Definitively, a budget refers to forecast of company’s incomes and expenses anticipated for a given period of time. With a budget, an organization is able to analyze how much money they are making and spending, and they are able to figure the best way to channel it among various categories and departments. Budgeting depicts the entire process of analyzing and planning using a budget. Since budgets are vital tools for management and planning, the process of budgeting generally affects all types of organizations regardless of their size and composition. Many organizations participate in budgeting process with the view of determining the most cost effective and efficient strategies of making profits and intensifying its capital and asset base. In management, budgeting guides an organization to use its scarce resources in a way that exploits the existing business opportunities well. Good budgeting concepts integrate efficient business judgment and help the management to Continue reading
Financial Management
Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow, including the administration and maintenance of financial assets. The primary concern of financial management is the assessment rather than the techniques of financial quantification. Some experts refer to financial management as the science of money management. The five basic components of the Financial Management Framework are: Planning and Analysis, Asset and Liability Management, Reporting, Transaction Processing and Control.
Strategies to Resolve the Principal Agent Problem
The principal agent problem refers to difficulties of motivating one party the agent to act for the best interest of the other party the principal. In a company, the owners of the assets (the stockholder) are the principals and the managers of the company are the agents. The stockholders of the company authorize the managers to manage and use their resources to make profit for the stockholders. The cause of the principal agent problem is that the information asymmetry between the principal and the agent and the principal and agent have different interests. Generally, the Agents are the managers of the resources and have more information than the principals. In a company, the managers of the company will have more information about the company than the stockholders of the company. The agents may use this asymmetric information to get interest for themselves rather than the principals. In general, the principal Continue reading
Working Capital Concepts
Working Capital, being lifeblood for any enterprise, its management becomes a crucial exercise for the Financial Manager of a firm. The need of working capital is directly linked to the growth of the firm. Working Capital refers to the funds invested in the current assets of a firm such as raw materials, work-in-progress, finished goods, receivables, cash etc. From the viewpoint of manufacturing process, working capital means that part of capital, which is required to keep the flow of production smooth and continuous. For day-to-day operations, a business needs to carry certain amount of raw material of all sorts so that commencement of production is not delayed, certain amount of work-in-process so that production operations go smoothly, certain amount of finished goods so that supply to market is not hampered by fluctuations in production, certain amount of book debts so that sales take place continuously and certain amount of Continue reading
The Cost of Preference Capital
The measurement of the cost of preference capital poses some conceptual difficulty. In the case of debt, there is a binding legal obligation on the firm to pay interest, and the interest constitutes the basis to calculate the cost of debt. However, in the case of preference capital, payment of dividends is not legally binding on the firm and even if the dividends are paid, it is not a charge on earnings; rather it is a distribution or appropriation of earnings to preference shareholders. One may be, therefore, tempted to conclude that the dividends on preference capital do not constitute cost. This is not true. The cost of preference capital is a function of the dividend expected by investors. Preference capital is never issued with an intention not to pay dividends. Although it is not legally binding upon the firm to pay dividends on preference capital, yet it is generally Continue reading
Management Accounting Best Practices – Cost Allocation
Cost allocation is the process of identifying and assigning the costs of services necessary for the operation of a business or other type of entity. Unlike a cost rating, the allocation is less concerned with the actual amount of the cost, and more concerned with allocating or assigning the cost to the correct unit within the organization. From this perspective, cost allocation can be seen as a tool that helps track all costs associated with the ongoing operation more efficiently, since each cost is associated with specific departments or groups of departments within the organization. A simple example of cost allocation would be the wages or salary of an employee assigned to work in a specific department. In a hospital, a nurse is normally assigned to a specific wing or floor, with the costs allocated to the general operation of that unit. As long as the nurse continues to work Continue reading
Concept of Internal Controls in Accounting
What are Internal Controls? In a broad sense, internal control comprises controls which embrace the organizational plan and the methods used to protection the assets, create the dependability of financial data and records, endorse working efficacy and loyalty to managerial policies. Internal control is categorized by independence between departments and lines of vicarious duty and authority. It is important that these internal controls verify the dependability and correctness of the data supportive all transactions using control total techniques, sanctions and approvals, contrasts, and other tests of data accuracy. Why Internal Controls are Important? Before management can make judgments to maximize the long run profit of a firm, it must first have dependable accounting data on which to base these decisions. This info should be timely, accurate, complete, and reliable. The protection of the assets of the firm against losses from misappropriation, robbery, failure to take discounts, inadequacy, and unjustified delays Continue reading