🔍
Introduction To Financial Management【Deric Business Class】 - YouTube
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hey guys welcome to derek business class
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in this video i'm gonna make a short
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introduction to financial management the
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first question is what is finance
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finance can be defined as the art and
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science of managing money art is like
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dancing singing drawing something which
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is based on feeling but science is more
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about facts and figures you have to do
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experiment come out with theories to
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explain what you believe so finance is
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basically a mix of art and science of
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managing money the key word here is
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managing money finance is all about
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managing money that's what we call
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financial management financial
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management is a very important aspect
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for companies it's because financial
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management is about maintenance and
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creation of economic value or wealth
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what is wealth let's take an example
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let's say the market value of company a
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is 100 billion dollars investors of
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company a all together invested thirty
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billion dollars so taking 100 billion
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dollars minus 30 billion dollars you
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will get seventy billion dollars this
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amount of money is what we call wealth
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created for investors shareholders only
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paid thirty billion dollars to buy the
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shares but the company created extra
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seventy billion dollars for the
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shareholders of course this is gonna be
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a good sign for investors as the value
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of the company has increased
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for finance it has two broad topics
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personal finance and corporate finance
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personal finances about how people
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manage their own money it would answer
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the questions such as how much they
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spend how much they save and how they
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invest their savings this is more for
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individual financial planning but for
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corporate finance this is all about how
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to manage company's money it would
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answer the questions such as how firms
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raise money from investors how firms
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invest money to earn a profit whether to
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reinvest profits in the business or
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distribute them back to investors for
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the following classes my focus will be
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on corporate finance which is about how
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to manage companies money you may ask a
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question if you are studying finance
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what occupation can you choose after you
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graduate alright for career
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opportunities you may work in banking
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industry help people do personal
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financial planning or investments become
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a real estate or property agent or
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probably an insurance agent
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another question that people may ask is
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is finance the same as accounting the
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answer can be yes and no yes because
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some functions of finance and accounting
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are closely related and overlapping no
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because they have some differences
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finance people are basically treasurer's
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whilst accounting people are controllers
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finance people always focus on how to
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invest how to make more money for the
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company
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they are just like the accelerator of a
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car to make a car move you have to press
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on the accelerator the harder you press
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the faster the car can move but at the
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same time you need to have a break this
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is the function of accounting which we
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call them controllers when finance
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people are moving too fast investing too
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much money in too many projects
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accounting people the brake will slow
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them down for safety purpose in smaller
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firms the financial manager generally
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performs both functions only in big
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corporations we will have two separate
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finance and accounting departments
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another thing about finance is that it
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deals with cash flows the focus of
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Finance is on how to manage cash but
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accounting applies accrual method in
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which accounting focuses on making
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proper records for transactions
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let's take an example company a
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experienced the following activity last
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year company sales was $100,000 with one
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car sold but customer has not made the
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payment that's why it is 100 percent
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still uncollected
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the cost of the car is $80,000 the
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company has already paid and full amount
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under supplier terms if you were to
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prepare an income statement under
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accounting record which is the accrual
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method you would recognize a sales of
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$100,000 costs of $80,000 so the company
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made a profit of $20,000 but under
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finance record which is the cash method
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since you had not received cash from the
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customer you would recognize a sales of
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$0 but you have already paid the
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supplier so there would be a cost of
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$80,000 eventually the company made a
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net loss of $80,000 for selling the car
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this example is to show us the
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difference between accounting and
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finance records
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next part we are gonna talk about the
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goal of a firm it is about what target a
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company wants to achieve the first one
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profit maximization profit maximization
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refers to how much dollar profit the
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company makes how to make the most
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profits from the business some companies
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may choose to increase the current
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profits by cutting research and
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development expenditures such method is
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a short term approach mostly concerned
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about short-term benefits only if
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company cuts the budget for R&D it may
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not be able to come out with new
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products eventually the company cannot
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survive in the long run another problem
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with profit maximization is that it
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ignores the timing of returns magnitude
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of returns and risk when you will
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receive the money how much money you
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will receive and how much is the risk
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these questions are not answered if
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companies only focus on profits third
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fulfilling objective of earning profit
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may not help in creating wealth in the
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long run profit should not be the only
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target of a company rather companies
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should look at how to create wealth
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wealth means value in fact companies
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should focus more on creating value for
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the company lastly it does not consider
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the social responsibility if the goal of
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a company is just to make profit it may
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not make donation it may not care about
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air pollution but nowadays social
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responsibility is very important for
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company to survive in the long run
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another goal of a firm is about
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shareholder wealth maximization it
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focuses on maximizing the value of a
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company when we say the value of a
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company it means the value of the stock
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or share so it is a long-term approach
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mostly concerned about the value of
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financial assets financial assets
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includes bonds shares and so on
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next it considers the timing of returns
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magnitude of returns and risk it will
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answer the following questions like when
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you will receive the money how much
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money you will receive and how much is
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the risk these are the important
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criteria of doing a business how to
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increase the value of a company for
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examples company may invest in new
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projects company may think of how to
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improve the quality of products not to
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cut the cost but to control the cost by
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improving the production process
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probably the old way of production is to
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take 10 steps to manufacture product but
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if you can come out with a better way of
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production reduce the process to 5 steps
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only you can control the cost some
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companies like uber grab car initially
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they were selling their products without
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making a profit
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some companies may even sell their
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products at a loss in order to gain the
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market share think about Google Gmail
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how can we use their service for free
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because the company aims at creating
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value for the company that's why the
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share price of Google is so expensive in
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short shareholder wealth means the share
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price or the firm's value maximizing
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shareholder wealth means maximizing the
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share price and also maximizing the
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firm's value
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in fact some companies focus on profit
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whilst some companies focus on value
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profit versus value which one is more
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important to company
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well profit is a subset of value which
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means that profit is only a small part
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of value as shown in the graph under
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value we have profit quality branding
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market share R&D and culture of company
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these are the factors that contribute to
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the value of a company that's why profit
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is not everything profit is just a small
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part of the value in other words
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creating value will help create profit
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but making profit does not necessarily
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create value for a company
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another goal of a firm is a stakeholder
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view stakeholders include all groups of
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individuals who have a direct economic
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link to the firm such as employees
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customers suppliers creditors community
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environment and so on
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companies should not only take care of
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the shareholders but also others in the
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process of making profit companies
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should avoid actions that could harm the
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interests of its stakeholders taking
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care of the stakeholders is not to
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maximize but to preserve stakeholder
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well-being for example donate money to
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the community to build schools or
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hospitals to prevent pollution of
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environment to take good care of the
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employees these are some examples of
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taking care of stakeholders such a view
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is considered to be socially responsible
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we usually call this as corporate social
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responsibility CSR more and more
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companies are contributing in csr which
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they believe that CSR would improve the
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financial performance of the company
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alright that's all for this video thanks
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for watching see you in the next one bye
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