What are a Advantages? A condition or circumstance that puts one in a favorable or superior position. The opportunity to gain something; benefit or profit. A favorable or desirable feature. A score marking a point interim between deuce and winning the game.
Any trait, feature or aspect that gives an individual, entity or any other thing a more favorable opportunity for success. “The advantages of Mary’s plan, compare to Bob’s plan, were that it required less money and manpower, and would complete 5 days sooner.” “He had an advantage over the other job candidates due to his personal relationship with the CEO.” Opposite of disadvantage.
An expert system is a computer program that designs to emulate and mimic human intelligence, skills, or behavior. An expert system an advanced computer application that implements to provide solutions to complex problems or to clarify uncertainties through the use of non-algorithmic programs where normally human expertise will need. Advantages and disadvantages of Expert Systems; They design to solve complex problems by reasoning through bodies of knowledge, represented mainly as if-then rules rather than through conventional procedural code. Expert systems are most common in the complex problem domain and consider as widely use alternatives in searching for solutions that require the existence of specific human expertise.
Here explain the advantages and disadvantages of expert systems.
Expert systems are most common in the complex problem domain and consider as widely use alternatives in searching for solutions that require the existence of specific human expertise. The expert system is also able to justify its provided solutions based on the knowledge and data from past users. Normally expert systems use in making business marketing strategic decisions, analyzing the performance of real-time systems, configuring computers, and perform many other functions that normally would require the existence of human expertise.
The difference between an expert system with a normal problem-solving system is that the latter is a system where both programs and data structures encode; while for an expert system only the data structures hard-coded and no problem-specific information encodes in the program structure. Instead, the knowledge of human expertise capture and codify in a process known as knowledge engineering.
Hence, whenever a particular problem requires the assistance of certain human expertise to provide a solution; the human expertise which has been codified will use and process to provide a rational and logical solution. This knowledge-based expert system enables the system to frequently add new knowledge; and, adapt accordingly to meet new requirements from the ever-changing and unpredictable environment.
Advantages of Using Expert System:
An expert system has been reliably used in the business world to gain tactical advantages and forecast the market’s condition. In this globalization era where every decision made in the business world is critical for success; the assistance provided from an expert system is undoubtedly essential and highly reliable for an organization to succeed.
Examples given below will be the advantages for the implementation of an expert system in business:
1] Providing consistent solutions:
It can provide consistent answers for repetitive decisions, processes, and tasks. As long as the rule base in the system remains the same, regardless of how many times similar problems are being tested, the conclusions drawn will remain the same.
2] Provides reasonable explanations:
It can clarify the reasons why the conclusion was drawn and be why it considers as the most logical choice among other alternatives. If there are any doubts in concluding a certain problem; it will prompt some questions for users to answer to process the logical conclusion.
3] Overcome human limitations:
It does not have human limitations and can work around the clock continuously. Users will be able to frequently use it in seeking solutions. The knowledge of experts is an invaluable asset for the company. It can store the knowledge and use it as long as the organization needs it.
4] Easy to adapt to new conditions:
Unlike humans who often have trouble adapting to new environments, an expert system has high adaptability and can meet new requirements in a short period. It also can capture new knowledge from an expert and use it as inference rules to solve new problems.
Disadvantages of Using Expert System:
Although the expert system does provide many significant advantages, it does have its drawbacks as well.
Examples given below will be the disadvantages for the implementation of an expert system in business:
1] Lacks common sense:
It lacks common sense needed in some decision making since all the decisions made base on the inference rules set in the system. It also cannot make creative and innovative responses as human experts would in unusual circumstances.
2] High implementation and maintenance cost:
The implementation of an expert system in business will be a financial burden for smaller organizations since it has high development costs as well as the subsequent recurring costs to upgrade the system to adapt to the new environment.
3] Difficulty in creating inference rules:
Domain experts will not be able to always explain their logic and reasoning needed for the knowledge engineering process. Hence, the task of codifying out knowledge is highly complex and may require high
4] May provide wrong solutions:
It is not error-free. There may error occur in the processing due to some logical mistakes made in the knowledge base, which will then provide the wrong solutions.
A good expert system expects to grow as it learns from user feedback. Feedback incorporates into the knowledge base as appropriate to make the expert system smarter. The dynamism of the application environment for expert systems base on the individual dynamism of the components.
This can classify as follows:
Most dynamic:
Working memory. The contents of the working memory, sometimes called the data structure, changes with each problem situation. Consequently, it is the most dynamic-component of an expert system, assuming, of course, that it keeps current.
Knowledgebase:
The knowledge base need not change unless a new piece of information arises that indicates a change in the problem-solving procedure. Changes in the knowledge base should carefully evaluate before being implemented. In effect, changes should not be based on just one consultation experience. For example, a rule that is found to be irrelevant less than one problem situation may turn out to be crucial in solving other problems.
Least dynamic:
Inference engine. Because of the strict control and coding structure of an inference engine, changes make only if necessary to correct a bug or enhance the inferential process. Commercial inference engines, in particular, change only at the discretion of the developer. Since frequent updates can be disruptive and costly to clients, most commercial software developers try to minimize the frequency of updates.
Learn about the different sales forecasting methods, their importance, advantages, and limitations. Optimize your sales strategy with expert insights. Sales Forecasting; Every manufacturer makes an estimation of the sales likely to take place in the near future. It gives focus to the activities of a business enterprise. In the absence of sales forecast, a business has to work at random. Forecasting is one of the important aspects of administration. The comer-stone of successful marketing planning is the measurement and forecasting to market demand. The sales forecast is the estimate of the number of sales to be expected for an item/product or products for a future period of time. So, what we discussing is – Types, Importance, Advantages, and Limitations of Sales Forecasting.
The Concept of Forecasting explains Sales Forecasting by Types, Importance, Advantages, and Limitations.
In this article is discussing, Sales Forecasting: Types of Sales Forecasting, Importance of Sales Forecasting, Advantages of Sales Forecasting, and Limitations of Sales Forecasting. So, let’s discuss; Meaning of Sales Forecasting: Any forecast can be termed as an indicator of what is likely to happen in a specified future time frame in a particular field. Therefore, the sales forecast indicates as to how much of a particular product is likely to be sold in a specified future period in a specified market at the specified price. Accurate sales forecasting is essential for a business house to enable it to produce the required quantity at the right time.
Types of Sales Forecasting:
The following Types of Sales Forecasting below are:
Economic: This type of forecast is important to understand the general economic trend through a careful study of Five Year Plans, Gross national products. National income, Government expenditure, Unemployment, Consumer spending habits etc. This is in order to have an accurate forecast. Big companies, in India, adopt this method.
Industry: The future market demand is calculated through industrial forecast or market forecast. The expected sales forecasts of all the industries, in the same line of business are combined. Market demand may be affected by controllable-price, distribution, promotion, etc., and uncontrollable-demographic, economic, political, technological development, cultural activities etc. The executive must take into account all these conditions while forecasting.
Company: The third step goes to the firm concerned to look into the market share, for which forecast is to be made. By considering both controllable and uncontrollable, based on chosen marketing plans within the firm, with that of other industries, steps are taken in formulating forecasts.
