The Performance Prism is a second generation performance measurement and management framework that has been developed by Neely, Adams and Kennerley to further aid organisations in their pursuit of measuring the overall performance of their operations. The creators of this model suggest that for organisations operating within almost any given industry, the most important aspect of management is to deliver on the expectations of the stakeholders associated with that organisation. The Performance Prism is designed to help with the complex relationships that organisations often possess with their various stakeholders within the context of its operating environment. It provides an innovative and holistic framework that directs management attention to what is important for long term success and viability and helps organisations to design, build, operate and refresh their performance measurement systems in a way that is relevant to the specific issues that they face within their given industry. This model attempts Continue reading
Financial Management Tools
Cost Audit – Definitions, Objectives, Advantages and Limitations
Cost audit is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilization of material or labor or other items of costs, maintained by the company. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting. As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.” The ICWAI defines cost audit as “system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information required to be maintained by specified industries” From above definition of cost audit, it is clear that cost audit is a systematic examination of cost accounts to verify correctness Continue reading
Credit Linked Notes (CLN)
Meaning of Credit Linked Notes Certain investors are prevented from entering into derivatives contracts, either by law or by internal investment policies. Credit Linked Notes (CLNs) allow such investors to derive some of the benefits of credit derivatives. Credit Linked Notes (CLNs) are regular debt obligations with an embedded credit derivative. They can be issued either directly by a corporation or bank or by highly rated special purpose vehicles created by dealers. The coupon payments made by a CLN effectively transfer the cash flow of a credit derivatives contract to individual investors. Credit Linked Notes are best understood by a simple example: ABC Investments would like to take on the risk associated with the debt of XYZ Corp., but all of XYZ’s debt is composed of bank loans and ABC Investments cannot simply sell protection in a Credit Default Swap (CDS) because its investment policy prevents it from entering into Continue reading
Steps Involved in the Process of Securitization
Securitization, a process by which illiquid financial assets are transformed into tradable commodities, is one of the most significant innovations of the financial world. Having originated in 1970 in mortgage markets in the USA, securitization has already converted over $90 trillion worth of non-tradable assets into marketable securities. As a powerful tool of liquidity and risk management, securitization has had a tremendous impact on the welfare of the world economy. In mortgage markets in many countries it provides a cheaper source of financing, and thus promotes the demand for housing. In the banking sector, securitization is widely used for allocating capital more efficiently, transforming risk into a tradable security, and reducing the overall cost of capital. It has enabled developing countries to emerging market institutions to raise their sovereign ratings ceilings and thereby tap international capital markets for lower-rate financing. Read More: The Concept of Securitization The process of securitization Continue reading
Income Statement or Profit and Loss Account – Meaning, Format and Explanation
The earning capacity and potential of the firm are reflected by the Income Statement or the Profit and Loss Account. The profit and loss account is the “scoreboard” of the firm’s performance during a particular period of time (usually one year). Since it reflects the results of operations for a period of time, it is a flow statement. In contrast, the balance sheet is a stock, or status statement as it shows assets, liabilities and owners’ equity at a point of time. The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for a period of time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period. If the firm’s operations prove to be unprofitable, total expenses will exceed total revenues and the difference is referred to Continue reading
Capital Budgeting- Definition, Nature and Procedure
Meaning of Capital Budgeting Capital expenditure budget or capital budgeting is a process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, machinery or furniture. The word investment refers to the expenditure which is required to be made in connection with the acquisition and the development of long-term facilities including fixed assets. It refers to process by which management selects those investment proposals which are worthwhile for investing available funds. For this purpose, management is to decide whether or not to acquire, or add to or replace fixed assets in the light of overall objectives of the firm. What is capital expenditure, is a very difficult question to answer. The terms capital expenditure are associated with accounting. Normally capital expenditure is one which is intended to benefit future period i.e., in more than one year as opposed to revenue expenditure, the Continue reading