The wealth maximization objective is almost universally accepted goal of a firm. According to this objective, the managers should take decisions that maximize the shareholders’ wealth. In other words, it is to make the shareholders as rich as possible. Shareholders’ wealth is maximized when a decision generates net present value. The net present value is the difference between present value of the benefits of a project and present value of its costs. A decision that has a positive net present value creates wealth for shareholders and a decision that has a negative net present value destroys wealth of shareholders. Therefore, only those projects which have positive net present value should be accepted. For example, suppose a firm invests $ 10,000 in a project that generates net cash flow $ 3,000 each year for five years. If the firm requires 10% return on its capital, the net present value of the Continue reading
Business Finance
Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.
Limitations of Budgetary Control
Every business firms have main objective to maximize the profits and to minimize the costs. No organisation can survive in this competitive market without the minimization of costs. Budgetary control system is very helpful in bringing economy in the business. Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as, “The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision”. Management must consider the following limitations of budgetary control as a device to solve managerial problems: Budgeting is not an exact science; its success depends upon the precision of estimates. Estimates are based on facts and managerial judgment. Managerial judgment can suffer from subjectivity and personal biases. The efficiency of budgeting thus depends Continue reading
Risks Associated with Payment Systems and Risk Mitigation Measures
Risks in payment systems In any payment transaction, there will be a time lag between the time payment instructions are issued and final settlement of these claims (either on gross or net basis). This time lag exposes the entire system to various risks which are given below: Credit Risk: the risk that a party within the system will be unable fully to meet its financial obligations within the system either when due or at any time in the future Liquidity Risk: the risk that a party within the system will have insufficient funds to meet financial obligations within the system as and when expected although it may be able to do so at sometime in the future Legal Risk: the risk that a poor legal framework or legal uncertainties will cause or exacerbate credit or liquidity risks Operational Risk: the risk that operational factors such as technical malfunctions or operational Continue reading
Bank Risk Exposure Types – On-balance Sheet and Off-Balance Sheet Exposures
Generally, credit risk is related to the traditional bank lending activities, while it also comes from holding bonds and other securities. Basel (1999) reports that for most banks, loans are the largest and most obvious source of credit risk; however, throughout the activities of a bank, which include in the banking book as well as in the trading book, and both on and off the balance sheet, there are also other sources of credit risk. Various financial instruments including acceptances, inter-bank transactions, financial futures, guarantees, etc increase banks’ credit risk. Therefore, it is indispensable to identify all the credit exposures— the possible sources of credit risk for most banks, which can also serve as a starting point for the following parts of this work. 1. On-balance Sheet Exposures Commercial and industrial, real estate, consumer and others are the most common types of loans. Commercial and industrial loans can be made Continue reading
Introduction to Commercial Credit Analysis
Businessmen need loans for their businessess. There are many instances when the applicant (businessman), unaware of the bank’s needs, does not present all the details required or presents it in a manner that causes the Bank to reject the application. At other times, as the information given is incomplete, the applicant is harassed by demands for more information and then after he has submitted that asked for for yet some more. Time drags on while the bedeviled applicant runs hither and thither exasperated, frustrated and harrowed. The banker is also exasperated, frustrated and harrowed. He exists to make loans but before he approves the application and permits disbursal, as a responsible professional, he has to be convinced that the borrower has the capacity and the willingness to repay. Nothing thrills him more than a well presented detailed application that addresses all the concerns that he may have. Credit Management seeks Continue reading
Case Studies on Debt Recovery Management
Case Study 1: HDFC Bank Recovery Mr.Kaushik Agarwal, about 18 months back had purchased 1 Tata Indigo, financed by HDFC bank. His EMI for this month (May’08) was bounced due to some reasons. The recovery person called him on the 22nd May for the payment of the same. He was out of town at that moment so Mr.Kaushik had asked him to send someone to his office on the 24th to collect cash. Now on 24th it slipped out of Kaushik’s mind that he had to pay cash to HDFC Bank and hence he did not withdraw any cash from the bank. As it was a Saturday so when the person came for collection, he requested him to come on Monday, as the bank was already closed for the day. On this the person, who had called Kaushik earlier on the 22nd, called him again and started shouting at him Continue reading