Definitively, a budget refers to forecast of company’s incomes and expenses anticipated for a given period of time. With a budget, an organization is able to analyze how much money they are making and spending, and they are able to figure the best way to channel it among various categories and departments. Budgeting depicts the entire process of analyzing and planning using a budget. Since budgets are vital tools for management and planning, the process of budgeting generally affects all types of organizations regardless of their size and composition. Many organizations participate in budgeting process with the view of determining the most cost effective and efficient strategies of making profits and intensifying its capital and asset base. In management, budgeting guides an organization to use its scarce resources in a way that exploits the existing business opportunities well. Good budgeting concepts integrate efficient business judgment and help the management toContinue reading
Financial Management Tools
Limitations of Ratio Analysis
Ratio analysis is useful, but analysts should be aware of these problems and make adjustments as necessary. Ratios analysis conducted in a mechanical, unthinking manner is dangerous, but if used intelligently and with good judgement, it can provide useful insights into the firm’s operations. Limitations of Ratio Analysis 1. Accounting Information Different Accounting Policies The choices of accounting policies may distort inter company comparisons. Example IAS 16 allows valuation of assets to be based on either revalued amount or at depreciated historical cost. The business may opt not to revalue its asset because by doing so the depreciation charge is going to be high and will result in lower profit. Creative accounting The businesses apply creative accounting in trying to show the better financial performance or position which can be misleading to the users of financial accounting. Like the IAS 16 mentioned above, requires that if an asset isContinue reading
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 formContinue reading
Incremental Cash Flow Analysis
The most important and also the most difficult part of an investment analysis is to calculate the cash flow associated with the project; the cost of funding the project; the cash inflow during the life of the project; and the terminal, or ending value of the project. Shareholders are interested in how many additional rupees they will receive in future for the rupees they lay out today. Hence, what matters is not the project’s total cash flow per period, but the incremental cash flow for a variety of reasons. They include; Cannibalization: When a new product is introduced it may take away the sales of existing products. Cannibalization also occurs when a firm builds a plant overseas and winds up substituting foreign production for parent company exports. In this case company may lose exports because it is supplying from its overseas production center. To the extent that sales of aContinue reading
Internal Check – Definition, Objectives, Advantages and Limitations
Internal check is an arrangement of duties of members of staff in such a manner than the work performed by one person is automatically and independently checked by the others. According to ‘F.R.M.De PAULA’, “Internal check means practically a continuous internal audit carried on by the staff it self, by means of which the work of each individual is independently checked by other members of the staff.” According to ‘D.R. DAVAR,’ “Internal check is a system or method introduced with defined instructions given to staff as to their sphere of work with a view to control and verification of their work and also maintenance of accurate records as the ultimate aim.” Objectives of Internal Check To exercise moral pressure over staff. To ensure that the accounting system produces reliable and adequate information. To provide protection to the resources of the business against fraud, carelessness and inefficiency. To distribute the workContinue reading
Important Considerations in Determining Capital Structure of a Company
The determination of capital structure involves additional considerations in addition to the concerns about EPS, value and cash flow. A firm may have enough debt servicing ability but it may not have assets to offer as collateral. Some of the most important considerations are discussed below: 1. Assets – The form of assets held by a company are important determinants of its capital structure. Tangible fixed assets serve as collateral to debt. In the event of financial distress, the lenders can access these assets and liquidate them to realize funds lent by them. Companies with higher tangible fixed assets will have less expected costs of financial distress and hence, higher debt ratios. Companies have intangible assets in the form of human capital, relations with stakeholders, brands, reputation etc., and their values start eroding as the firm faces financial difficulties and its financial risk increases. 2. Growth Opportunities – The natureContinue reading