a larger amount of goods, while receiving interest on loans. Interest income has two forms: interest rate and discount rate. The interest rate is the rate of interest that the borrower pays to the lender. The discount rate is the rate of interest that the bank pays to its depositors. The difference between the interest rate and the discount rate is the bank's profit. Firms and enterprises issue debt instruments, which are in the form of bonds. Bonds are a source of debt financing in the form of a fixed term with their subsequent redemption and payment of certain interest. Buyers of bonds become creditors. A necessary condition for the distribution of bonds is the trust in the firms of their potential buyers. shares are a common form of fundraising. By issuing and selling shares, an entrepreneurial firm receives a debt loan from the buyer, as a result of which the shareholder acquires the right to the property of the company, as well as to receive dividends. Dividends in this case are interest on a loan, which is presented in the form of money paid for shares. Through this type of loan, the company has the opportunity to receive significant financial capital. The next form of financial support for the company is the provision of government subsidies. State subsidies come from the budget in the order of redistribution for the purpose of additional financing of business organizations in which the state is interested. Subsidies can be in the form of cash or grants. There is an indirect form of state financing, which is carried out in the form of granting tax incentives to entrepreneurial firms. 3. Accounting and balance sheet Бухгалтерский учет is a process that consists of obtaining information about financial transactions, processing data and documenting all the results of financial transactions. The main activity of the company is the turnover of industrial goods and cash. In the course of business, a firm engages in many functions such as buying and selling goods, paying various bills, and earning money through various channels. All these operations require strict accounting, so accounting is an integral part of doing business. In every firm, the management team should include a specialist such as an accountant. The accounting department assists the head of the company in managing finances. Accounting documentation contains a huge number of digital indicators that characterize the work of the company. The accountant collects report data, processes and analyzes it, systematizes it, and then brings it to management in the form of easily perceived information about the financial condition of the company. The functions of accounting include conducting financial analysis in the process of entrepreneurial activity of the company. Financial analysis is used in the course of drawing up a business plan for a firm's upcoming operation. As a result of the compiled financial analysis, possible financial problems of the company are determined and ways to solve them are outlined. Accounting calculates the costs and volumes of the company's costs for the production of products, the amount of profit as a result of the sale of products, monitors the cost-effective value. In addition, accounting is designed to monitor the budget of the company, the volume of expenses and income, the amount of tax payments. The main form of accounting is balance sheet. All data on the financial condition of the company are entered in the balance sheet book. Data on the financial activities of the company for a certain period (month, quarter, year) are entered in the final balance sheet. This document contains all the information about the financial activities of the company: its income and expenses, costs and debts, property status. In the process of entrepreneurial activity, there is an interchange of goods and money. Buying materials for the production of goods or finished products, the entrepreneur gives money. After the sale of the goods, an adequate amount of money is returned to the entrepreneur. In the process of making barter transactions, entrepreneurs exchange goods. During the interchange of funds, they are also balanced, i.e., a balance is maintained. All these data should be recorded in the balance sheet tables. The balance sheet must comply with the formula in which the income must be equal to the sum of the expense and the balance. All components of this formula have a monetary equivalent, which is convenient when calculating the financial resources of the company. The balance sheet depends on two interrelated types of capital of the firm: active and passive capital. Active capital represents the property of the company, which is expressed in the asset of its balance sheet in the form of fixed and working capital. Passive Capital consists of the sources of funds from which the firm's assets were formed. They, in turn, are divided into equity firms and borrowed capital. In the balance sheet formula, the difference between the amounts of assets and liabilities should form the amount of equity. list of Assets represent all the incoming income of the company, which are converted into inventories, cash reserves, fixed and current assets of the company. Liabilities firms represent its obligations in the form of financial or material resources that are received from internal or external sources and are subject to reimbursement. In other words, liabilities are the company's debts that must be repaid in accordance with the obligations assumed. Assets show the direction of cash that is used by the firm in the course of its activities. Liabilities characterize the direction of receipts of financial resources presented in the form of cash loans. Equity capital is formed by the company's own financial resources, which, in turn, are obtained from the investments of the company's founders. The company's own funds together with liabilities form the company's assets. Assets and liabilities must be presented in a balance sheet, each line of which is called a balance sheet item. The table consists of a list of all types of assets and liabilities, a comparison of the sum of their balance sheets and the company's own capital. In the final balance sheet, the values of assets and liabilities must be balanced. In order to have a concrete idea of changes in the financial condition of the company, it is necessary to have a balance sheet drawn up at the