Seed capital means the initial capital used to start a business. Seed capital often comes from the company founders’ personal assets or from friends and family. The amount of money is usually relatively small because the business is still in the idea or conceptual stage. Such a venture is generally at a pre-revenue stage and seed capital is needed for research & development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of venture capitalists. Seed capital is needed to get most businesses off the ground. It is considered a high-risk investment, but one that can reap major rewards if the company becomes a growth enterprise. This type of funding is often obtained in exchange for an equity stake in the enterprise, although with less formal contractual overhead than standard equity financing. Banks and venture capital investors view seed capital Continue reading
Business Finance Concepts
Bankruptcy Recovery Strategies
A firm is said to be bankrupt or in financial distress if it is unable to meet its current obligations to the creditors. Bankruptcy may occur because of a number of external and internal factors. The primary cause of a firm encountering financial distress starts when it finds it difficult to meet the scheduled payments or when the cash flow projections of the firm are indicative of the fact that it will soon be unable to do so. Some important business bankruptcy recovery strategies are: 1. Settlements without going through Formal Bankruptcy When a firm goes through the period of financial distress, it is very important for its management and creditors to decide whether the problem is a temporary one and it is possible for the firm to continue its operations or whether the problem is more serious and permanent in nature that has the possibility of endangering the life Continue reading
Investment Center Performance Evaluation
Investment centers are decentralized divisions or sub-units for which the manager has maximum discretion in determining not only short-term operating decision on product mix, pricing and production methods, but also level and type of investment. An investment center extends the profit center concept in that the measured profit is related to the center investment. It may be described as a special form of profit center since a profitability measure is being developed for the center. The concept relating profits to assets employed has an intuitive appeal for it for indicates whether the return for the capital invested in the division and it is important that an evaluation be made the overall company are earning on in elaborate systems for authorizing capital investment center performance can be the aggregation of past and present capital projects each project individually. Such a measurement also provides an incentive for division managers to monitor Continue reading
Exchange Rate Determination Models
Determination of the exchange rate is as simple as the determination of price of any commodity or product or service. Only thing, here the commodity itself is one currency, so price of one currency in terms of another is required. But the caveat is determination of price of any commodity/product/service is not that simple. The determinants of the exchange rate are too many to consider. Yet certain macro variables would capture the same. Flow models and asset models are used in exchange rate determination. These are explained below: 1. Flow Model The flow model of exchange rate determination simply is based on demand and supply of Forex. Demand for foreign exchange takes place whenever a country imports goods and services, people of a country undertake visits to other countries, citizens of a country remit money abroad and whatever purpose, business units set up foreign subsidiaries and so on. In all Continue reading
Concept of Surplus in Financial Management
There are different views regarding the meaning and concept of surplus in financial management. According to one school of thought, the balance remaining after deducting the liabilities and share capital from the total of assets is known as ‘surplus‘. In the opinion of the other school, ‘surplus‘ represents the ‘undistributed earnings’ of a company, i.e., the balance of profits remaining after paying dividends to the shareholders. Still, there are others in whose opinion ‘surplus‘ is a left over which represents an addition to assets that is carried over on the ‘equity side’. But, surplus is solely equity of stock-holders and not an asset in any sense of the word. In simple words, ‘surplus‘ may be described as the net income of the company remaining after payment of dividend and all other expenses. It is the difference between the book value of the assets and the sum of liabilities and capital. Continue reading
Zero Based Budgeting
Traditional budgeting starts with previous year expenditure level as a base and then discussion is focused on certain “additions” or “cuts” to be made in the previous year spending. The top management finally gives its approval after hearing the arguments for and against the “additions and “cuts”. In Zero Based Budgeting (ZBB) reference, is not made to previous level of spending. A convincing case is made for each decision unit to justify the budget allotment for that unit during that period. Zero Based Budgeting differs from traditional budgeting on many points and following tire a few points of difference between the two systems of budgeting: Traditional Budgeting Vs Zero Based Budgeting Traditional budgeting is accounting-oriented and mainly lays its emphasis in previous year expenditure. Zero Based Budgeting is decision-oriented and makes all projects and programmes old and new to complete for scarce resources. In traditional budgeting, past expenditure forms the Continue reading