There are three classes (Periods) of sales forecasts:
Short-run Forecast:
It is also known as operating forecast, covering a maximum of one year or it may be half-yearly, quarterly, monthly and even weekly. This type of forecasting can be advantageously utilized for estimating stock requirements, providing working capital, establishing sales quotas, fast-moving factors. It facilitates the management to improve and coordinate the policies and practice of Marketing-production, inventory, purchasing, financing etc. The short-run forecast is preferred to all types and brings more benefits than other types.
Purpose of Short-Term Forecasting:
Production Policy: By knowing the future demand the decision regarding production policy can be taken so that there is no problem of overproduction and short supply of input materials.
Material Requirement Planning: By knowing the future demand, the availability of the right quantity and quality of materials could be ensured.
Purchase Procedure: The purchase programme could be decided depending on the material requirements.
Inventory Control: Proper control of inventory could be ensured so that inventory carrying cost is minimum or optimum.
Equipment Requirement: The decision regarding procurement of new equipment in view of the capacity and capability of the existing equipment can be taken.
Man-Power Requirement: The decision regarding recruitment of extra labor on the full time or part time could be taken.
Finance: The arrangement of funds for the purchase of raw materials, machines, and parts could be made.
Medium-run Forecast:
This type of forecast may cover from more than one year to two or four years. This helps the management to estimate probable profit and control over budgets, expenditure, production etc. The factors-price trend, tax policies, institutional credit etc., are specially considered for a good forecast.
Long-run Forecast:
This type of forecast may cover one year to five years, depending on the nature of the firm. Seasonal changes are not considered. The forecaster takes into account the population changes, competition changes, economic depression or boom, inventions etc. Also, This type is good for adding new products and dropping old ones. The forecasting that covers a considerable period of time, such as 5, 10, 20 years is called long-term forecasting.
The period no doubt depends upon the nature of business or type of the product the firm is engaged in manufacturing. In many industries like steel plants petroleum refinery or paper mills where the total investment for the equipment/infrastructure is quite high, long-term forecasting is needed.
Purposes of Long-Term Forecasting:
To plan for the new unit of production, or expansion of the existing unit or diversification of lines of production or shut down of the existing units depending upon the level of demand.
Also, To plan the long-term financial requirement for various needs.
To make proper arrangement for training the personnel so that manpower requirement of desired expertise can be met in future.
Importance of Sales Forecasting:
The following Importance of Sales Forecasting below are:
Supply and demand for the products can easily be adjusted, by overcoming temporary demand, in the light of the anticipated estimate; and regular supply is facilitated.
A good inventory control is advantageously benefited by avoiding the weakness of understocking and overstocking.
Allocation and reallocation of sales territories are facilitated.
It is a forward planner as all other requirements of raw materials, labor, plant layout, financial needs, warehousing, transport facility etc., depend in accordance with the sales volume expected in advance.
Sales opportunities are searched out on the basis of forecast; mid thus discovery of selling success is made.
It is a gear, by which all other activities are controlled as a basis of forecasting.
Advertisement programmes are beneficially adjusted with full advantage to the firm.
It is an indicator to the department of finance as to how much and when finance is needed; it helps to overcome difficult situations.
It is a measuring rod by which the efficiency of the sales personnel or the sales department, as a whole, can be measured.
Sales personnel and sales quotas are also regularized-increasing or decreasing-by knowing the sales volume, in advance.
Additional:
It regularizes productions through the vision of sales forecast and avoids overtime at high premium rates. It also reduces idle time in manufacturing.
As is the sales forecast, so is the progress of the firm. The master plan or budget of a firm is based on forecasts. “The act of forecasting is of great benefit to all who take part in the process and is the best means of ensuring adaptability to changing circumstances. The collaboration of all concerned leads to a unified front, an understanding of the reasons for decisions, and a broadened outlook.”
Sales forecast enables all the departments of the business to work together in proper coordination and cooperation.
Sales forecast helps in product mix decisions as well. It enables the business to decide whether to add a new product to its product line or to drop an unsuccessful one.
The sales forecast is a commitment on the part of the sales department and it must be achieved during the given period, and.
It helps in guiding marketing, production and other business activities for achieving these targets.
Advantages of Sales Forecasting:
Sales are the lifeblood of every company. The advantages of forecasting your company’s sales lie mainly in giving you a firm idea of what to expect in the coming months. A standard sales forecast looks at conditions present in your business during previous months and then applies assumptions regarding customer acquisition, the economy, and your product and service offerings. Forecasting sales identifies weaknesses and strengths before you set your budget and marketing plans for the next year, allowing you to optimize your purchasing and expansion plans.
The following Advantages of Sales Forecasting are four types:
1. Cash Flow:
Forecasting helps manage cash flow by predicting future sales and ensuring that the company can meet its financial obligations. This foresight can prevent potential shortfalls and ensure that there are sufficient funds for operations, investments, and emergencies.
2. Purchasing:
Sales forecasting aids in planning purchasing activities. By anticipating future demand, companies can make timely and cost-efficient procurement decisions, avoiding both overstocking and stockouts.
3. Planning:
It assists in strategic planning by providing a basis for making informed decisions. This includes production planning, workforce planning, and setting realistic sales targets and marketing strategies.
4. Tracking:
Sales forecasting offers a framework for tracking progress and performance. This allows management to monitor actual sales against forecasts, identify variances, and adjust strategies accordingly to stay on track with company goals.
By leveraging these advantages, businesses can enhance their operational efficiency, financial stability, and overall market competitiveness.
Limitations of Sales Forecasting:
In certain cases forecast may become inaccurate. The failure may be due to the following factors:
Fashion:
Changes are throughout. Present style may change any time. It is difficult to say as to when a new fashion will be adopted by the consumers and how long it will be accepted by the buyers. If our product is similar to fashion and is popular, we are able to have the best result; and if our products are not in accordance with the fashion, then sales will be affected.
Lack of Sales History:
A sales history or past records are essential for a sound forecast plan. If the past data are not available, then the forecast is made on guess-work, without a base. Mainly a new product has no sales history and forecast made on guess may be a failure.
Psychological Factors:
Consumer’s attitude may change at any time. The forecaster may not be able to predict exactly the behavior of consumers. Certain market environments are quick in action. Even rumors can affect market variables. For instance, when we use a particular brand of soap, it may generate itching feeling on a few people and if the news spread among the public, sales will be seriously affected.
Other Reasons:
It is possible that the growth may not remain uniform. It may decline or be stationary. The economic condition of a country may not be favorable to the business activities-policies of the government, the imposition of controls etc. It may affect the sales.
Basic Limitations of Sales Forecasting;
The tastes and preferences of the buyers do not remain constant. A sudden change in the preference of the buyers may render the forecasts meaningless.
The economic conditions prevailing in every country also do not remain stable. The purchasing power of money, desire to save and invest etc., are some of the important economic factors having a bearing on sales forecast.
The political conditions in a State also influence sales forecast. The policies of the Government regarding business change often. A sudden hike in excise duty or sales tax by the Government may affect sales.
The entry of competitors may also affect sales. A firm enjoying monopoly status may lose such a position if the buyers find the competitors’ products more superior.
Progress in science and technology may render the present technology obsolete. As a result, products which are right now enjoying a good market may lose the market and the demand for products made using the latest technology will increase. This is particularly true in the case of the market for electronic goods, computer hardware, software and so on.
