Meaning of Accounts Receivables When goods and services are sold under an agreement permitting the customer to pay for them at a later date, the amount due from the customer is recorded as accounts receivables; So, receivables are assets accounts representing amounts owed to the firm as a result of the credit sale of goods and services in the ordinary course of business. The value of these claims is carried on to the assets side of the balance sheet under titles such as accounts receivable, trade receivables or customer receivables. This term can be defined as “debt owed to the firm by customers arising from sale of goods or services in ordinary course of business.” According to Robert N. Anthony, “Accounts receivables are amounts owed to the business enterprise, usually by its customers. Sometimes it is broken down into trade accounts receivables; the former refers to amounts owed by customers, Continue reading
Business Finance Concepts
Difference between Venture Capital & Other Funds
Venture Capital Vs Development Funds Venture capital differs from Development funds as latter means putting up of industries without much consideration of use of new technology or new entrepreneurial venture but having a focus on underdeveloped areas (locations). In majority of cases it is in the form of loan capital and proportion of equity is very thin. Development finance is security oriented and liquidity prone. The criteria for investment are proven track record of company and its promoters, and sufficient cash generation to provide for returns (principal and interest). The development bank safeguards its interest through collateral. They have no say in working of the enterprise except safeguarding their interest by having a nominee director. They do not play any active role in the enterprise except ensuring flow of information and proper management information system, regular board meetings, adherence to statutory requirements for effective management control where as Venture capitalist Continue reading
Why Wealth Maximization is Considered to be Better Operating Goal?
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
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
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
Factors to Consider when Choosing a Source of Finance
There are many sources of finance available to a business. Finance is needed for several purposes and different purposes need sources of finance which are most suitable to them. When choosing an appropriate source of finance some factors have to be considered. The factors that need to be considered when choosing an appropriate source of finance are: The amount of money needed: This is the amount of finance the organisation wants to raise. Not all sources of finance provide all amounts of funds. Some sources are notable to raise large amounts of funds whereas others are not flexible enough to put up for the small sum of money the business requires. Therefore it is necessary to identify the amount of money needed by the company to choose a suitable source of finance. For example borrowing a commercial loan for a small and short-term cash-flow problem is unwise because loans may Continue reading