The Limitations of Traditional Management Accounting There exist five major limitation for traditional management accounting. The first one is the traditional management accounting may treat the firm as a single part. It only provided information for a single enterprise management decision and control, ignoring the external environment and other relevant information also can reflect the firm’s position in the market. Second, the traditional management accounting limited to the collection and analysis of internal financial information, the information break away from the requirements of corporate strategic management and weakened the role of management accounting. Third, the concept of traditional management accounting just focus on solving the relevant and individual internal issues. It can not form a sound management system with the market and long-term interests, so that the composition of the budget system just only concentrate on the enterprise’s internal planning and operations. The forth is the traditional management accounting adopted Continue reading
Financial Management Concepts
The Benefits and Limitations of Budgets
A budget is a comprehensive, formal, coordinated, detailed, quantitative plan that estimates the probable expenditures for acquiring and using financial and other resource for an organization over a specific time period. Budgeting describes the overall process from preparing budget, using budgets during the business operation, and later performance evaluation. It provides us the valuable tools for planning and control of finances and affects nearly every type of organization-from governments and large corporations to small businesses-as well as families and individuals. A small business generally engages in budgeting to determine the most efficient and effective strategies for making money and expanding its asset base. Budgeting can help a company use its limited financial and human resources in a manner which best exploit existing business opportunities such production expansion and acquisition that might otherwise miss. A good and through understanding of how budgeting works is a must for ambitious business executive if Continue reading
Estimation of Working Capital Requirements
In estimating working capital needs, different people adopt different approaches. Some experts suggest that the working capital should be greater than the minimum requirements of the firm. The management should feel safety. It would be able to meet its obligations even in adverse circumstances. However, the excessive capital may lead to waste and inefficiency. On the other hand, some experts suggest that the working capital should be lower than the requirement so that no idle funds shall be invested in the current assets and it ultimately leads to increase in profitability of the company. However, in such case the firm always have risk of technical insolvency as it may not meet its obligations as and when they falls due for payment. So the question is what the proper amount of working capital is?. It is not an absolute amount. It depends upon the needs and circumstances available in the firm. Continue reading
Capital Sources for Business: Bonds
A bond is a type of loan. Bonds are certificates of debt that is issued by a government or corporation in order to raise money with a promise to pay a specified sum of money at a fixed time in the future and carrying interest at a fixed rate. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). The main types of bonds are corporate bond, municipal bond, Treasury bond, Treasury note, Treasury bill, and zero-coupon bond. It is a tradable debt instrument that might be sold at above or below par (the amount paid out at maturity), and are rated by bond rating services to specify likelihood of default. Bonds are relatively more secured than equity and has priority over shareholders if the company becomes insolvent and its assets are distributed. There is no legal distinction between a debenture Continue reading
Concept of Goal Congruence
Goal congruence is the term which describes the situation when the goals of different interest groups coincide. A way of helping to achieve goal congruence between shareholders and managers is by the introduction of carefully designed remuneration packages for managers which would motivate managers to take decisions which were consistent with the objectives of the shareholders. Agency theory sees employees of businesses, including managers, as individuals, each with his or her own objectives. Within a department of a business, there are departmental objectives. If achieving these various objectives also leads to the achievement of the objectives of the organization as a whole, there is said to be goal congruence. Achieving Goal Congruence Goal congruence can be achieved, and at the same time, the ‘agency problem’ can be dealt with, providing managers with incentives which are related to profits or share price, or other factors such as: Pay or bonuses related Continue reading
Financial Accounting vs Management Accounting
Financial Accounting and Management Accounting are two interrelated facets of the accounting system. They are not exclusive of each other; they are supplementary in nature. Financial accounting provides the basic structure for collecting data. The data collection structure is suitably modified or adjusted for accumulating information for management accounting purposes. In a broader sense, management accounting includes financial accounting. They differ in their emphasis and approaches. They are as follows: Financial accounting serves the interest of external users (i.e. investors etc.) while management accounting caters to the needs of internal users (i.e. management). Financial accounting is governed by the generally accepted accounting principles while management accounting has no set principles. Financial accounting presents historical information while management accounting represents predetermined as well as past information. Financial accounting is statutory while management accounting is optional. Financial accounting presents annual reports while management accounting reports are of both Continue reading