To check the financial health of a business, you need to evaluate its financial performance, liquidity, solvency, profitability, and other key financial indicators. Below are some of the key areas to focus on when assessing the financial health of your business. Financial Statements The first step in evaluating the financial health of your business is to review your financial statements. The financial statements include the balance sheet, income statement, and cash flow statement. These statements provide a summary of your business’s financial activity and performance over a specific period. Balance Sheet: The balance sheet provides an overview of your business’s financial position at a specific point in time. It lists your assets, liabilities, and equity. You can use the balance sheet to evaluate your business’s liquidity and solvency. Income Statement: The income statement shows your business’s revenue, expenses, and net income over a specific period. You can use the income Continue reading
Financial Management Concepts
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
Assessment of Agency Theory
Agency theory refers to a contract whereby principals engage with agents to perform some act on their behalf. The act involved giving power to an agent for some decision-making. Everyone work on the feet of benefit that can be gained for oneself. That’s why it is strongly agreed that the agent, as a utility maximizer will not act in the best interest of the principal. Therefore, agents may cheat if they were not monitored by the principal, and the principal, on the other hand, must bear agency costs to avoid suffering loss. These agency costs include monitoring costs of an agent, bonding costs whereby the agent will try to show that they are not self-serving, and residual losses that are too costly to monitor. In general, agency cost is one of a type of internal cost incurred from or must be paid to, an agent acting on behalf of a Continue reading
Types of Securitization Structures
Through securitization process, debts are factored and discounted in a structured and sophisticated manner which allows for the availability of funds and the repayment of the debt obligations through the creation of an insolvency remote vehicle which is separate, distinct and independent of the Originator. Securitization structures are most appropriate for a company that seeks financing but is unable to tap funding sources for the desired tenor and funding cost because of its perceived credit risk. In general, any asset class with relatively predictable cash flows can be securitized. The Special Purpose Vehicle (SPV) re-designs the type of bonds to be issued depending on the deal structure. The broad types of securitization structures include: Cash vs. Synthetic Structures: Most transactions world over follow the cash structure in which the originator sells assets and receives cash instead. In a synthetic transaction, the seller keeps his title and investment on the assets Continue reading
Determinants of Working Capital
There are no set rules or formulate to determine the working capital requirements of a firm. The corporate management has to consider the various factors in making decisions regarding working capital balances. An appraisal of these would provide guidance to management in estimating prospective needs. These are called as determinants of working capital. The firm must estimate its working capital very accurately because excessive working capital results in unnecessary accumulation of inventory and wastage of capital whereas shortage of working capital affects the smooth flow of operating cycle and business fails to meet its commitment. In this section let us examine the various determinants of working capital. Nature of Business is one of the factors. Usually in trading businesses the working capital needs are higher as most of their investment is found concentrated in stock. On the other hand, manufacturing/processing business need a relatively lower compared to that of trading Continue reading
Conceptual Framework of Accounting
An accounting framework is a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements. The main reason for developing a conceptual framework are that gives a framework for setting accounting standards, a basis for resolving accounting disputes and fundamental principles which then do not have to be repeated in accounting standards. Furthermore, Conceptual Framework can be categorized in terms of the distinctive function of management accounting within the management process in organizations. Moreover, the way in which the utility of the outcomes of the management accounting process can be tested. Conceptual Framework is a criteria which can be used to assess the value of the processes and work technologies used in management accounting and capabilities necessarily associated with the effectiveness of the management accounting function overall. Conceptual Framework plays an important role in Continue reading