Budgets are integral parts of planning for business and attaining its perceived objectives. Accordingly business activities involving future planning use the budgetary control process. Different types of budgets to serve business purposes are in vogue, but uses of some budgets that are invariably used by businesses are taken up in detailed manner in this write up. 1. Sales Budget Sales budget is an estimate of expected sales revenue for ensuing financial period. Estimates of sales are budgeted on the basis of variety of factors like earlier period sales, production capacities, existing and expected sales environments, economic factors like trade policies of the Governments, seasonal fluctuations, entity’s capacity to create new markets, financing, advertisements and other marketing plans, and many other factors. The cornerstone of budgeting process is the sales budget because the usefulness of entire operating budget depends on it. Some important uses of sales budget are enumerated as under: 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.
What is Expense Center?
In expense centers, inputs or expenses are measured in monetary terms whereas the outputs are not measured in monetary terms. There are two types of expense centers – engineered expense centers and discretionary expense centers. Engineered expense centers: In these centers, inputs or expenses are measured in monetary terms and outputs are measured in physical terms. These centers are usually found in the manufacturing units that use a standard cost system. There are certain responsibility centers within administrative and support departments that actually are engineered expense centers. In these centers, the cost of the product is determined by multiplying the output of each unit with its standard cost. Its efficiency is measured by comparing the actual cost with the standard cost. Discretionary expense centers: In discretionary expense centers, the output cannot be measured in monetary terms. Discretionary expense centers include administrative and support units like legal, accounting, Continue reading
Term Loan Appraisal
The primary task of a lending institutions before granting a term loan is to assure itself that the anticipated rise in the income of the borrowing unit would materialize, thus providing the necessary funds for repaying the loans according to the terms of amortization. The liquidity of term loans depends not so much on the short-run sale ability of the goods and commodities as on the increased term loan income of borrowing units resulting from a higher level of utilization of existing installed capacity. For assessing the risks involved in term lending, the normal criteria used for judging the soundness of short-term loans are often unreliable and inadequate. The methods of analysis and the standard to be adopted for appraisal of term loans are more similar to investment decisions than to short-term lending. Appraisal of term-loans requires a dynamic approach involving, inter alia, a projection of future trends of Continue reading
Importance of Financial Statements to External Users
In the presence of globalization, financial statements have become the standard measurement in judging a company’s performance. Financial statements are an overall impression of the company which shows profitability, efficient utilization of assets, settlement of outstanding debts, management of equity, and liquidity position to make economic and business decisions by both internal and external users. The analysis of financial statements is the application of financial activities and additional facts of the business, the examination of historical, present, and possible results and monetary situation to make investing, financing, and commercial decisions. External decision makers of an organization are defined as potential shareholders, clients, creditors (banks), and tax authorities who need a financial record to give decisions about investment, approval of loan application, acquisition of products, and compliance with applicable tax laws and regulations. This article will assess the importance of financial statements to external users in addition to a qualitative factor. Continue reading
Some Inhibiting Factors that Affect the Derivative Instruments
Though derivatives are very useful for managing various risks, there are certain inhibiting factors which stand in their way. They are as follows: (i.) Misconception of Derivatives: There is a wrong feeling that derivatives would bring in financial collapse. There is an enormous negative publicity in the wake of a few incidents of financial misadventure. For instance, Barings had its entire net worth wiped out as a result of its trading and options writing on the Nikkie index futures. There are some other similar incidents like this. To quote a few: Procter and Gamble, Indah Kiat, Showa Shell etc. However it must be understood that derivatives are not the root cause for all these troubles. Derivatives themselves cannot cause such mishaps. But, the improper handling of these instruments is the main cause for this and one can not simply blame derivatives for all these mishappenings. (ii.) Leveraging: One the important Continue reading
Accounting Concepts Used for the Preparation of Financial Statements
Basic accounting concepts used for the preparation of financial statements are: Money measurement concept – Accounting normally deals with only those items that are capable of being expressed in monetary terms. Money has the advantage that it is a useful common denominator with which to express the wide variety of recourses held by a business. However, not all such resources are capable of being measured in monetary terms and so will be excluded from a balance sheet. The money measurement concept, thus, limits the scope of accounting reports. Historic cost concept – Assets are shown on the balance at a value that is based on their historic cost (that is, acquisition cost). This method of measuring asset value has been adopted by accountants in preference to methods based on some form of current value. Many commentators find this particular convection difficult to support as outdated historic cost are unlikely to Continue reading