Role and responsibilities of a finance manager have undergone a remarkable transformation during the past four decades. Not too many years ago, finance manager had a very limited role in a business enterprise. Finance manager was responsible only for maintaining financial records, preparing reports on the company’s status and performance and arranging funds needed by the company so that it could meet its obligations in time. Finance manager, as a matter of fact, was regarded as specialized staff officer in the company concerned only with administering sources of funds. Finance manager was called upon only when his specialty was needed. For example, when the company experienced the problem of dearth of funds, the management expected the finance manager to locate suitable sources of funds and procure additional funds. However, the finance manager transcended his traditional role of garnering external funds for the enterprise following technological changes in major industries, increased Continue reading
Business Finance Concepts
Why Shareholder Wealth Maximization is Important in Business?
In modern finance, it is proven that shareholder wealth maximization is the superior goal of a firm and shareholders are the residual claimants; therefore maximizing shareholder returns usually implies that firms must also satisfy stakeholders such as customers, employees, suppliers, local communities, and the environment first. Also, a firm’s value can not be maximized if the management board or shareholders ignores the interest of its stakeholders. Thus, the main goal of a firm is to maximize shareholder wealth but it does not mean that management should disregard stakeholders. To begin with, it is necessary to understand what is shareholder wealth and why maximizing shareholder wealth is a superior objective? Maximizing shareholder wealth is defined as maximizing purchasing power as well as the flow of dividends to shareholders through time and it is a long-term perspective. In addition, a very important point to explain why shareholder wealth maximization is superior objective Continue reading
Motives for Holding Cash – Cash Management Concepts
Cash is the medium of exchange on the common purchasing power and which is the most important component of working capital. It includes coins, currency, cheques held by the firm and the balances in its bank accounts. Sometimes near-cash items also are included.’ Cash is the basic input required to keep the firm running on a continuous basis. At the same time it is the ultimate output expected to be realized by selling goods and services. A firm should hold sufficient cash, neither more, not less. An excessive cash remains idle which simply increases the cost without contributing anything towards the profitability of the firm and in the opposite case, trading and/ or manufacturing operation will be disrupted. Not only that, it largely upholds, under given condition, the quantum of other ingredients of working capital, viz., inventories and debtors, that may be needed for a given scale and type of Continue reading
Bonds and Debentures
Definition of Debentures A company may not with to possess itself of the use of more share capital or ownership securities, and yet desire more available money. It may invite persons to kind their money as a loan, instead of contributing it as a part of the capital. Money so lent must also be recorded and acknowledged. The document which the lender receives is called a debenture. The holder of this debenture is a creditor of the company, while the shareholder is one of the proprietors of the capital of the company and so responsible for its liabilities. The debenture holder is one of the liabilities for which the shareholder is responsible. Thus a company in order to secure long-term finance for initial needs and more often for extensions and developments to supplement its capital may issue debentures or “creditorship securities”. In fact in every country, debenture issue is one Continue reading
Foreign Capital
Foreign capital or investment has become significant part of sources of funding for various projects in every country. This source of funding has received the attention of both the government as well as the corporate sector that there has been increasing reliance on this source for planning and execution of projects by the government as well as the corporate sector. Foreign capital can come into a country in different forms. Let us first understand these forms of foreign capital before discussing the need for foreign capital. Forms of Foreign Capital Direct Entrepreneurial Investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad Continue reading
The Fundamental and Enhancing Qualitative Characteristics of Financial Information
The purpose of financial statements is to give financial statements information about the change in financial position, financial performance and financial position of the organization. These can provide data use in decision making such as investment, credit and economic decision making which are useful for various users. There are seven main groups of users which are public, investors, lenders, employees, customers, supplies, government and other agencies and the needs of information is different for each group, for instance, employee will interest on the profitability, retirement benefits and employment opportunities and so on. The qualitative characteristics can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. However, it can limited by two pervasive constraints which is cost and materiality in providing useful financial information. Fundamental Qualitative Characteristics of Financial Information Relevance: Relevant financial reporting information Continue reading