The goals of financial management can be classified in many ways. Official goals, operative goals and operational goals are one classification. Official goals are the general aims of the organization. Maximization of return on investment and market value per share may be termed as official goals of financial management. Operative goals indicate what the organization is really attempting to do. They are focused and help in choice making. Expected return on investment, cost of capital, debt-equity norms, etc dong with time horizon are specified or their acceptable ranges/limits are static keeping in view the official goals. The operational goals of financial management are more directed quantitative and verifiable. The scale, mix and timing of specific form of finance are detailed. The official, operative and operational goals are structured with a pyramidal shape, the official goals at the top (concerned with the top executives), operative goals at the middle (concerned with Continue reading
Financial Management Concepts
Conflicts between Managers and Shareholders
Agency theory portrayed the fundamental problems in an organization that is self-interested behavior. Self interested behavior was usually direct to an unfavorable effect on any organization which was by and large for the purpose of getting highest share holder wealth. Company managers could have personal objectives that compete with the owner’s objective of maximization of shareholder wealth. Since the shareholders approved managers to administer the firm’s assets, a possible difference of interest occurred between the two groups. Self-Interested Behavior Agency theory argued that, in imperfect capital and labor markets, managers were trying to find make best use of their own values without regard for corporate shareholders. Agents have the capability to manage their own self-interest comparatively more then the best interests of the firm because of asymmetric information (e.g., managers know better than shareholders either they are talented and capable of meeting the shareholders’ objectives and vagueness. Facts of self-interested Continue reading
Creative Accounting – Definition, Techniques and Ethical Considerations
Definition of Creative Accounting Creative accounting is accounting practice that falls outside the regulation and give benefit to certain people. It can be described as a practice with a clear aim to interrupt the financial reporting process which affects reported income to make it looked normal and provides no true economic advantages to relevant parties like shareholders. Concisely, creative accounting is the transformation of financial accounting figures from what they actually are to what users’ desire by taking advantage of the accounting policies which is permitted by accounting standards. Creative accounting is a practice that potentially being undertaken as a result from some individual care more on their own interest and indirectly causes issues arise in ethical dimension of creative accounting. From information perspective, agency theory gives a clear picture on creative accounting scenario. Whereby managers misuse their privileged position in manipulating financial reporting in their own interest which Continue reading
Debt Equity Ratio
Meaning of Debt Equity Ratio Capitalization of a company consists of funds raised by issuing various types of securities, i.e., ordinary shares, preference shares, debentures etc. To decide as to the ratio of various types of securities to total capitalization is a very difficult task but the decision in this important for the business to decide as to the ratio of ownership capital to the creditorship capital or loan capital. The ratio of borrowed capital to the owned capital may be called debt equity ratio. In other words, debt equity ratio is the ratio between borrowed capital on the one hand and owned capital on the other. Debt equity ratio is positively correlated with the capital gearing. If capital gearing in a company is high, debt equity ratio would also be high or vice versa. For example, if the total capital of Rs. 1,00,000 in a company consists of Rs. Continue reading
DuPont Analysis – Return on Equity (ROE) Analysis
Financial statement analysis is employed for a variety of reasons. Outside investors are seeking information as to the long run viability of a business and its prospects for providing an adequate return in consideration of the risks being taken. Creditors desire to know whether a potential borrower or customer can service loans being made. Internal analysts and management utilize financial statement analysis as a means to monitor the outcome of policy decisions, predict future performance targets, develop investment strategies, and assess capital needs. As the role of the credit manager is expanded cross-functionally, he or she may be required to answer the call to conduct financial statement analysis under any of these circumstances. The DuPont analysis is a useful tool in providing both an overview and a focus for such analysis. History of DuPont Analysis The DuPont model of financial analysis was made by F. Donaldson Brown, an electrical engineer Continue reading
Double Entry System of Bookkeeping
The recording of financial transactions undertaken by an individual or an organization defined Bookkeeping. The organization could be an enterprise, a charitable organization or even a local sports club. The necessary support for such accounting function is provided by bookkeeping as the preparation of cost reports, financial statements, and tax returns. Making entries to specific accounts with debit and credit system and keeping track of a business’s financial transactions is involved. Bookkeeping has evolved through the years from clay tablets, to paper ledgers, and now computerized systems. Even for now, bookkeeping fundamentals have not been changed through the ages. And chances are the future societies will not be able to exist without a formal system of financial recording keeping. In short, some of the same problems that plagued ancient bookkeepers still exist even with modern advancement. The process of bookkeeping is always considered to be as vital importance to categorize Continue reading