The excess of the amount of working capital over permanent working capital is known as variable or short-term working capital. The amount of such working capital keeps on fluctuating from time to time on the basis of business activities. It may again be sub-divided into seasonal and special working capital. Seasonal working capital is required to meet the seasonal demands of busy periods occurring at stated intervals. On the other hand, special working capital is required to meet extra-ordinary needs for contingencies. The main sources of short-term working capital are as follows: 1. Indigenous Bankers Private moneylenders and other country bankers used to be the only source of finance prior to the establishment of commercial banks. They used to charge very high rates of interest and exploited the customers to the largest extent possible. Now a day with the development of commercial banks they have lost their monopoly. But even Continue reading
Financial Management Concepts
What is Over Capitalization?
Concept of Over Capitalization The phrase ‘Over Capitalization’ should not be confused with excess of capital. Truly speaking, over capitalization is a relative term used to denote that the firm in question is not earning reasonable income on its funds. According to Bonneville, Dewey and Kelly, when a business is unable to earn a fair rate of return on its outstanding securities, it is over capitalized. Thus over capitalization refers to that state of affairs where earning of the corporation do not justify the amount of capital invested in the business. The main symptom of over capitalization in a company is the amount of earning which it is making on its total capital. Thus, a company is said to be over capitalized when it earns less than what it should have earned as fair rate of return on its total capital. To ascertain whether the company is earning reasonable rate Continue reading
Important Perspectives on Asset Securitization
Asset securitization is the transformation of a mix of illiquid individual loans that are combined into relatively similar pools and transformed into highly liquid bonds traded in securities markets and usually, when securities are backed by non-mortgage loans, they are referred to as asset-backed securities (ABS). Securities issued exclusively against credit and loans with mortgage guarantees are referred to as mortgage-backed securities (MBS). Assets like ABS, MBS and it likes are now widely spread in fixed income portfolios at both the institutional and individual investor level. Although the largest and most well known example of asset securitization is the residential mortgage market. The dealings of asset securitization transactions vary, the typical transaction involves the sale by a bank or financial institution (who are called originator) of certain assets on its balance sheet to a trust, corporation or a separate entity, called special purpose vehicle (SPV). Thus, through the asset securitization Continue reading
Different Types of Securitized Instruments
Pass Through Certificates and Pay Through Certificates There is no uniform name for the securities issued by the special purpose vehicle (SPV) as such securities take different forms. These securities could either represent a direct claim of the investors on all that the SPV collects from the receivables transferred to it: in this case, the securities are called pass through certificates as they imply certificates of proportional beneficial interest in the assets held by the SPV. Alternatively, the SPV might be re-configuring the cash flows by reinvesting it, so as to pay to the investors on fixed dates, not matching with the dates on which the transferred receivables are collected by the SPV. In this case, the securities held by the investors are called pay through certificates. 1. Pass Through Certificates In case of pass through certificates payments to investors depend upon the cash flow from the assets backing such Continue reading
The Role of Derivatives in the Financial Crisis
Derivative contracts are probabilistic bets on future events, they are securities with a price that are dependent upon or derived from one or more underlying assets. Many people argue that derivatives reduce systemic problems, in that participants who cannot bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. We have now reached the stage where those who work in finance, and many who work outside finance, need to understand how derivatives work, how they are used, and how they are priced. For this reason, derivatives are at the center of everything. However, in 2008 the world witnessed a financial and economic hurricane that left massive financial and economic damages. It was universally recognized as the worst economic crash since the Great Depression. The old saying has it that success has Continue reading
Labor Cost – Definition, Types and Importance
Like materials, labor is also one of the prime inputs of production system. All manufacturing concerns require the labor for carrying out their production activities. The labor consists of workers who are essential to convert materials into finished products. The workers operate machine and perform other tasks to help convert materials into final outputs. The labor can be either direct or indirect. The labor who is directly engaged in the conversion process is called direct labor and who is not is called indirect labor. The labor, however, should be properly utilized and satisfactorily paid in order to minimize labor turnover and labor cost. Unlike materials, labor is complex to deal with. Dissatisfied and discontented labor always results in high labor costs and low quality outputs. Therefore there should be proper planning, accounting and controlling of labor. Concept and Meaning of Labor Cost The payment made to the labor in exchange Continue reading