Meaning of Flexible Budgeting Defining the term budgeting is helpful in understanding its role in an entity. Budgeting is described as a quantitative reflection of a business or an individual plan on the use of resources for a specified period of time, in many instances per year. In simpler terms, budgeting is the generation of a document that brings together approximations of income and expenditure for an upcoming period. Given the small duration that is covered, budgeting is also viewed as short-term financial arrangement or plan. In addition, budgets are taken as representations of action plans that help managers pursue business objectives. Thus, it is summed that budgeting is a comprehensive and coordinated plan, based on financial figures, pertaining to operations and resources used in an organization for a specified duration in the future. The overall objective of the budgetary process is to improve the performance of the organization. Comprehending Continue reading
Business Finance Concepts
The Objective of Shareholder Wealth Maximization
In old times, the traditional approach of companies was to maximize the owner’s profit. Modern approach puts more emphasis on Shareholder Wealth Maximization rather than owner profit maximization. This includes increasing the earnings per share (EPS) of every shareholder so that their net worth is maximized. Wealth increase is equal to what gross present worth in needed for raising profits in the future. This value needs to be discounted as per the time frame to found out the annualized rate of return for the shareholder. In Shareholder Wealth Maximization, it places priority before any other objective for the organization. Any action which has positive effective on Shareholder Wealth Maximization needs to be given priority. In any capitalistic society, the goal of business should be Shareholder Wealth Maximization as mostly the ownership of goods and services is by individuals, since, they own all the means so that they can make money. Continue reading
Labor Cost Control – Meaning and Need
Labor cost covers one of the major portion of the total cost of a product or job. It may increase unnecessarily due to inefficiency of workers, wastage of materials by workers, idle time, unusual overtime work and high labor turnover. Hence, the management should devise effective techniques for controlling labor cost to ensure maximum outputs of better quality at low cost through proper utilization of the labor force. Basically, management is concerned with controlling labor cost. Labor cost control involves such systems, procedures, techniques and tools used by the management in order to keep the labor cost of the product or job as minimum as possible. Labor cost control consists of a number of such regular activities which are carried on by various departments of the organization in a coordinated manner to ensure the availability of the best employees and their optimum utilization. It is the system followed by the Continue reading
Convertible Issues – Explanation and Significance
A convertible issue is a bond or a share of preferred stock that can be converted at the option of the holder into common stock of the same company. Once converted into common stock, the stock cannot be exchanged again for bonds or preferred stock. Issue of convertible preference shares and convertible debentures are called convertible issues. The convertible preference shares and convertible debentures are converted into equity shares. The ratio of exchange between the convertible issues and the equity shares can be stated in terms of either a conversion price or a conversion ratio. Convertible Preference Shares: The preference shares which carry the right of conversion into equity shares within a specified period, are called convertible preference shares. The issue of convertible preference shares must be duly authorized by the articles of association of the company. Convertible Debentures: Convertible debentures provide an option to holders to convert them into Continue reading
Debt Instruments – Meaning, Objectives and Features
The debt markets today are a major source of financing than the banking system. It is any market situation where debt instruments are traded. It establishes a planned environment where the debts are traded amongst the interested parties. The debt markets are known by other names based on the types of instruments are traded. For example when municipal or corporate bond are traded, debt market is called bond market whereas if notes or securities or mortgages are traded market is called credit market. The debt market is three times larger than stock/equity market. The debt markets are categorized into two other markets called money market and capital market. Money market is a subsection of the fixed income market. It specializes in short-term debts with the maturity of one-year. Capital markets specialize in long-term debts. It is a market in which financial instruments are traded by the institutions and individuals. Institutions Continue reading
Modes of Long-Term Working Capital Financing
Working capital refers to that part of the total capital employed which has been invested for the financing of current assets e.g. inventories, debtors, cash and bank balances, bills receivable, prepaid expenses etc. That is, total of all current assets is working capital. Firms need both a long-term (or permanent) investment in working capital and a short-term or cyclical one. The permanent working capital investment provides an ongoing positive net working capital position, that is, a level of current assets that exceeds current liabilities. This allows the firm to operate with a comfortable financial margin since short-term assets exceed short-term obligations and minimizes the risk of being unable to pay its employees, vendors, lenders, or the government (for taxes). To have positive net working capital, a company must finance part of its working capital on a long-term basis. Beyond this permanent working capital investment, firms need seasonal or cyclical working Continue reading