beginning and at the end of the reporting period. This allows you to keep under control all changes in the assets, liabilities and equity of the company. For each balance sheet item, a special document is created, which is called account. An account compiled according to data from asset accounts is called active, and an account compiled according to data from liability accounts is called passive. Each type of active and passive account has its own standard number. Thanks to this circumstance, an accountant or financier has the opportunity to obtain the necessary information from the accounting report of any company. The billing process uses the double entry rule. This rule means that any amount of money used in the process of financing the activities of the company must be entered into two types of accounts: debit and credit. This allows you to track the direction of receipt and expenditure of funds. In addition, by comparing the debit and credit data, you can check the compliance of all accounting records. The results of the debit and credit amounts should be equal, this indicates the correct balance. Accounting reflects the income and expenses of the company. This information relates to a specific reporting period in which there were receipts and payments of funds that are related to these incomes and expenses. Profits firms are taxed in accordance with Article 248 of the Russian Tax Code. The income of the organization is: income from the sale of goods and services, income from the sale of property rights, income not related to the sale. When calculating the tax, the reporting (tax) period is taken in which the receipts of funds, property funds or property rights are recorded. The company's income is classified according to the direction of its activities: 1) from the main activity: income received in the process of selling the company's products or services; 2) from the sale of the company's investments: income received as a result of the sale of securities or non-current assets of the company; 3) from the financial activities of the company: income received in the process of placing shares and bonds of the company among investors. expenses firms are considered to be a decrease in property, cash, commitments that lead to a decrease in the total capital of the firm. Expenses are not considered those expenses that do not affect the value of the company's capital. These include: the creation of non-current assets, contracts in favor of a commission or agents, contributions to the authorized capital of other firms or companies, the acquisition of shares in other organizations, payment for stocks of materials and work, repayment of loans or credits, payment of advances and deposits. Expenses in accounting, like income, are classified depending on the direction of the company. Expenses that are associated with the ordinary activities of the company include: 1) expenses that are associated with the production and sale of the company's products or the provision of services; 2) expenses associated with the provision of leased assets; 3) expenses associated with the participation of the company in the authorized capital of other organizations; 4) expenses on deductions in the form of depreciable assets in order to recover the cost of fixed assets; 5) expenses associated with payment for granting rights under patents for inventions. Expenses for ordinary activities pass through the account in the amount that was accrued in cash, equal to the amount of the loan or other debt. The cost of a firm's ordinary activities determines the cost of goods or services sold. Depending on the cost of goods, the financial results of the company's activities are formed. The cost price represents the current costs of the company for the production of goods, which are expressed in monetary terms. The cost price consists of the cost of material resources, labor resources, energy, natural resources and other costs. There are a number of conditions that are necessary for the recognition of expenses in accounting. These include the following conditions: 1) the expense must be made in accordance with the requirements of legislative acts and regulations; 2) the presence of confidence in the reduction of the economic benefits of the firm; 3) determination of the amount of expense. If there is a non-compliance with at least one condition, a receivable is formed in accounting. Taxation of expenses also requires compliance with certain conditions: 1) expenses must be economically justified, i.e., aimed at the implementation of activities, the purpose of which is to generate income; 2) expenses must have documentary evidence, i.e., be drawn up in accordance with legislative acts; 3) these expenses should not be included in the list of expenses not subject to taxation; 4) expenses should not be compiled on the basis of the depreciation of fixed production assets for the period falling on January 1, 2002 and later. Expenses that meet the listed requirements are divided into expenses of the current period and expenses of future reporting periods. Expenses of the current period are subdivided depending on the conditions, direction and nature of the company's activities. There are costs associated with production activities and the sale of goods and services (labor costs, material costs, accrued depreciation, and others) and costs not related to the sale of products. Tax calculations are determined on an accrual basis. 