Performance-based budgeting has been the center of reforms in both the private and the public sectors. However, a substantial ambiguity still remains on how to define and implement performance-based budgeting. A somewhat close definition is that performance-based budgeting apportions resources in accordance with specific achievement or quantifiable results. Performance budgeting can also be defined as systems of planning, budgeting, and appraisal that focuses the link between budgeted funds and the expected outcome. Therefore, performance-based budgeting links measurable performance and allocation of resources, with the capacity to state the level of achievable output with the injection of additional resources. Nevertheless, the output can never be measured accurately. Performance budgeting is result oriented in that it holds different divisions accountable to specific performance standards. This form of budgeting enhances awareness of the kind of services expected by the taxpayer. This type of budgeting is flexible since it allocates resources in a lump sum Continue reading
Corporate 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
Three Approaches to Working Capital Management
Working capital is said to be the life blood of a business. Working capital signifies funds required for day-to-day operation of the firm. In financial literature, there exist two concepts of working capital namely: gross and net. Accordingly, gross concept working capital refers to current assets viz: cash, marketable securities, inventories of raw materials, work-in-process, finished goods and receivables. According to net concept, working capital refers to the difference between current assets and current liabilities. Ordinarily, working capital can be classified into fixed or permanent and variable or fluctuating parts. The minimum level of investment in current assets regularly employed in business is called fixed or permanent working capital and the extra working capital needed to support the changing business activities is called variable or fluctuating working capital. There are broadly 3 working capital management strategies/ approaches to choose the mix of long and short-term funds for financing the net working Continue reading
Leasing – Meaning, Types, Benefits and Limitations
Leasing is understood to be a financial instrument that permits an individual or the lessee to enjoy the utility of a physical asset without possessing it or without assuming ownership of the asset. Leasing can also be defined as an arrangement between two main parties namely: the lessor or the leasing company and the person or the lessee. The customer or the lessee can rent the asset from the company for a particular period of time. The rent for leasing are always predetermined and are due after a particular fixed intervals of time and the lessee assumes the ownership of the property for the entire lease period. There is no purchase option at the expiry of the lease period. Leasing applies to equipment’s that are expensive and bulky or large. Leasing has advantage of tax exemption since the individual avoids the per annum leasing charges; also there is the advantage of avoiding Continue reading
Corporate Finance – Concept and Meaning
Business firms and government organizations do need to implement various programs to achieve their goals. Implementing programs require resources such as natural resources, human resources and financial resources. Effectiveness in the management of financial resources is key to optimize the use of natural and human resources. In the case of individual, management of financial resources or funds is known as personal finance. The same is called by public finance in government organizations. Corporate finance is used to refer to the management of funds in the context of business firm. Thus, finance as a discipline is classified into three domains: public finance, business finance and personal finance. Public finance is the management of funds for governments: both local government and central government. Traditionally, it deals with the management of revenue and expenditure of government. Personal finance refers to the management of funds of and individual. Generally, business finance, corporate finance and Continue reading
Advantages and Disadvantages of Ratio Analysis
Ratios are an expression of one number in terms of another. This form of analysis facilitates comparison between the financial performances of different businesses or industries. Ratio, vertical and horizontal analysis are commonly used by financial analysts because they are useful tools for planning, controlling and monitoring an organisational performance. A range of financial ratios are there, including: liquidity, solvency, profitability, efficiency and investor ratios. Advantages of ratio analysis include: Ratio analysis enables the users of the financial statement to make comparisons between the financial performances of two or more businesses, even if they are of different sizes or from different industries, by converting financial numbers into standardized form using pre-defined formulas. Ratios are easy to calculate and do not consume significant amount of time. Ratio analysis is a useful tool to monitor and control a business organisation’s performance. The users of the financial statements are often interested in assessing Continue reading