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
Financial Management Concepts
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
The Concept of Cash Management
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
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