4. Financial analysis of the company's activities The most important factor for the successful existence of the company and the implementation of entrepreneurial activities is the financial condition of the company. Comparisons with the states of competing firms are necessary to assess the financial condition of a firm. This is done through financial analysis. Financial analysis is based on the study of financial indicators of entrepreneurial activity of firms. Indicators can reflect general ideas about the state of the company and can highlight the most significant values that have a great impact on the performance of the company. Indicators that help form a specific idea of the state of the company for a certain period of time are called economic criteria. There are many criteria that are used in the process of financial analysis of a firm. The most commonly used economic criteria are: asset liquidity, which includes the coverage ratio and maturity ratio; profitability, profitability, payback, capital turnover rate, stability criterion. Liquidity of assets provides the firm with confidence in its solvency by regulating the rapid conversion of the firm's assets into cash. If a firm is short of cash, it can sell its liquid assets to pay off debts. Thus, the company's accounts must contain a certain amount of money, which is a liquid asset. This amount should not be very large, since the main financial assets of the company must take an active part in the turnover. The level of liquidity is assessed using two ratios: the coverage ratio and the maturity ratio. Coverage ratio is the ratio of the firm's current assets to the firm's short-term liabilities. In this ratio, the quantitative indicator of current assets should not be less than the volume of short-term liabilities. Otherwise, if a situation arises when there is a shortage of profits to cover debt obligations, the company loses the ability to cover debts at the expense of current assets. Urgency factor is the ratio of highly liquid assets subject to quick sale and short-term liabilities of the firm. Ideally, indicators of marketable liquid assets and short-term liabilities should be equal. Then the firm has the ability to quickly convert assets into cash and cover debts. The urgency coefficient in this case will be close to unity. If the urgency coefficient is much greater than one, this is an unfavorable circumstance for the company's activities, since a certain amount of money arises that does not have the opportunity to participate in the turnover. One of the main factors for the success of the company, as well as an important criterion for the financial condition of the company is profitability. This criterion indicates that the firm's income not only covers its costs in the process of obtaining this income, but also constitutes net profit. The profitability ratio should not be zero or negative. These indicators may indicate that the company is unprofitable and even its possible bankruptcy. To assess the relative level of profitability of a firm, it is necessary to use certain indicators. These include: profitability and payback. Profitability characterizes the ratio of the amount of profit of the company, which is received for a certain period of time, and the cost of production and other types of funds used by the company in order to obtain this profit. The profitability formula, according to the definition, will look like this: Profitability \uXNUMXd net profit (gross profit) / cost of fixed and working capital. The profitability indicator calculated in this way should be equal to 0,2 + 0,4 or 20 + 40%. The Russian economy uses several specific indicators of profitability. These include: 1) return on assets (company property). This indicator determines the degree of efficiency in the use of the firm's assets. It is determined using the formula of the ratio of net and gross profits to the value of the company's assets for a certain period of time; 2) return on equity of the company. This indicator characterizes the degree of efficiency in the company's use of its own capital. It is defined as the ratio of net profit and the cost of capital of the company; 3) profitability of sales. Characterizes the amount of profit that falls on a unit of sales volume value. It is defined as the ratio of net profit and the amount of total income after the sale of goods and services; 4) profitability of current costs. This indicator characterizes the efficiency of costs used in the production and sale of the company's products. Determined by dividing profit from sales by the total cost of goods sold; 5) return on invested capital. Characterizes the efficiency of using the company's own capital and invested funds. Determined by dividing net profit by the average value of the company's capital and invested funds for a certain period of time; 6) profitability of production. Characterizes the efficiency of use of production resources. To calculate this indicator, the company's profit before taxes is divided by the cost of the company's fixed and working assets; 7) profitability of the company's fund. Shows the efficiency of using the company's production assets. It is determined by the ratio of net and gross profit to the average value of the company's fixed assets. The successful operation of the company depends on the observance of the conditions under which profits must exceed the volume of sales of products, which indicates a decrease in the volume of costs as part of the cost of goods. This pattern is called leverage effect and is determined using operational analysis or break-even analysis. Operating lever is used to determine the degree of change in profit depending on the change in the volume of products sold. The dependence lies in the fact that a change in sales volumes leads to a change in profit volumes. The indicator of operating leverage is determined by the ratio of marginal profit to the total profit of the company before tax. One of the profitability planning methods is to use the method using profitability threshold. Using this method, the minimum volume of products sold (Qmin) is calculated, which covers the volume of production costs in the process of manufacturing and selling products. This ratio is called the break-even point. It is calculated using the following formula: Qmin = F/ (P - a) and Qmin = F/ (1 - b),where Qmin - the minimum volume of sales of the company's products; F - current costs of funds used in the course of the company's activities; P is the cost of a unit of goods; a - the value of variable costs per unit of goods; b is the share of variable costs in total income. Stock of financial strength firm characterizes the value that reflects the firm's ability to reduce its production without the risk of incurring losses. This value is calculated by calculating the difference between the planned sales volume and the break-even point. Margin of financial strength = planned volume - breakeven point. The relative value is determined by determining the share of the planned volume of sales. The financial safety margin is calculated in order to assess the production risk. The strength of the operating leverage directly depends on the size of the financial safety margin. The higher the margin of financial safety, the lower the strength of operating leverage. Sensitivity