The methods of sales forecasting discussed above have respective advantages and limitations or merits and demerits. No single method may be suitable. Therefore, a combination method is suitable and may give a good result. The forecaster must be cautious while drawing decisions on sales forecast. Periodical review and revision of sales forecast may be done, in the light of performance. A method which is quick, less costly and more accurate may be adopted.
Financial planning is an important part of financial management. It is the process of determining the objectives; policies, procedures, programmes, and budgets to deal with the financial activities of an enterprise. Financial planning reflects the needs of the business and is integrated with the overall business planning. Proper financial planning is necessary to enable the business enterprise to have the right amount of capital to continue its operations efficiently. So, what we discussing is – Financial Planning: Steps, Elements, Advantages, Limitations.
The Concept of Financial Planning explains their key points into Steps, Elements, Advantages, and Limitations.
Financial planning involves taking certain important decisions so that funds are continuously available to the company and are used efficiently. In this article we Discuss; Financial Planning: Steps of Financial Planning, Elements of Financial Planning, Advantages and Disadvantages of Financial Planning, Limitations of Financial Planning, and Process of Financial Planning.
Steps in Financial Planning:
Financial planning involves the following steps:
These are:
Set-up Financial Objectives.
Financial Policies.
Procedures, and.
Flexibility.
Now, explain each one;
Set-up Financial Objectives:
The financial objectives of a company should be clearly determined. Both short-term and long-term objectives should be carefully prepared. The main purpose of financial planning should be to utilize financial resources in the best possible manner. There should be an optimum utilization of funds. The concern should take advantage of the prevailing economic situation.
Financial Policies:
The financial policies of a concern deal with procurement, administration, and distribution of business funds in the best possible way. There should be clear-cut plans of raising required funds and their possible uses. The current and future needs for funds should be considered while formulating financial policies.
Procedures:
The procedures are formed to ensure consistency of actions. The procedures follow the formulation of policies. If a policy is to raise short-term funds from banks, then a procedure should be laid to approach the lenders and the persons authorized to initiate such actions.
Flexibility:
The financial planning should ensure proper flexibility in objective, policies, and procedures so as to adjust according to changing economic situations. The changing economic environment may offer new opportunities. The business should be able to make use of such situations for the benefit of the concern. A rigid financial planning will not let the business use new opportunities.
Elements of Financial Planning:
Financial planning involves the following steps or elements:
These are:
Objectives.
Capital Requirements.
Kinds of Securities to be issued, and.
Policies.
Now, explain each one;
Objectives:
For effective financial planning, it is essential to clearly lay down the financial objectives sought to be achieved. The financial objectives should be based on the overall objectives of the company. The objectives of financial management may be set up in the areas, namely, investment, financing, and dividend.
Capital Requirements:
Capital is required for various needs of the business. The separate assessment is to be made of the requirements of fixed and working capital. Fixed capital is needed for acquiring fixed assets such as land and building, plant and machinery, furniture, etc. It is blocked for a long time. Working capital is required for holding current assets like stock, bills receivable, etc. and cash for meeting day-to-day expenses in running the business.
Kinds of Securities to be issued:
A company can issue equity shares, preference shares, and debentures to raise long-term funds. The types and proportion of securities to be issued should be properly determined.
Policies:
Financial planning leads to the formulation of policies relating to borrowing and lending, cash control and other financial activities. Such policies will help in taking vital decisions for the administration of capital and achieving coordination in financial activities.
Advantages and Disadvantages of Financial Planning:
These are the advantages of financial planning; It will set out clearly the money that you need to put together to start the business and then to run it for a period. It will help you to obtain funding if you need it. It will help prevent you from going into a business that will not be successful. Highlight periods where your business may need extra financial help. Inspire confidence in lenders and banks that you may have to approach for finance. It will help you to spot problems early so you can make plans for the necessary solution. For example, it will highlight whether you are holding too much stock or whether your collection is less than it should be or that you will be short of cash at a particular time.
These are the disadvantages of financial planning; It can be a costly process because you will need the assistance of your accountant or financial adviser. It can take a lot of time, A financial plan merely forecasts and accounting.
Limitations of Financial Planning:
Some of the limitations of financial planning are discussed as follows:
Financial plans are prepared by taking into account the expected situations in the future. Since the future is always uncertain and things may not happen as these are expected, so the utility of financial planning is limited. The reliability of financial planning is uncertain and very much doubted.
Changes:
Once a financial plan is prepared then it becomes difficult to change it. A changed situation may demand a change in financial plan but managerial personnel may not like it. Even otherwise, assets might have been purchased and raw material and labor costs might have been incurred. It becomes very difficult to change a financial plan under such situations.
A Problem of Coordination:
The financial function is the most important of all the functions. Other functions influence a decision about the financial plan. While estimating financial needs, production policy, personnel requirements, marketing possibilities are all taken into account.
Unless there is a proper-coordination among all the functions, the preparation of a financial plan becomes difficult. Often there is a lack of coordination among different functions. Even indecision among personnel disturbs the process of financial planning.
Rapid Changes:
The growing mechanization of the industry is bringing rapid changes in the industrial process. The methods of production, marketing devices, consumer preferences create new demands every time. The incorporation of new changes requires a change in financial plan every time.
Once investments are made in fixed assets then these decisions cannot be reversed. It becomes very difficult to adjust a financial plan for incorporating fast-changing situations. Unless a financial plan helps the adoption of new techniques, its utility becomes limited.
Understand the Process of Financial Planning:
Following decisions are included in financial planning or process of financial planning is as under:
Objectives:
In the first stage, financial objectives of the organization are determined. Financial objectives of an organization may be of two kinds:
Short-term: It includes the maintenance of adequate liquidity in the organization,
Long-term: It includes the procurement of adequate finance from different sources so as to increase the efficiency of the organization.
Policies:
In the second stage of financial planning, financial policies are determined so that financial objectives could be achieved. It includes capitalization policy, capital structure policy; fixed assets management policy, dividend policy, working capital management policy, credit policy, etc.
For instance, in respect of capital structure, the policy of the company may be to depend on equity share capital in the initial years; regarding distribution of dividend, the policy may be to keep the rate of dividend low in the initial years, regarding credit sale the policy of the organization may be to sell goods on credit to creditworthy customers alone.
Procedures:
In the third stage of financial planning, financial procedures are determined. Procedures are clearer than policies. In case of a procedure, it is laid down in what order a job will be performed. For instance, the decision regarding depending on equity capital in the initial years of the company is a policy but the different steps taken to procure equity capital fall under the category of financial procedure.
Similarly, credit sale is a policy but prescribing the sequence of action to be taken in case of non-realisation of payment on time, is a financial procedure.
Financial Planning: Steps, Elements, Advantages, Limitations. Image credit from #Pixabay.
Explore the advantages and limitations of forecasting to enhance your decision-making. Gain insights into effective strategies for accurate predictions. As we know, What is Forecasting? It may not reduce the complications and uncertainty of the future. Forecasting is the process of making predictions of the future based on past and present data and most commonly by analysis of trends. A commonplace example might be an estimation of some variable of interest at some specified future date. However, it increases the confidence of the management to make important decisions. Forecasting is the basis of promising. Forecasting uses many statistical techniques.
