Fixed capital means the portion of the capital, which is meant for meeting the permanent or long-term needs of the business. In other words fixed capital is required for the acquisition of those assets that are to be used over a long period. So, Fixed capital is an alternative term for fixed assets. Fixed capital is required for acquisition of the following assets: Tangible assets such as land, buildings, plant and machinery, furniture and fittings, etc. Intangible assets such as goodwill, patents, copyrights, promotion, cost, etc. It should be noted that the fixed assets couldn’t be withdrawn from the business without disturbing the normal working of the undertaking. It is, therefore, necessary that sufficient funds are raised for acquisition of fixed assets. These funds are required not only while establishing a new enterprise but also for expanding, diversifying and maintaining intact the existing enterprise. Assessment of Fixed Capital Requirements The Continue reading
Business Finance Concepts
Earnings Management – Meaning, Definition, Motives and Strategies
Over the past two decades there has been collapses in corporate sector affecting various companies including Enron, American International Group (AIG), HIH Insurance and National Bank of Fiji. Due to these collapses, the need for proper management of the earning or revenue generated by the company has become the very significant part as main objective of every company. Along with this objective, managers of the organization have different incentives to manage the earning of the company. Management of earnings means structuring the financial transactions and statements in the manner so as to have maximum benefit. It tries to mislead the users of the financial statements by presenting the earnings as budgeted or thought by the management instead of presenting the actual performance made by the company during the period. The different incentives for earnings management are – increased managerial remuneration, management buyout and managing the regulatory concerns imposed by different authorities. Continue reading
Inefficient Working Capital Management
Working capital management is an important component of management of corporate finance; since it directly influences firm’s profitability as well as liquidity in everyday activities. In any business organization, it is obvious that there must be sufficient working capital to run day to day operation. Therefore, to operate the business activities smoothly, working capital of firm’s must be sufficient. Then, the concern of working capital management is setting sufficient (optimal level) of working capital and managing short term assets and liabilities of firms within a specified period of time, usually one year. It is obvious that, the importance of efficient working capital management is unquestionable to all business activities. Because, business capability relies on its ability to effectively use (manage) receivables, inventories and payables. If there are excessive stock, debtors and cash and very few creditors, there will be an over investment in current asset. The inefficiency of managing working Continue reading
Corporate Finance – Concept and Meaning
Business firms and government organizations do need to implement various programs to achieve their goals. Implementing programs require resources such as natural resources, human resources and financial resources. Effectiveness in the management of financial resources is key to optimize the use of natural and human resources. In the case of individual, management of financial resources or funds is known as personal finance. The same is called by public finance in government organizations. Corporate finance is used to refer to the management of funds in the context of business firm. Thus, finance as a discipline is classified into three domains: public finance, business finance and personal finance. Public finance is the management of funds for governments: both local government and central government. Traditionally, it deals with the management of revenue and expenditure of government. Personal finance refers to the management of funds of and individual. Generally, business finance, corporate finance and Continue reading
Advantages and Disadvantages of Different Sources of Finance
Finance is essential for a business’s operation, development and expansion. Finance is the core limiting factor for most businesses and therefore it is crucial for businesses to manage their financial resources properly. Finance is available to a business from a variety of sources both internal and external. It is also crucial for businesses to choose the most appropriate source of finance for its several needs as different sources have its own benefits and costs. 1. Personal Savings This is the amount of personal money an owner, partner or shareholder of a business has at his disposal to do whatever he wants.When a business seeks to borrow the personal money of a shareholder, partner or owner for a business’s financial needs the source of finance is known as personal savings. Advantages; The owner would not want collateral to lend money to the business. There is no paperwork required. The money need Continue reading
Shareholder Wealth Maximization
According to the maximization model, there are three types of maximization in a company, which are shareholder maximization, stakeholder-owner maximization and total stakeholder maximization. Shareholder wealth maximization is a particular case of stakeholder-owner maximization, where only the pure owner interest as supplier of risk-capital is considered in the maximization. The stakeholder-owner has particular resources and interests which are important for the commitment of other stakeholders and thus for the economic performance of the venture as a whole and for the distribution of stakeholder benefits. Examples of such stakeholder-owners would include managers within the company who were also shareholders or suppliers who had an interest in the ownership of the company. Total stakeholder maximization includes the advantages for all groups, such as employees, local communities, shareholders, suppliers, customers, investors and partners. Among the three maximization of a company, shareholder wealth maximization plays a significant role and indeed more important than the Continue reading