analysis of critical ratios is carried out in order to assess the degree of change in any parameter of the analysis, while others remain constant. Operating profit depends on the cost of sales volume, on the total volume of sales, on the ratio of fixed and variable costs associated with the cost. An important criterion for profitability is payback. This indicator characterizes the time frame for the return of financial resources invested in the production and sale of the company's products. This value is called the payback period of investments and is determined by dividing the volume of capital investments by the volume of annual profit. The payback period of capital invested in a business is measured in number of years. Capital turnover rate is an indicator of the rate of use of funds invested in the business of the company. To determine the value of the indicator of the rate of capital turnover, the ratio of the volume of profit from the sale of goods and the value of the firm's assets in monetary terms is used. This value reflects the possible amount of profit from each monetary unit used from the firm's asset. The result of the turnover rate indicator must be greater than one. Stability criterion or reliability of the company shows how reliably the company is provided with its own resources and what is its dependence on external sources of financing. The value of this indicator is determined using the ratio of external investment to the firm's own cash resources. The indicator must have a value less than one. If the stability index is much less than one, this indicates that the company has a high level of financial independence and uses external sources of financing. 5. Business and prices An integral and important component in the business activities of the company is the price of goods and services. Price serves as the only element in the activities of the firm, which is the producer of profit. The price, in contrast to the quality and properties of the goods, is a very flexible element that can be subject to rapid change. The price reflects the quality characteristics of the product, which affects the pricing policy. The pricing policy is to solve one of the five tasks, which include: 1) "Skim cream" policy: This policy is used by firms that charge high prices for their goods. Using this method, they must be sure that their product is in high demand among a large number of buyers, that it is superior to its competitors, that a high price corresponds to a high quality product, and that profit is ensured by low prices. production costs; 2 survival: the task is short-term and is set in the event of a problem of fierce competition, in the event of a change in consumer needs. Due to high prices, the firm has the opportunity to cover production costs in order to continue the activities of the firm; 3) increase in current profit: to apply this method, the firm conducts an evaluation analysis of the activities of firms that use alternative policies. After that, a price is set that can provide a higher level of profit. However, this method is not suitable for the firm's long-term outlook due to the unpredictable reactions of competitors and legislative restrictions; 4) the desire to become leaders manufacturers of high quality products. This task can be set when products meet the highest quality standards and are offered at the highest prices; 5) increase in market share. This goal is set in order to reduce costs per unit of production by increasing sales volumes, which contributes to a long-term increase in profits in the future of the company. Low prices are set when low prices help stimulate market share growth; when production costs are reduced due to the acquired experience of the company; when setting a low price is a strategy to combat competitors. The price of goods depends on the level of consumer demand. An indicator that reflects the dependence of price levels on current demand is called the demand curve. In a normal social environment, price and demand are inversely proportional. This means that an increase in the price of a good reduces the demand for it. The opposite dynamics is observed in relation to prestigious goods. Some categories of buyers prefer to purchase high quality goods at high prices. Demand curve characterizes the reaction of buyers who belong to different categories, i.e., determines their sensitivity to price. A firm can use one of three methods to analyze demand curves: 1) statistical analysis of factors affecting the relationship between prices and sales volumes. This method is quite complicated and requires qualified assistance from specialists; 2) conducting experiments with prices. This method consists in changing prices for the same product and conducting a comparative assessment of the results of sales volumes; 3) a method of surveying buyers, during which the degree of dependence of the quantity of purchased products on the level of prices for it is clarified. In addition to the demand curve, to determine the sensitivity of demand to the prices of goods, there is a concept elasticity of demand. If the demand for goods changes even with a slight change in prices, this indicates elasticity of demand. If demand remains almost unchanged when prices change, we can talk about its inelasticity. The elasticity of demand can decrease when: 1) there is no pronounced competition of similar products; 2) the increase in prices is not particularly noticeable to buyers; 3) buyers are in no hurry to change their preferences; 4) buyers associate the increase in prices with an increase in the quality of the goods; 5) the increase in prices is associated with inflation in the economic market. When demand is elastic, it makes sense for a firm to consider options for lowering prices, which can help increase profits. The elasticity of demand can have a different value for different sizes and directions of price changes, as well as for different time periods (short-term and long-term elasticity). If the maximum price of a good is determined by the demand of consumers, then the minimum price of a good is determined by the costs of the firm. In order for the company to be able to conduct successful activities, the price of goods must be set to cover all the costs of production and sale of goods, and also provide the company with a good share of profits. There are two types of costs: fixed and