Concept of Cash “Cash, like the blood stream in the human body, gives vitality and strength to business enterprises.” Though cash hold the smallest portion of total current assets. However, cash is both the beginning and end of working capital cycle – cash, inventories, receivables and cash. It is the cash, which keeps the business going. Hence, every enterprises has to hold necessary cash for its existence. Moreover, steady and healthy circulation of cash throughout the entire business operations is the basis of business solvency. In the words of R.R. Bari, “Maintenance of surplus cash by a company unless there are special reasons for doing so, is regarded as a bad sigh of cash management.” Cash may be interpreted under two concepts. In narrow sense, cash is very important business asset, but although coin and paper currency can be inspected and handled, the major part of the cash of most Continue reading
Financial Management Concepts
Sensitivity Analysis and Scenario Analysis in Capital Budgeting
Capital Budgeting is the process by which a Business makes decision on whether to take up a project or not. This involves analysis of the amount of money which is required to invest in the project and the revenue that the project will generate. A business uses various techniques and analysis tools to determine the effects of the various projects. This may involve the calculation of the time taken for the undertaking to produce return to cover the initial contribution, or the amount of cash flow that will be produced from the undertaking totally in its entire span of period along with the amount of profit or loss generated from the same or the break even of the project can be calculated using the discount rate of the project. All the techniques and methods involve making assumptions and making estimations about the future performance of the project. The results derived Continue reading
Organization of Foreign Exchange Department
The Foreign Exchange department, which is also being called as the International Banking Division, is one of the important departments of the banks operating in international market. In India also all scheduled commercial banks, both in the nationalized or non-nationalized sectors, do have Foreign Exchange departments, both at their principal offices as well as offices, in metropolitan centers. This department functions independently under the overall change of some senior executive or a senior officer well-versed in foreign exchange operations as well as in the rules and regulations in force from time to time pertaining to foreign exchange transactions advised by various government agencies. The principal function of a Foreign exchange department is to handle foreign inward remittances as well as outward remittances; buying and selling of foreign currencies, handling and forwarding of import and export documents and giving the consultancy services to the exporters and importers. Besides this, the department Continue reading
Ploughing Back of Profits – Definition, Need, Advantages and Disadvantages
The ‘Ploughing Back of Profits‘ is a technique of financial management under which all profits of a company are not distributed amongst the shareholders as dividend, but a part of the profits is retained or reinvested in the company. This process of retaining profits year after year and their utilization in the business is also known as ploughing back of profits. It is actually an economical step, which a company takes, in the sense, that instead of distributing the entire earnings by way of dividend, it keeps a certain percentage of profit to be re-introduced into the business for its development. Such a phenomenon is also known as ‘Self-Financing’, ‘Internal Financing’, or ‘Inter- Financing’. A part of profits is ploughed back or re-employed into the business and is regarded as in ideal source of financing expansion and modernization schemes as there is no immediate pressure to pay a return on Continue reading
Determinants of Capital Structure
Capital structure refers to the way a firm chooses to finance its assets and investments through some combination of equity, debt, or internal funds. It is in the best interests of a company to find the optimal ratio of debt to equity to reduce their risk of insolvency, continue to be successful and ultimately remain or to become profitable. The capital structure of a concern depends upon a large number of factors such as leverage or trading on equity, growth of the company, nature and size of business, the idea of retaining control, flexibility of capital structure, requirements of investors, cost of floatation of new securities, timing of issue, corporate tax rate and the legal requirements. It is not possible to rank hem because all such factors are of different important and the influence of individual factors of a firm changes over a period of time. The factors influencing the Continue reading
Weighted Average Cost of Capital (WACC)
A firm uses various sources of finance to finance its projects. Each source of finance will be having a specific cost. So in order to determine the overall cost of capital of the firm, the weighted average cost of individual sources of finance should be determined with the weights being the proportion of each type of capital used. The Weighted Average Cost of Capital (WACC) is defined as the weighted average of the cost of various sources of finance, weights being the book value or market values of each source of finance. If ko represents the weighted average cost of capital or overall cost of capital then, ko = wdkd + wpkp + wtkt + weke + wrkr where, ko = weighted average cost of capital kd = cost of debt kp = cost of preferred stock kt = cost of term Continue reading