Revenue Management – Meaning, Benefits, Scope and Future

The phenomena of revenue management gained importance in recent years due to variable and discriminatory pricing schemes offered by various companies to their customers. Revenue management applies the orderly analytics that predict the behavior of the consumer at micro level and augment the prices and availability of products to the customers thus enhancing the overall revenue for the company. The aim of devising revenue management techniques is to deliver the fine product or service to the appropriate customer at the precise price. Revenue management system is based on analyzing the customer’s perception of the value that the product would provide and make straight the availability, placement and price according to that perception.

This discipline became the need of every business rapidly. There could be many reasons for this. Even a kid whose is out for selling orange juice will have to analyze and predict the appropriate weather and time for selling his product. When we talk about giant businesses, the need for assessing customer demand and subsequently managing that demand is enormous and critical. A revenue management system is answer to the question of such demand.

History of Revenue Management

The concept of revenue management is not new to the business world. Every business that is selling some fragile product needs to flex the price of that commodity due to some uncertain environmental change or response to some competitor’s action or customer’s demand. Seats in airplanes, clothes (i.e. for summer and winter), rooms in hotels etc., all require revenue management strategies to be sold in a manner that maximize the overall wealth of the company.… Read the rest

Value Added Statements – Definition, Advantages and Disadvantages

Meaning and Definition of Value Added Statements

The main thrust of financial accounting development in the recent decades has been in the area of `how’ we measure income rather than `whose’ income we measure. The common belief of the traditional accountants that profit is a reward of the proprietors has been considered as a very narrow definition of income. This was so because previously the assets were assumed to be owned by the proprietor and liabilities were thought as proprietor’s obligations. This notion of proprietorship was accepted and practiced so as long as the nature of business did not experience revolutionary changes. However, with the emergence of corporate entities and the legal recognition of the existence of business entities separate from the personal affairs and interest of the owners led to the rejection of proprietary theory.

Value added is now reported in the financial statements of companies in the form of a statement. Value Added Statement (VAS) is aimed at supplementing a new dimension to the existing system of corporate financial accounting and reporting. This is called value added statement. This statement shows the value created; value added (value generated) and the distribution of it to interest groups viz. Employees, shareholders, promoters of capital and government. Since VAS represents how the value or wealth created or generated by an entity is shared among different stakeholders, it is significant from the national point of view. ICAI, 1985 has defined Value Added Statement as a statement that reveals the value added by an enterprise which it has been able to generate, and its distribution among those contributing to its generation known as stakeholders.… Read the rest

Value Added – Concept, Definition and Uses

Meaning and Definitions of Value Added

The traditional basic financial statements are balance sheet and Profit & Loss account. These statements generate and provide data related to financial performance only. They do not provide any information which shows the extent of the value or the wealth created by the company for a particular period. Hence, there arose a need to modify the existing accounting and financial reporting system so that the business unit is able to give importance to judge its performance by indicating the value or wealth created by it. To this direction inclusion of Value Added statement in financial reporting system is useful. The Value Added concept is now a recognized part of the accountant’s repertoire.

However, the concept of Value Added (VA) is not new. Value Added is a basic and broad measure of performance of an  enterprise. It is a basic measure because it indicates the net output produced or wealth created by an enterprise. The Value Added of an enterprise may be described as the difference between the revenues received from the sale of its output, and the costs which are incurred in producing the output after making necessary stock adjustments.

Some definitions of Value Added are following;

  • E.S.Hendriksen has defined Value-added as: “The market price of the output of an enterprise less the price of the goods and services acquired by transfer from other firms.”
  • Morely has defined Value-added as:”The value, which the entity has added in a period that equals its sales less bought-in-goods and services.” i.e.
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The Performance Prism

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 to distinguish itself from other similar models such as the Balanced Scorecard by offering a unique perspective on a measuring system that can ultimately be adopted as a way of operating within an industry, rather than just measuring performance of the organisation. The balanced scorecard, with its four perspectives, focuses on finance, customers, internal processes and innovation and learning. In doing so it downplays the importance of other stakeholders, such as suppliers and employees. The business excellence model combines results, which are readily measurable, with enablers, some of which are not. Shareholder value frameworks incorporate the cost of capital into the equation, but ignore all aspects relating to stakeholders.… Read the rest

Evaluating a Company’s Capital Structure using Ratios

A business organization may be financially sound today but it may loose strength tomorrow because of losses. Therefore it is necessary to maintain a judicious balance between the owned capital and borrowed capital. The following ratios have been calculated to analyze the capital structure of a company.

1. Capital Gearing Ratio

Capital Gearing Ratio of an organization measures the relationship between equity share capital to preference capital and loan capital. ‘Capital gearing’ refers to the ratio between the variable cost bearing capital and fixed cost bearing capital of the organization and helps to frame the capital structure of the organization. Capital gearing may be of three types:

  1. High Gearing Capital, which indicates the excess of interest bearing long-term finance over the equity funds;
  2. Low Gearing Capital, which indicates the excess of equity funds over the interest bearing long-term finance; and
  3. Evenly Geared, which indicates the equality between the interest bearing long-term finance and equity funds.

As regards the role of capital gearing in the successful operation of the organization, it is as significant as the use of gears in the speed of an automobile. Just as gears are used in an automobile for maintaining the speed because an automobile starts at low gear and when it start running fast, in the same way when an organization is incorporated, it is begun with more equity capital and less interest bearing finance. But as the business moves ahead, fixed cost bearing finance such as preference capital, debentures and term loans etc., increases and the equity capital either remains constant or increases at a very low speed.… Read the rest

DuPont Analysis – Return on Equity (ROE) Analysis

Financial statement analysis is employed for a variety of reasons. Outside investors are seeking information as to the long run viability of a business and its prospects for providing an adequate return in consideration of the risks being taken. Creditors desire to know whether a potential borrower or customer can service loans being made. Internal analysts and management utilize financial statement analysis as a means to monitor the outcome of policy decisions, predict future performance targets, develop investment strategies, and assess capital needs. As the role of the credit manager is expanded cross-functionally, he or she may be required to answer the call to conduct financial statement analysis under any of these circumstances. The DuPont analysis is a useful tool in providing both an overview and a focus for such analysis.

History of DuPont Analysis

The DuPont model of financial analysis was made by F. Donaldson Brown, an electrical engineer who joined the giant chemical company’s Treasury department in 1914. A few years later, DuPont bought 23 percent of the stock of General Motors Corp. and gave Brown the task of cleaning up the car maker’s tangled finances. This was perhaps the first large-scale re-engineering effort in the USA. Brown devised formulae to analyse the source of shareholder returns generated by these companies. These formulae or methods came to be known as DuPont system of analysis. Ensuing success launched the DuPont model towards prominence in all major U.S. corporations. It remained the dominant form of financial analysis until the 1970’s. The DuPont analysis is known by many other names, including DuPont Equation, DuPont Framework, DuPont Identity, DuPont Model, DuPont Method, or Strategic Profit Model.… Read the rest