The Concept of Business is explaining Forecasting for Company, in points of Advantages and Limitations or Disadvantages.
In this article, we will discuss Forecasting for Business Planning: First Advantages of Forecasting Methods, Advantages of Forecasting, after that Limitations of Forecasting, Basic Disadvantages of Forecasting, and finally discussing Steps in Forecasting. Usage can differ between areas of application: for example, in hydrology the terms “forecast” and “forecasting” are sometimes reserved for estimates of values at certain specific future times, while the term “prediction” is used for more general estimates, such as the number of times floods will occur over a long period.
Forecasting plays a vital role in the process of modern management. It is an important and necessary aid to planning and planning is the backbone of effective operations.
Forecasting by promoting the participation of the entire organization in this process provides opportunities for teamwork and brings about unity and coordination.
The making of forecasts and their review by managers, compel thinking ahead, looking to the future and providing for it.
Forecasting provides a way for effective coordination and control. Forecasting requires information about various external and internal factors. The information is collected from various internal sources. Thus, almost all units of the organization are involved in this process, which provides interactive opportunities for better unity and coordination in the planning process. Similarly, forecasting can provide relevant information for exercising control. Also, The managers can know their weakness in the forecasting process and they can take suitable action to overcome these.
A systematic attempt to probe the future by inference from known facts helps integrate all management planning so that unified overall plans can be developed into which divisional and departmental plans can mesh.
The uncertainty of future events can be identified and overcomes by effective forecasting. Therefore, it will lead to success in the organization.
#Limitations of Forecasting:
The following limitations of forecasting are listed below:
The basis of Forecasting:
The most serious limitations of forecasting arise out of the basis used for making forecasts. Top executives should always bear in mind that the bases of forecasting are assumptions, approximations, and average conditions.
Management may become so concerned with the mechanism of the forecasting system that it fails to question its logic. Also, This critical examination is not to discourage attempts at forecasting. But to sound caution about the practice of forecasting and its inherent limitations.
Reliability of Past Data:
The forecasting is made on the basis of past data and the current events. Although past events/data are analyzed as a guide to the future, a question is raised as to the accuracy as well as the usefulness of these recorded events.
Time and Cost Factor:
Time and cost factor is also an important aspect of forecasting. They suggest the degree to which an organization will go for formal forecasting. Also, The information and data required for forecast may be in highly disorganized form; some may be in qualitative form.
The collection of information and conversion of qualitative data into quantitative ones involves a lot of time and money. Therefore, managers have to tradeoff between the cost involved in forecasting and resultant benefits. So forecasting should be made by eliminating the above limitations.
#Disadvantages of Forecasting:
The primary disadvantage of forecasting is the same as that of any other method of predicting the future: No one can be absolutely sure what the future holds. Any unforeseen factors can render a forecast useless, regardless of the quality of its data. Also, some forecasting methods may use the same data but deliver widely different forecasts. For instance, one forecasting method can show that interest rates will rise, while another will illustrate that rates will hold steady or decline.
#Steps of Forecasting:
Procedure, stages or general steps involved in forecasting are given below:
The management can develop a sound foundation, for the future after considering available information, experience, type of business, and the rate of development.
Collecting and analyzing data:
Data collection is time-consuming. Only relevant data must be kept. Many statistical tools can be used to analyze the data.
Estimating future events:
The future events are estimated by using trend analysis. Trend analysis makes provision for some errors.
Comparing results:
The actual results are compared with the estimated results. If the actual results tally with the estimated results, there is nothing to worry. In case of any major difference between the actuals and the estimates, it is necessary to find out the reasons for poor performance.
Follow up action:
The forecasting process can be continuously improved and refined on the basis of past experience. Areas of weaknesses can be improved for the future forecasting. There must be regular feedback on past forecasting.
Above advantages and limitations, may be explained as you want to understating about Forecasting. Risk and uncertainty are central to forecasting and prediction; it is generally considered the good practice to indicate the degree of uncertainty attaching to forecasts. In any case, the data must be up to date in order for the forecast to be as accurate as possible. In some cases, the data used to predict the variable of interest is itself forecasted.
Importance of Forecasting in Business – As we know Business forecasting is an act of predicting future economic conditions based on past and present information. It refers to the technique of taking a perspective view of things likely to shape the turn of things in the foreseeable future. As the future is always uncertain, there is a need for an organized system of forecasting in business. Define, Business Forecasting is the calculation of probable events, to provide against the future. It, therefore, involves a ‘look ahead’ in business and an idea of predetermination of events and their financial implications as in the case of budgeting. So, what we discussing is – Importance, Advantages, Limitations of Business Forecasting in Business.
The Concept of Financial Management is explaining Business Forecasting for Business, in points of Importance, Advantages, and Limitations.
In this article, we will discuss Business Forecasting for Business: First Importance of Business Forecasting, then basic Advantages of Business Forecasting, after that main Advantages of Business Forecasting, and finally discussing Limitations of Business Forecasting. Let’s start discussing:
Importance of Business Forecasting:
The following key points show the growing importance of business forecasting:
These are:
Plan Formulation.
Estimation of financial requirements.
Smooth and continuous working of a concern.
The correctness of management decisions.
Promotion for new business.
Success in business.
Co-Operation and coordination, and.
Complete Control.
Each one Explanation:
Plan Formulation:
The importance of correct forecasting is apparent from the Key role it plays in planning. It should not go unaccounted that forecasting is an essential element in planning since planning premises include some forecasts. There are forecast data of a factual nature having enormous implication on sound premises. Undoubtedly, forecasting is a prelude to planning and indeed it is the foundation on which planning takes place.
In fact, planning under all circumstances and in all occasions involve a good deal of forecasting, i.e. appraising the future in the light of existing conditions and environment. Forecasting and planning are closely related. Adequate planning, no matter whether it is overall or sectoral, short-term or long-term, largely depends on forecasting.
Estimation of financial requirements:
The importance of forecasting can’t ignore in estimating the financial requirements of a concern. Efficient utilization of capital is a delicate issue before the management. No business can survive without adequate capital.
But adequacy of either fixed or working capital depends entirely on sound financial forecasting. Financial estimates can calculate in the light of probable sales and cost thereof. How much capital needs for expansion, development, etc., will depend upon accurate forecasting?
Smooth and continuous working of a concern:
“Forecasting of earnings” ensures smooth and continuous working of an enterprise, particularly to newly established ones. By forecasting, these concerns can estimate their expected profits or losses. The object of a forecast is to reduce in black and white the details of working of a concern.
The correctness of management decisions:
The correctness of management decisions to a great extent depends upon accurate forecasting.
“Administration is essentially a decision-making process and authority has responsibility for making decisions and for ascertaining that the decisions made are carried out. In business, whether the enterprise is large or small, changes in conditions occur; shifts in personnel take place, unforeseen contingencies arise. Moreover, just to get the wheels started and to keep them turning, decisions must be made.”
This shows that the decision-making process continues throughout the life of the concern. Forecasting plays an important role in various fields of concern. As in the case of production planning, management has to decide what to produce and with what resources. Thus forecasting considers an indispensable component of the business because it helps management to take correct decisions.
Promotion for new business:
Forecasting is of utmost importance in setting up a new business. It is not an easy task to start a new business as it is full of uncertainties and risks. With the help of forecasting the promoter can find out whether he can succeed in the new business; whether he can face the existing competition; what is the possibility of creating demand for the proposed product etc.
