Financial Management Concepts

Definition of Budgetary Control

Budgetary control is the  process of  determining  various  budgeted figures  for  the enterprise for the future period and then comparing the budgeted figures with the actual  performance  for calculating  variances, if  any.  It is a continuous process, which helps in planning and coordination. It  provides a method of control too.

The Institute of Cost and Management Accountants, England defines budgetary control as “the establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision”.

… Read the rest
Abey Francis

Demand and Supply of Capital for Investments

Demand for Capital

The demand schedule for capital refers to the arrangement of the various proposed projects in a descending order according to their estimated rates of return together with required amounts of capital needed by the respective projects.

Before analyzing the investments, the management must understand the nature of opportunities. Some investments are complimentary i.e. making one investment implies that another investment will be necessary. Some investments are mutually exclusive i.e. acceptance of one, implies rejection of others and some investments are independent. It is therefore necessary to identify the various opportunities of investments. Alternative investments can be ranked according to their relative profitability.… Read the rest

Abey Francis

Financial Statements Preparation of Not-For-Profit Organizations

Contributions are the primary revenue to a Not-for-Profit Organization (NFPO). Because the NFPO has characteristics which difference with the for-Profit Organization, its accounting method of recording contributions has own standards.

Primarily the nonprofit organization must produce three important annual financial statements: the statement of financial position, the statement of operation, and the statement of cash flow. One of the principle differences in nonprofit financial statements compared to for-profit entities is the objective of a nonprofit is to realize its socially desirable goals and objectives for the community it serves, rather than to realize a net profit. Financial statements are important communication information about NFPO to members, contributors and creditors.… Read the rest

Abey Francis

Baumol’s Sales Revenue Maximization Model

Sales maximization model is an alternative model for profit maximization. This model is developed by Prof. Boumol, an American economist. This  alternative goal has assumed greater significance in the context of the growth of Oligopolistic firms.

Baumol’s sales revenue maximization model  highlights that the primary objective of a firm is to maximize its sales rather than profit maximization. It states that the goal of the firm is maximization of sales revenue subject to a minimum profit constraint. The minimum profit constraint is determined by the expectations of the share holders. This is because no company can displease the share holders.

“Though businessmen are interested in the scale of their operations partly because they see some connection between scale and profits, I think management’s concern with the level of sales goes considerably further.

… Read the rest
Abey Francis

Theories of Capitalization

Capitalization is the total amount of a company’s long-term financing. Such financing may include retained earnings, preferred and common stock and other forms of long-term debt (bonds and debentures).  Capitalization can be distinguished from capital structure. Capital structure is a broad term and it deals with qualitative aspect of finance. While capitalization is a narrow term and it deals with the quantitative aspect.

The two main theories of capitalization which are used to determine the amount of capitalization are as follows:

1. Cost Theory of Capitalization

According to the cost theory of capitalization, the value of a company is arrived at by adding up the cost of fixed assets like plants, machinery patents, etc.,… Read the rest

Abey Francis

The Concept of Financial Innovation

Financial intermediaries have to perform the task of financial innovation to meet the ever-changing requirements of the economy and to help the investors cope with the increasingly volatile market. Because of this reason there is a necessity for the financial intermediaries to innovate unique financial instruments.

The following are the major reasons for financial innovation:

  1. Low Profitability: Profitability refers to the ability of a financial institution to maximize profits. The profitability of the major financial institutions have been declining in the recent times. So, the institutions are compelled to seek new products, which fetches high returns.
  2. Competition: The entry foreign and private players in the financial services sector have led to severe competition in the industry.
… Read the rest
Abey Francis