A cash manager, among other tasks, has to collect customers’ payments and concentrate them as well as managing the disbursements related to payments becoming due. In other words he manages the time line of short term cash flows and there under also those related to receivables. Connected with these activities there are often delays. In general a float represents a delay on the collection or on the disbursement of cash flow processes. Obviously, a cash manager’s target is to reduce delays in collections. Furthermore it is common practice that cash manager try also to maximize the float on disbursements within the credit terms agreed while exceeding these terms is, from an ethical point of view, questionable. In relation to either collections or disbursements these delays can be divided into four types or components. While a payment is made by check and sent by mail we know there is a time Continue reading
Business Finance Concepts
Sources of Short Term Finance
Short term finance in business usually refers to the additional money a business requires for doing its business for short terms, which is usually a maximum period of one year. These funds are usually used for day to day operations such as payment of wages, inventory ordering, advertisement expenses and so on. The major sources of short term finance are discussed below: 1. Trade Credit Trade credit is a common source of short-term finance available to all companies. It refers to the amount payable to the suppliers of raw materials, goods etc. after an agreed period, which is generally less than a year. It is customary for all business firms to allow credit facility to their customers in trade business. Thus, it is an automatic source of finance. With the increase in production and corresponding purchases, the amount due to the creditors also increases. Thereby part of the funds required Continue reading
Hire Purchase System – Concept and Meaning
Purchase and sale of goods under a hire purchase system is different from cash sale and credit sale. In case of cash sale, the buyer pays the lump sum to the seller and immediately ownership is passed along with the goods. While in credit sale the payment is made in future. In these both cases the ownership and possession of goods pass on the buyer. However, hire purchase system is a special system of purchase and sale. In hire purchase system, the buyer acquires the property by promising to pay necessary installment payment of monthly, quarterly, half yearly or any other period. The period of payment has to be fixed while, signing the hire sell agreement. Though, the buyer acquires the asset under hire purchase system after signing the agreement, the title of ownership remains with vendor until the buyer squares up his/her entire liability. When the buyer pays the Continue reading
Factors Determining Financial Structure of a Company
Capital structure refers to the mixture of long term funds represented by equity share capital, preference share capital and long term debts. As a matter of fact, capital structure planning is one of the major tasks which involve determination of the right proportion of different securities. Each Corporate security has its own merits and demerits. Too much inclusion of any one kind of security in the capital structure of a company may prove unprofitable or subsequently risky. Therefore, a prudent financial decision should be taken after considering all the factors in view. Capital structure should always be made in the interest of equity shareholders because they are the ultimate owners of the company. However, the interest of other groups, including employees, customers, creditors, society and government should also be duly considered. In this way, efforts should be made to have capital structure most advantageous. Within the constraints, maximum use should Continue reading
Behavioral Aspects of Budgeting
Budgetary control relies greatly on the individuals of a corporation. The human aspect in the budgetary system can be very complicated since the budgetary process involves relationships between different people within the corporation which includes the chief executive officer, managers and staff. Some times budgets affect people’s behaviors and vice versa. Thus the behavioral aspects of budgeting are of vital significance and consist of many different areas that high attention must be paid. First and foremost, we need to know the factors affecting the behavioral aspects of budgeting, including: Budgets perceived by employees as being too difficult In situations that lack full participation of all levels in preparing for the budgets, the employees will perceive the budgets as being too difficult to follow. In addition, the punishment that comes along from failing to meet what this budgeted has a tendency to encourage staff’s attempts to beat the system. This greatly Continue reading
Importance of Cost of Capital
The cost of capital is very important concept in the financial decision making. Cost of capital is the measurement of the sacrifice made by investors in order to invest with a view to get a fair return in future on his investments as a reward for the postponement of his present needs. On the other hand from the point of view of the firm using the capital, cost of capital is the price paid to the investor for the use of capital provided by him. Thus, cost of capital is reward for the use of capital. The progressive management always likes to consider the importance cost of capital while taking financial decisions as it’s very relevant in the following spheres: Designing the capital structure: The cost of capital is the significant factor in designing a balanced and optimal capital structure of a firm. While designing it, the management has to Continue reading