After discovering the business opportunity, he will see the possibilities of assembling men, money, materials etc. The success of a business unit depends upon as to how sound is the forecasting? Proper forecasting will help to minimize the role of luck or chance in determining business success or failure. A successful promoter is also the prophet of economic conditions.
Success in business:
The accurate forecasting of sales helps to procure necessary raw materials based on which many business activities undertake. Accurate sales forecasting becomes the basis for several other budgets. In the absence of accurate sales forecasting, it is difficult to decide as to how much production should be done.
Thus, to a great extent, the budgets of other departments depend upon the compilations based on the sales forecasts and the accuracy of these budgets also depends upon the correctness of sales forecasting. Thus, the success of a business unit depends on accurate forecasting by the various departments.
Cooperation and coordination:
Forecasting is not one man’s job. It needs proper co-ordination of all departmental heads in a company. Thus, by bringing the participation of all concerned in the process of forecasting, team spirit and coordination automatically encourage.
According to Henry Fayol,
“The act of forecasting is of great benefit to all who take part in the process and is the best means of ensuring adaptability to changing circumstances. The collaboration of all concerned leads to a united front, an understanding of the reasons for decisions and a broadened outlook.”
Complete Control:
Forecasting provides the information which helps in the achievement of effective control. The managers become aware of their weaknesses during forecasting and through implementing better effective control they can overcome these weaknesses.
Basic Advantages of Business Forecasting:
The following Advantages of Business Forecasting basically understand:
By forecasting regularly, it forces you to continually think about your future and where your business is headed. Also, This will allow you to foresee changing market trends and stay ahead of your competition.
Keep your customers satisfied by providing them with the product they want, when they want it. The advantage of forecasting in business will help predict product demand so that enough product (or staffing) is available to fill customer orders particularly if demand is seasonal.
If you expect to apply for a loan or line of credit, your financial institution will likely ask you to provide them with forecasting reports with your submission.
Forecasting can give you the intelligence to anticipate a downturn in sales and plan for it. Likewise, it can alert you to periods when you can expect an increase in sales and you can organize additional staffing ahead of time.
If you can’t measure it, you can’t improve it. Setting goals alongside your business forecast allow you to track your progress and plan your operations that are aligned with what you want to achieve.
Main Advantages of Business Forecasting:
The following Advantages of Business Forecasting below are:
These are:
Create Own a New Business.
Your Business Formulating Plans.
Based-Business Estimating Financial Require.
Facilitating Managerial Decisions.
Mostly Quality of Management.
Encourages Cooperation and coordination.
Control Better Utilisation of Resources, and.
Finally get Success in Business.
Here are Explain each:
Create Own a New Business:
While setting up a new business, several business forecasts are required. One has to forecast the demand for the product, the capacity of competitors, expected share in the market, the amount and sources of raising finances, etc. The success of a new business will depend upon the accuracy of such forecasts. If the forecasts are made systematically, then the operations of the business will go smoothly and the chances of failure will be minimized.
Your Business Formulating Plans:
Forecasting provides a logical basis for preparing plans. Also, It plays a major role in managerial planning and supplies the necessary information. The future assessment of various factors is essential for preparing plans. In fact, planning without forecasting is an impossibility. Henry Fayol has rightly observed that the entire plan of an enterprise is made up of a series of plans called forecasts.
Based-Business Estimating Financial Require:
Every business needs adequate capital. In the absence of correct estimates of financial requirements, the business may suffer either from inadequate or from excess capital. Forecasting of sales and expenses helps in estimating future financial needs. Also, The plans for expansion, diversification, or improvement necessitate the forecasting of requirements of funds. Proper financial planning depends upon systematic forecasting.
Facilitating Managerial Decisions:
Forecasting helps management to take correct decisions. By providing a logical basis for planning and determining in advance the nature of future business operations, it facilitates correct managerial decisions about material, personnel, sales, and other requirements.
Mostly Quality of Management:
It improves the quality of managerial personnel by compelling them to look into the future and make provision for the same. By focussing attention on the future, forecasting helps the management in adopting a definite course of action and a set purpose.
Encourages Cooperation and coordination:
Forecasting calls for some minimal effort on the part of all and. thus, creates a sense of participation. Also, It is not one man’s or one department’s job. No department or person can make its forecasts in isolation.
There should be a proper co-operation and co-ordination among different departments for setting proper forecasts for the business as a whole. So, the forecasting process leads to better co-operation and co-ordination among people of various departments of the organization.
Control Better Utilization of Resources:
Forecasting ensures better utilization of resources by revealing the areas of weaknesses and providing necessary information about the future. Also, Management can concentrate on critical areas and control more effectively.
Finally get Success in Business:
Success in business, to a great extent, depends upon correct predictions about the future. Systematic forecasting ensures the smooth and continuous working of the business. By knowing the future course of events in advance, one could always face the difficulties in a planned manner.
Limitations of Business Forecasting:
In spite of many advantages, some people regard business forecasting,
“As an unnecessary mental gymnastics and reject it as a sheer waste of time, money and energy.”
The reason for the same lies in the fact that despite all precautions, an element of error is bound to creep in the forecasts and we cannot eliminate guesswork in forecasts.
It is also felt that forecasting is influenced by the pessimistic or optimistic attitude of the forecaster. It may not be possible to make forecasts with pinpoint accuracy. But, it still cannot undermine the importance of business forecasting.
The management should first make use of statistical and econometric models in making forecasts and then apply collective experience, skill and objective judgment in evaluating the forecasts. Further, the forecasts should be constantly monitored and revised with the changed circumstances.
Importance, Advantages, Limitations of Business Forecasting to Business. Image credit from #Pixabay.
What is the Meaning of Ratio Analysis? Ratio analysis refers to the analysis and interpretation of the figures appearing in the financial statements (i.e., Profit and Loss Account, Balance Sheet and Fund Flow statement, etc.). So, What we discussing is – Importance, Objectives, Advantages of Ratio Analysis. It is a process of comparison of one figure against another. It enables users like shareholders, investors, creditors, government, and analysts, etc. to get a better understanding of financial statements.
The Concept of Accounting explains Ratio Analysis in the points of Importance, Objectives, Advantages.
Definition of Ratio Analysis: Define the term ratio analysis as “The systematic use of ratios to interpret the financial statements so that the strengths and weaknesses of a firm, as well as its historical performance and current financial conditions, can determine.” Ratio analysis is a very powerful analytical tool useful for measuring the performance of an organization.
Accounting ratios may just use as a symptom like blood pressure, pulse rate, body temperature, etc. The physician analyses this information to know the causes of illness. Similarly, the financial analyst should also analyze the accounting ratios to diagnose the financial health of an enterprise. In this article discussing Ratio Analysis: First Importance of Ratio Analysis, then second Objectives of Ratio Analysis, and finally Advantages of Ratio Analysis.
Importance of Ratio Analysis:
The following 10 best points of Importance of Ratio Analysis below are:
Measure General Efficiency:
Ratios enable the mass of accounting data to summarize and simplify. They act as an index of the efficiency of the enterprise. As such they serve as an instrument of management control.
