Budgets are integral parts of planning for business and attaining its perceived objectives. Accordingly business activities involving future planning use the budgetary control process. Different types of budgets to serve business purposes are in vogue, but uses of some budgets that are invariably used by businesses are taken up in detailed manner in this write up. 1. Sales Budget Sales budget is an estimate of expected sales revenue for ensuing financial period. Estimates of sales are budgeted on the basis of variety of factors like earlier period sales, production capacities, existing and expected sales environments, economic factors like trade policies of the Governments, seasonal fluctuations, entity’s capacity to create new markets, financing, advertisements and other marketing plans, and many other factors. The cornerstone of budgeting process is the sales budget because the usefulness of entire operating budget depends on it. Some important uses of sales budget are enumerated as under: Continue reading
Business Finance Terms
What is Expense Center?
In expense centers, inputs or expenses are measured in monetary terms whereas the outputs are not measured in monetary terms. There are two types of expense centers – engineered expense centers and discretionary expense centers. Engineered expense centers: In these centers, inputs or expenses are measured in monetary terms and outputs are measured in physical terms. These centers are usually found in the manufacturing units that use a standard cost system. There are certain responsibility centers within administrative and support departments that actually are engineered expense centers. In these centers, the cost of the product is determined by multiplying the output of each unit with its standard cost. Its efficiency is measured by comparing the actual cost with the standard cost. Discretionary expense centers: In discretionary expense centers, the output cannot be measured in monetary terms. Discretionary expense centers include administrative and support units like legal, accounting, Continue reading
Capital Sources for Business: Equity Shares
Equity shares are financial instruments to raise equity capital. The equity share capital is the backbone of any company’s financial structure. Equity capital represents ownership capital. Equity shareholders collectively own the company. They enjoy the reward of ownership and bear the risk of ownership. The equity share capital is also termed as the venture capital on account of the risk involved in it. The equity shareholders’ liability, unlike the liability of the owner in a proprietary concern and the partners in a partnership concern, is limited to their capital subscription and contribution. In India, under the Companies Act 1956, shares which are not preference shares are called equity shares. The equity shareholders get dividend after the payment of dividend to the preference shareholders. Similarly, at the event of the winding up of the company, capital is returned to them after the return of capital to the preference shareholders. The equity Continue reading
Working Capital Management – Definition, Significance, Objectives, and Importance
Working Capital is the part of the firm’s capital which is required for financing short term or current assets such as stock, receivables, marketable securities and cash. Money invested in these current assets keep revolving with relative rapidity and is being constantly converted into cash. These cash flows rotate again in exchange of other such assets. Working Capital is also called as “short term capital”. “Liquid Capital”, “Circulating or revolving capital”, The Working Capital management refers to management of the working capital or to be more precise the management of current assets and current liabilities. Working capital management is a very important to ensure that the company has enough funds to carry on with its day-to-day operations smoothly. A business should not have a very long Cash Conversion Cycle. A cash Conversion Cycle measures the time period for which a firm will be deprived of funds if it increases its Continue reading
Credit Management Concepts: Know Your Client
A cardinal rule in banking is the concept of “Know your client”. This means exactly what is says. The banker will do all he can to find out as much as he can about the company and the client. In this no information is too small or too immaterial since they will fit into a larger picture and the fate of the facilities extended may depend upon it. It has to be always remembered that the project may appear sound, the documentation perfect and the financials impeccable. However, if the intent is to cheat, it could cause severe losses to the Bank. Banks are always aware that a dishonest man is also a very clever person. Additionally the dishonest person has the advantage in that the innocent banker believes him to be a good, honest soul. He knows he is not; he knows he intends to cheat the banker and Continue reading
Credit Management – Managing Trade Credit and Accounts Receivable in Business
“The purpose of any commercial enterprise is the earning of profit, credit in itself is utilized to increase sale, but sales must return a profit.” – Joseph L. Wood The primary objective of management of receivables should not be limited to expansion of sales but should involve maximization of overall returns on investment. So, receivables management should not be confined to mere collection or receivables within the shortest possible period but is required to focus due attention to the benefit-cost trade-off relating to numerous receivables management. Principles of Credit Management In order to add profitability, soundness and effectiveness to receivables management, an enterprise must make it a point to follow certain well-established and duly recognized principles of credit management. The first of these principles relate to the allocation of authority pertaining to credit and collections of some specific management. The second principle puts stress on the selection of proper credit Continue reading