variable. fixed costs are those costs that do not depend on production volumes and volumes of products sold (payment for energy, heating, rent, salaries to company employees, and others). variable costs reflect the costs that are associated with the production level of the firm. Complete Costs are the sum of the fixed and variable costs of a firm. average costs are costs per unit of output. Average costs are determined by dividing the total cost by the volume of output. In order to correctly set the prices of goods, it is necessary to study the effect of production volumes on the value of costs. Having studied the influence of costs and consumer demand on pricing policies, it is also necessary to consider prices, costs and possible reactions of competing firms. With similar trade offers of the company with its main competitors, prices are set at approximately the same level. In the event that a company's product is of higher quality than a competing product, the price is set at a higher level. You should not forget about the possible reaction of competitors in response to the company’s actions and be in a state of readiness to change prices at any time. When choosing a pricing method, three main factors must be taken into account, which include: consumer demand, cost indicators, and the pricing policy of competitors. According to these factors, three price cap levels are determined. The lower level of the price cap is made up of costs, the middle level is determined by the prices of competitors, and the high level of the price cap is the opinion of buyers about the product. In order to choose the right pricing method, at least one of the factors must be considered. The simplest pricing method is the method of charging a premium to production costs per unit of output. This method is used for the following reasons: it is much easier to calculate the cost than to estimate consumer demand; firms using this method will set approximately the same price level, which will reduce competition; the application of this method is mutually beneficial for buyers and sellers. A common method of price formation is the method of price calculation, which is based on compliance with the level of profitability of capital invested in the business. The purpose of this method is to set a goal at which profit volumes provide an opportunity for a return on investment. Pricing methods include a method that uses the perception of the value of the goods by buyers. To form the idea of buyers about the value of the product on the positive side, advertising campaigns, presentations and other promotional activities are used. When using the method of setting the price based on the real value of the goods, a low price can be set for a high quality product. This method allows you to attract the attention of a larger number of buyers to the products, who will appreciate the affordable prices and good quality of the goods. In addition, the application of this method has a positive effect on the company's activities in the form of a reduction in production costs while maintaining product quality. You can set the price of goods based on the use of the current price level of competitors. Firms that are engaged in the production and sale of similar products charge approximately the same prices for goods. In the future, firms can change the established prices depending on changes in the prices of competitors, assign surcharges or discounts. The final price is set after consideration of additional factors, which include: the psychological factor of price perception, the pricing policy of the company, the attitude of other market participants to the price. When buying a product, buyers evaluate its quality characteristics, their relationship with the price, the level of prestige of the product. The level of assigned prices should correspond to the pricing policy of the company. The attitude to the prices of the company of other market participants is in the reaction to the prices of distributors, dealers, sales representatives. Adaptation of prices in the market depends on various conditions, including: geographical characteristics, differences in the requirements of individual market segments, order volumes, the use of discounts and offsets, and others. Having established the initial value of prices, in the process of selling goods, the company may find itself in a situation where it is necessary to raise or lower them. Price cuts can be accepted by the firm in situations such as low capacity utilization, a reduction in the firm's market share, and the desire for a dominant position in the market. The increase in prices can be used by the firm in the event of cost inflation, with an increase in consumer demand. Any change in prices in the market causes a reaction from consumers, market participants (distributors, dealers), suppliers and competitors. More sensitive to price changes are consumers who are interested in the motives for price changes. The most sensitive for consumers is the increase in prices for expensive and more demanded goods. The reaction of competitors to changes in firm prices can be varied. Competitors react most often when their product is similar to the firm's. If a competitive firm takes action to change prices, the firm can use ways to respond to these actions. These include: 1) maintaining the price and profit level; 2) increase in the value of the goods while maintaining the price; 3) increase in price while improving the quality of the goods; 4) price reduction; 5) creation of a new product capable of making a worthy competition; 6) situational reaction of the firm. In the process of entrepreneurial activity, a businessman is obliged to acquire the skills of conducting a pricing policy. The success of the company depends on this. Authors: Egorova E.N., Loginova E.Yu. << Back: Forms of business organization (Forms of business organization. Business partnerships. Full partnership. Individual entrepreneurship. Limited liability company (LLC). Joint-stock companies. Additional liability companies. Limited partnerships. Cooperatives. Municipal and unitary enterprises. Public and religious organizations. Associations of entrepreneurs) >> Forward: Entrepreneurial risk (Risk: concept and types. Classification of risks. Risk factors, their structure. Risk assessment. Ways to reduce risk)
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