Measure Financial Solvency:
Ratios are useful tools in the hands of management and other concerned to evaluate the firm’s performance over some time by comparing the present ratio with the past ones. They point out the firm’s liquidity position to meet its short-term obligations and long-term solvency.
Forecasting and Planning:
Ratio analysis is an invaluable aid to management in the discharge of its basic function such as planning, forecasting, control, etc. The ratios that are derived after analyzing and scrutinizing the past result, helps the management to prepare budgets to formulate policies and to prepare the plan of action, etc.
Facilitate Decision-Making:
It throws light on the degree of efficiency of the management and utilization of the assets and that is why it is called a surveyor of efficiency. They help management in decision-making.
Corrective Action:
Ratio analysis provides the inter-firm comparison. They highlight the factors associated with successful and unsuccessful firms. If the comparison shows an unfavorable variance, corrective actions can initiate. Thus, it helps the management to take corrective action.
Intra Firm Comparison:
Intra firm comparisons are facilitating. It is an instrument for the diagnosis of the financial health of an enterprise. It facilitates the management to know whether the firm’s financial position is improving or deteriorating by setting a trend with the help of ratios.
Act as a Good Communication:
Ratios are an effective means of communication and play a vital role in informing the position of and progress made by the business concern to the owners and other interested parties. The communications by the use of simplifying and summarize ratios are more easy and understandable.
Evaluation of Efficiency:
Ratio analysis is an effective instrument that, when properly used, is useful to assess important characteristics of business—liquidity, solvency, profitability, etc. A study of these aspects may enable conclusions to draw relating to the capabilities of the business.
Effective Tool:
Ratio analysis helps in making effective control of the business- measuring performance, control of cost, etc. Effective control is the keynote of better management. The ratio ensures secrecy.
Detection of Unfavourable Factors:
Analysis of financial statements enables the analyst to find out the soundness or otherwise of the business. If the analysis reveals financial unsoundness, the factors responsible for such unsoundness can separate and corrective action was taken without loss of time.
The Objectives of Ratio Analysis:
The main objectives of ratio analysis are to show a firm’s relative strengths and weaknesses. Other objectives of ratio analysis include comparisons for a useful interpretation of financial statements, finding solutions to unfavorable financial statements and to help take corrective measures when, in comparison to other similar firms, financial conditions and performance of the firm are unfavorable.
Ratio analysis also determines the financial condition and financial performance of a firm. Using ratio analysis allows an analyst to determine the ability of the firm to meet its obligations, the overall operating efficiency, and performance of the firm and the efficiency with which the firm is utilizing its assets in generating sales.
Ratio analysis is a tool used to conduct a quantitative analysis of information in a company’s financial statements. Ratios are calculated by individuals from current year numbers and are these numbers are then used to judge the performance of the company by comparing them to previous years, other companies, the industry or even the economy.
Extra Knowledge:
Ratio analysis can help give a quick indication of how a company is doing in certain key areas and the ratios can categorize as short-term solvency ratios, debt management ratios, asset management ratios, profitability ratios, and market value ratios. Ratio analysis should only use as the first step in financial analysis.
As it is a tool that is based on accounting information, it can limit by any distortions that arise in financial statements due to historical cost accounting and inflation. It can also be difficult to draw comparisons using ratio analysis due to differences in the analysis made by other firms.
Using ratio analysis can identify areas that may need to be investigating further. Some of the advantages of ratio analysis include that it helps in credit analysis, it can help in financial performance analysis and that it simplifies a financial statement.
The basic important advantages of Ratio Analysis are also great.
Ratio analysis is an important tool for analyzing the company’s financial performance. The following are the important advantages of the accounting ratios.
Analyzing Financial Statements:
Ratio analysis is an important technique of financial statement analysis. Accounting ratios are useful for understanding the financial position of the company. Different users such as investors, management. bankers and creditors use the ratio to analyze the financial situation of the company for their decision making purpose.
Judging Efficiency:
Accounting ratios are important for judging the company’s efficiency in terms of its operations and management. They help judge how well the company has been able to utilize its assets and earn profits.
Locating Weakness:
Accounting ratios can also use in locating the weakness of the company’s operations even though its overall performance may be quite good. Management can then pay attention to the weakness and take remedial measures to overcome them.
Formulating Plans:
Although accounting ratios are using to analyze the company’s past financial performance, they can also use to establish future trends of its financial performance. As a result, they help formulate the company’s plans.
Comparing Performance:
A company needs to know how well it is performing over the years and as compared to the other firms of a similar nature. Besides, it is also important to know how well its different divisions are performing among themselves in different years. Ratio analysis facilitates such comparison.
Main Advantages of Ratio Analysis:
Ratio analysis is widely used as a powerful tool for financial statement analysis. It establishes the numerical or quantitative relationship between two figures of a financial statement to ascertain the strengths and weaknesses of a firm as well as its current financial position and historical performance. It helps various interested parties to evaluate a certain aspect of a firm’s performance.
The following 10 best points are the principal advantages of ratio analysis:
Forecasting and Planning:
The trend in costs, sales, profits, and other facts can know by computing ratios of relevant accounting figures for the last few years. This trend analysis with the help of ratios may be useful for forecasting and planning future business activities.
Budgeting:
The budget is an estimate of future activities based on experience. Accounting ratios help to estimate budgeted figures. For example, the sales budget may prepare with the help of an analysis of past sales.
Measurement of Operating Efficiency:
The analysis indicates the degree of efficiency in the management and utilization of its assets. Different activity ratios indicate operational efficiency. The solvency of a firm depends upon the sales revenues generated by utilizing its assets.
Communication:
Ratios are effective means of communication and play a vital role in informing the position of and progress made by the business concern to the owners or other parties.
Control of Performance and Cost:
Ratios may also use for control of performances of the different divisions or departments of an undertaking as well as control of costs.
Inter-firm Comparison:
A comparison of the performance of two or more firms reveals efficient and inefficient firms, thereby enabling inefficient firms to adopt suitable measures for improving their efficiency. The best way of inter-firm comparison is to compare the relevant ratios of the organization with the average ratios of the industry.
The indication of Liquidity Position:
They help to assess the liquidity position i.e., the short-term debt-paying ability of a firm. Liquidity ratios indicate the ability of the firm to pay and help in credit analysis by banks, creditors and other suppliers of short-term loans.
The indication of Long-term Solvency Position:
They also use to assess the long-term debt-paying capacity of a firm. The long-term solvency position of a borrower is a prime concern to the long-term creditors, security analysts and the present and potential owners of a business. It measures by the leverage/capital structure and profitability ratios which indicate the earning power and operating efficiency. Ratio analysis shows the strength and weaknesses of a firm in this respect.
The indication of Overall Profitability:
The management is always a concern with the overall profitability of the firm. They want to know whether the firm can meet. It is short-term as well as long-term obligations to its creditors, to ensure a reasonable return to its owners. And, secures optimum utilization of the assets of the firm. This is possible if all the ratios are considered together.
The signal of Corporate Sickness:
A company is sick when it fails to generate a profit continuously and suffers a severe liquidity crisis. Proper ratio analysis can give the signal of corporate sickness in advance. So, timely measures can take to prevent the occurrence of such sickness.
Aid to Decision-making:
They help to make decisions like whether to supply goods on credit to a firm. Whether bank loans will make available etc.
