Financial Management Concepts

Fixed and Flexible Budget

According to the flexibility factor, budgets are classified into:

Fixed Budget

This is budget in which targets are rigidly fixed. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they are applicable. Thus, twelve months or more may elapse before figures forecast for the budget are used to measure actual performance. Many things may happen during this intervening period and they may make the figures go widely out of line with the actual figures. Though it is true that a fixed, or static budget as it is sometimes called, can be revised whenever the necessity arises, it smacks of rigidity and artificiality so far as control over costs and expenses are concerned.… Read the rest

Abey Francis

Zero Based Budgeting

Traditional budgeting starts with previous year expenditure level as a base and then discussion is focused on certain “additions” or “cuts” to be made in the previous year spending. The top management finally gives its approval after hearing the arguments for and against the “additions and “cuts”. In  Zero Based Budgeting (ZBB) reference, is not made to previous level of spending. A convincing case is made for each decision unit to justify the budget allotment for that unit during that period.  Zero Based Budgeting differs from traditional budgeting on many points and following tire a few points of difference between the two systems of budgeting:

Traditional Budgeting Vs Zero Based Budgeting
  1. Traditional budgeting is accounting-oriented and mainly lays its emphasis in previous year expenditure.  
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Abey Francis

Need for Financial Restructuring

Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. The process of financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is likely to impact the financial health of the corporation. When completed, this reordering of corporate assets and liabilities can help the company to remain competitive, even in a depressed economy.

Just about every business goes through a phase of financial restructuring at one time or another. In some cases, the process of restructuring takes place as a means of allocating resources for a new marketing campaign or the launch of a new product line.… Read the rest

Abey Francis

What is Trading on Equity?

The phrase trading on equity is a financial jargon which indicates the utilization of non-equity sources of funds in the capital structure of an enterprise. At a high debt-equity ratio, a firm may not be able to borrow funds at a cheaper rate of interest it may not able to borrow funds at all. This is so because creditors lose confidence in the company which has a high debt-equity ratio. How can creditors have confidence in the company which has only creditors and no equity stockholders? The company will, therefore, have to strive hard to regain a reasonable debt-equity ratio so that the expectations of the market may be satisfied.… Read the rest

Abey Francis

Financial Manager – Roles and Responsibilities

Ever since the 1900s and even after the Great Depression in the 1930s, the primary role of a finance people was only a descriptive discipline on bookkeeping which means accurately recording all transactions related to the payment of suppliers, billing of customers, and handling of cash passing through the accounts department and issuing periodic financial statements. Until the late 1960s increased competition in industries forced financial managers to shift their focus towards evaluating investment opportunities and making decisions on the choice of assets and liabilities necessary to maximize the company’s value. The 1970s and 80s were a period of increased international competition, CEOs became concerned with operational efficiency to cope with the fast-growing market, this included the accounting functions which were streamlined and required to reach out to become a profit center for the whole organization.… Read the rest

Abey Francis

Types of Dividend Policies

The size and frequency of dividend payments are critical issues in company policy. Dividend policy affects the financial structure, the flow of funds, corporate liquidity, stock prices, and the morale of stockholders. The finance manager plays an important role in the dividend policy. The  objective  of  dividend  policy  is  to  maximize shareholder’s  return  so  that  the  value of his investment is  maximized. Shareholders’ return consists of two  components: dividends and capital gains. Dividend policies has  a direct impact on these components;

  1. A Low payout ratio  may produce higher share  price  because  it  accelerates earnings growth. Investors of growth companies  will  realize  their  return  mostly  in  the  form of capital  gains.  
… Read the rest
Abey Francis