Budgeting is a basic and essential process in a business which allows businesses to gain many goals in one course of action. The budgeting process may be carried out by individuals or by companies to estimate whether the person/company can continue to operate with its projected income and expenses. There are several purposes to create and implement a budget include control and evaluation, planning, communication, and motivation. Control and Evaluation This is most important matter after finalized a budget is providing sufficient control and evaluating its performance.If performance does not meet the budget, action can be taken immediately to adjust activities. Budgeting allows a company to have a certain range of control over costs, such as reducing many types of unnecessary expenses or assigning responsibility for these expenses. A budget also gives a company a benchmark by which to evaluate business units, departments, and even individual managers. Unfortunately this purpose Continue reading
Business Finance Concepts
Investment Center
Profit centers, by definition, are really not quite like independent firms. Profit centers do not incorporate allocation of invested capital and appropriate cost of such capital. Where the profit-center concept for control purposes is extended to include such items, the result is known as an investment center. Investment centers may be thought of as profit centers with the addition of an asset base. Investment center is the ultimate extension of the responsibility idea. It is a center in which the head of the center is held responsible for the use of the assets as well as revenues and expenses. In other words, he is expected to earn a satisfactory return on the assets employed in his responsibility center. However, the selection of the appropriate asset base can present difficulties. Three fundamental questions must be resolved in arriving at an asset base appropriate for a particular investment center: Which assets should Continue reading
The Benefits and Limitations of Budgets
A budget is a comprehensive, formal, coordinated, detailed, quantitative plan that estimates the probable expenditures for acquiring and using financial and other resource for an organization over a specific time period. Budgeting describes the overall process from preparing budget, using budgets during the business operation, and later performance evaluation. It provides us the valuable tools for planning and control of finances and affects nearly every type of organization-from governments and large corporations to small businesses-as well as families and individuals. A small business generally engages in budgeting to determine the most efficient and effective strategies for making money and expanding its asset base. Budgeting can help a company use its limited financial and human resources in a manner which best exploit existing business opportunities such production expansion and acquisition that might otherwise miss. A good and through understanding of how budgeting works is a must for ambitious business executive if Continue reading
Advantages and Disadvantages of Activity Based Costing (ABC)
Activity based costing (ABC) is a costing model that recognizes activities in a company and assigns the cost of each activity resource to all products and services according to the actual use by each: it assigns more indirect costs overhead into direct costs. In this method a company can exactly estimate the cost of its individual products and services for the purposes of recognizing and reducing those which are unbeneficial and lowering the prices of those which are overpriced. In a business organization, the Activity based costing method assigns an organization’s resource costs through activities to the products and services given to its consumers. It is commonly used as a device for understanding product and consumer cost and profitability. As such, Activity based costing has predominantly been utilized to support strategic decisions such as pricing, outsourcing and recognition and measurement of procedure enhancement initiatives. Activity based costing is basically a Continue reading
Capital Sources for Business: Bonds
A bond is a type of loan. Bonds are certificates of debt that is issued by a government or corporation in order to raise money with a promise to pay a specified sum of money at a fixed time in the future and carrying interest at a fixed rate. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). The main types of bonds are corporate bond, municipal bond, Treasury bond, Treasury note, Treasury bill, and zero-coupon bond. It is a tradable debt instrument that might be sold at above or below par (the amount paid out at maturity), and are rated by bond rating services to specify likelihood of default. Bonds are relatively more secured than equity and has priority over shareholders if the company becomes insolvent and its assets are distributed. There is no legal distinction between a debenture Continue reading
Marakon Model of Shareholder Value Creation
The Marakon model was developed by Marakon Associates, a management consulting firm known for its work in the field of value-based management. According to Marakon model, a firm’s value is measured by the ratio of its market value to the book value. An increase in this ratio depicts an increase in the value of the firm, and a reduction reflects a reduction in the firm’s value. The model further states that a firm can maximize its value by following these four steps: Understand the financial factors that determine the firm’s value Understand the strategic forces that affect the value of the firm Formulate strategies that lead to a higher value for the firm Create internal structures to counter the divergence between the shareholders goals and the management’s goals. 1. Financial Factors The first step in this model is to identify the financial factors that affect the value of the firm. Continue reading