Simplification of Financial Statements:
They make it easy to grasp the relationship between various items and helps in understanding the financial statements.
Importance, Objectives, Advantages of Ratio Analysis. Image credit from #Pixabay.
A Eurobond is an international bond that denominates in a currency not native to the country where it issues. Also, call external bonds; “External bonds which, strictly, are neither Eurobonds nor foreign bonds would also include: foreign currency-denominated domestic bonds…”This article explains the Euro bonds or Eurobonds with their topics Meaning, Definition, Characteristics, Types, and Advantages. Money may raise internationally by bond issues and by bank loans. This does in domestic as well as international markets.
The Concept of Eurobonds or Euro bonds explains in Meaning, Definition, Types, Characteristics, and Advantages.
It can categorize according to the currency in which it issues. London is one of the centers of the Eurobond market, with Luxembourg being the primary listing center for these instruments. The difference is that in international markets the money may come in a currency that is different from that normally used by the borrower. A foreign bond a bond issue in a particular country by a foreign borrower. Eurobonds bonds underwrite and sell in more than one country.
Meaning and Definition of Eurobonds:
A foreign bond may define as an international bond sold by a foreign borrower but denominated in the currency of the country in which it is placed. It underwrites and sells by a national underwriting syndicate in the lending country. Thus, a US company might float a bond issue in the London capital market, underwritten by a British syndicate and denominated in sterling.
The bond issue would sell to investors in the UK capital market, where it would quote and traded. Foreign bonds issued outside the USA call Yankee bonds, while foreign bonds issued in Japan are called Samurai bonds. Canadian entities are the major floaters of foreign bonds in the USA.
Euro bonds may define as an international bond underwritten by an international syndicate and sold in countries other than the country of the currency in which the issue denominates. In the Eurobond market, the investor holds a claim directly on the borrower rather than on a financial institution.
Eurobonds are generally issued by corporations and governments needing secure, long-term funds and are sold through a geographically diverse group of banks to investors around the world. Eurobonds are similar to domestic bonds in that they may issue with fixed or floating interest rates.
An Issue of Eurobonds:
The issue of Eurobonds is normally undertaken by a consortium of international banks. A record of the transaction called a “Tombstone” is subsequently published in the financial press. Those banks whose names appear at the top of the tombstone have agreed to subscribe to the issue. At a second level, a much larger underwriting syndicate mentioned.
The banks in the managing syndicate will have made arrangements with a worldwide group of underwriters, mainly banks and security dealers. After arranging the participation of several underwriters, the managing syndicate will have made a firm offer to the borrower, which obtains the funds from the loan immediately. At a third level, the underwriting group usually arranges for the sale of the issue through an even larger selling group of banks, brokers, and dealers.
Types of Eurobonds:
There are three types of Eurobonds, of which two are international bonds. A domestic bond is a bond issue in a country by a resident of that country.
There are several different types of Eurobonds.
Straight Bond: Bond is one having a specified interest coupon and a specified maturity date. Straight bonds may issue with a floating rate of interest. Such bonds may have their interest rate fixed at six-month intervals of a stated margin over the LIBOR for deposits in the currency of the bond. So, in the case of a Eurodollar bond, the interest rate may base upon LIBOR for Eurodollar deposits.
Convertible Eurobond: The Eurobond is a bond having a specified interest coupon and maturity date. But, it includes an option for the hold to convert its bonds into an equity share of the company at a conversion price set at the time of issue.
Medium-term Eurobond: Medium-term Euro notes are shorter-term Eurobonds with maturities ranging from three to eight years. Their issuing procedure is less formal than for large bonds. Interest rates on Euro notes can fix or variable. Medium-term Euro-notes are similar to medium-term roll-over Eurodollar credits. The difference is that in the Eurodollar market lenders hold a claim on a bank and not directly on the borrower.
Characteristics of Euro bonds or Features of Eurobonds:
The following characteristics of euro bonds below are;
Straight bonds: the fixed interest rate at periodic intervals, usually annually.
Floating-rate notes (FRNs): rollover pricing payment usually six months interest stated in terms of a spread over some reference rate.
Zero-coupon bonds: discount securities, sold either at a fraction of face value and redeemed at face value, or sold at face value and redeemed at a premium.
Convertible bonds: can exchange for some other type of asset: stock, gold, oil, other bonds.
Mortgage-backed Eurobonds: backed by a pool of mortgages, or other bonds Institutions which would otherwise exclude from Eurobond market can get access.
Dual-currency bonds: purchased in one currency, coupon or principal paid in a second currency.
The following Eurobonds features are:
The issuing technique takes the form of a placing rather than formal issuing, this avoids national regulations on new issues.
Eurobonds place simultaneously in many countries through syndicates of underwriting banks. Which sells them to their investment clientele throughout the world.
Unlike foreign bonds, Eurobonds sale in countries other than that of the currency of denomination; thus dollar-denominated Eurobonds sale outside the U.S.A.
The interest on Eurobonds is not subject to withholding tax.
Advantages of Eurobonds:
The Eurobonds market possesses several advantages for borrowers and investors.
The advantages of Eurobonds to borrowers are:
The size and depth of the market are such that it can absorb large and frequent issues.
The Eurobond market has freedom and flexibility not found in domestic markets.
The cost of the issue of Eurobonds, around 2.5 percent of the face value of the issue.
Maturities in the Eurobond market are suited to long-term funding requirements.
A key feature of the Eurobond market is the development of a sound institutional framework for underwriting, distribution, and the placing of securities.
The advantages of Eurobonds to investors are:
Euro bonds are issued in such a form that interest can pay free of income or withholding taxes of the borrowing countries. Also, the bonds issued in bearer form and are held outside the country of the investor, enabling the investor to evade domestic income tax.
Issuers of Eurobonds have a good reputation for creditworthiness.
A special advantage to borrowers as well as lenders provides by convertible Eurobonds. Holders of convertible debentures give an option to exchange their bonds at a fixed price.
The Eurobond market is active both as a primary and as a secondary market.
Bonds denominated in a particular currency that usually issues simultaneously in the capital markets of several nations. They differ from foreign bonds in that most nations do not have pre-offering registration or disclosure requirements for Eurobond issues. An Example of a Eurobond a bond issue by a Russian corporation in the European market that pays interest and principal in U.S. dollars.
Meaning, Definition, Characteristics, Types, and Advantages of Eurobonds. Image Credit from Online.
The meaning of management accounting is Presentation of accounting information is to assist in the management of management accounting policy creation and to help in the day-to-day operation of an undertaking. Management Accounting of Functions, Advantages, and Limitations. Thus, it is related to the use of aggregated accounting data with the help of financial accounting andcost accounting with the objective of planning, planning, controlling and decision making by the management. Management accounting link management with accounting is the subject of management accounting as any accounting information required to make managerial decisions. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।
Better Explanation of Management Accounting of Functions, Advantages, and Limitations. With Meaning and Definition.
Management Accountancy is a composite mix together in all aspects of complete, financial accounting, cost accountancy, and financial management. This crystal becomes clear that management presents accounting management accounting information in the form of processed data collected from financial accounting, cost accounting so that it can be very useful in the management part to make appropriate decisions in management, Scientific methods, when necessary.
Meaning of Management Accounting:
Management Accounting is the presentation of accounting information in order to formulate the policies to be adopted by the management and assist its day-to-day activities. In other words, it helps the management to perform all its functions including planning, organizing, staffing, directing and controlling.
Definitions of Management Accounting:
In the words of J. Batty:
“Management Accountancy is the term used to describe the accounting methods, systems, and techniques which, with special knowledge and ability, assist management in its task of maximizing profit or minimizing losses.”
According to R. N. Anthony:
“Management Accounting is concerned with accounting information that is useful to management.”
According to ICWA of India:
“Management accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making.”
According to CIMA London:
“Management accounting is the provision of information required by management for such purposes as the formulation of policies, planning and controlling the activities of the enterprise, decision-making on the alternative courses of action, disclosure to those external to the entity (shareholders and others), disclosure to employees and safeguarding of assets.”
According to the American Accounting Association:
Management Accounting is “The application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives”.
From the above it is clear that management accounting uses all techniques of financial accounting, cost accounting and statistics to collect and process data for making it available to management so that it can take decisions in a scientific manner.
The Objects or Functions of Management Accounting:
The primary object of Management Accounting is to present the accounting information to the management. The Following objects are:
Planning:
Management Accounting assists the management in planning as well as to formulate policies by making forecasts about the production, the selling, the inflow and outflow of cash, etc., i.e., in planning a very wide range of activities of the business. Not only that, but it may also forecast how much may be needed for alternative courses of action or the expected rate of return therefrom and, at the same time, decide upon the program of activities to be undertaken.
Organizing:
By preparing budgets and ascertaining specific cost center, it delivers the resources to each center and delegates the respective responsibilities to ensure their proper utilization. As a result, an inter-relationship grows among different parts of the enterprise.
Motivating:
By setting goals, planning the best and economical courses of action and also by measuring the performances of the employees, it tries to increase their efficiency and, ultimately, motivate the organization as a whole.
Coordinate:
It helps the management in coordinating the activities of the enterprise, firstly, by preparing the functional budgets, then coordinating the whole activity by integrating all functional budgets into one which goes by the name of “Master Budget”. In this way, it helps the management by coordinating the different parts of the enterprise. Besides, overall coordination is not at all possible without “Budgetary Control”.
Control:
The actual work done can be compared with ‘Standards’ to enable the management to control the performances effectively.
Communicate:
It helps the management in communicating the financial information about the enterprise. For taking decisions as well as for evaluating business performances, management needs information. Now, this information is available with the help of reports and statements which form an integral part of Management Accounting.
Interpret Financial Information:
It is not possible for all concerned to understand clearly the different treatments of accounting until and unless the users have acquired a piece of sufficient knowledge about the subject since accounting is a highly technical subject.
And, for the same reason, management may not understand the implications of the accounting information in its raw form. But this problem does not arise in the case of Management Accounting as it presents the required information in an intelligible and non-technical way. This leads the management to interpret financial data, evaluate alternative courses of action and to take correct decisions.
Miscellaneous:
While evaluating the efficiency and effectiveness of different policies.
Locating uneconomic as well as the inefficient place of business activities, and.
Solving business problems, e.g., to expand the existing business unit or not, etc.
Advanced Advantages of Management Accounting:
Management accounting has various advantages. Through an effective management accounting system, it is possible to enhance the overall performance of the company. Let us have a look at the advantages of management accounting.
Advanced technique and features:
The reasons because of which the management system seems reliable are the special tools and technique. To form an accurate and valid report special techniques like budget controlling, marginal costing, control accounting, etc are used. Use of the technique may differ according to the issue at hand. However, this technique makes it easier to make decisions in favor of the company.
Cost transparency:
In the corporate world, the majority of the costs come from the Information Technology (IT). The work of management accounting in the firm is to work with the IT department closely. This action ensures budget actions and provides cost transparency to the company.
Flexibility and freedom:
Management accounting systems of a flexible nature. These reports do not require to be made yearly, monthly, or weekly. Therefore, the accountant gets enough time to prepare a perfect report.
Marginal costing:
Marginal costing is possible with the aid of the management accountant. It fixes the selling price of the products created in the organization. Further, it also suggests several ways to use scarce materials and resources. It also recommends actions based on a fixed cost, contribution, and other extras.
The efficiency of the company:
Companies opt for Management accounting as it increases the efficiency of the company in performing operations. It contributes to striving for better performance by evaluating and comparing. Management accounting makes it easier to achieve various results. This indirectly motivates employees to strive for better performance. As a result, they receive rewards in the form of promotions. Thus, management accounting indirectly increases the efficiency of the company as a whole.
The bar of Profitability:
Management accounting includes budgetary control and capital budgeting. The use of this method makes it easier for the company to cut short the extra expenditure for performing vital operations. This indirectly increases the bars of profits for the company, as the company is able to reduce its pricing on the products.
Simplifies the decision making in Financial Statements:
Managerial decisions and other activities of management require a simplified report of the financial statement of the company. For this action, the management accountant creates a detailed technical report with simpler interpretations. Here, he represents the key facts of the financial statements. This enables the managing officers to take up appropriate decisions for the betterment of the company.
Enables the fluctuation of business monetary fund:
One of the essential factors in business is the monetary fund. Management accounting enables control over the fluctuation of this monetary fund. Management accounting studies the flow of the funds in detail. Moreover, it helps in maintaining the emergency fund in case of any urgency. Further, it also helps in eliminating any source within the company that misuses the fund. After all, emergency preparation should always be kept aside before setting up any business.
Assist in goal completion:
The objective of the report presented by the management accountant is to assist in achieving a long-term goal. It becomes possible to achieve the goal due to the detailed information of the management accountant, which highlights the strong and weak points of the company. In addition, this information helps to identify the weakness and takes measures to overcome them.
Future prediction from the past result:
Every new system that evolves for the corporate world has a single motive. It is to attain success in the competitive market. With similar intent, management accounting system also strives for betterment in performance. Thus, with the help of given data of the past (of the company), it provides a chance to prepare for better future results.
Although management accounting does not promise perfect decisions, they do increase the chances of taking effective and efficient decisions.
Key Advantages of Management Accounting:
The following advantages maybe derive from Management Accounting:
The business activities are managing better by the application of both budgeting and planning.
No doubt it helps to increase the efficiency of the business.
Measures the actual performance in comparison with the budgets.
Also helps to improve the relationship between management and labor.
It helps the management to chalk-out future plans of action on the basis of past results.
Helps the management in such a way that the latter can maximize the rate of return on capital employed.
Advanced Limitations of Management Accounting:
The origin of management accounting can trace to overcome the limitations of financial accounting and cost accounting. Financial accounting is very useful to the different categories of persons but it suffers from the following limitations:
Historical Nature:
Financial accounting is of historical nature. It does not provide the necessary information to the management for planning, control, and decision-making. It does not tell how to increase the profit and maximize the return on the capital employed.
Technical Subject:
Financial accounting is highly technical in nature. Financial accounts can be prepared and interpreted only by those persons who possess adequate knowledge of accounting concepts and conventions and are well conversant to the practice of accounting.
Recording of Actual Cost:
In financial accounting assets and properties are recorded at their cost. No effect of changes in their value is recorded in the books after its acquisition. Thus, it has nothing to do with their realizable or replaceable value.
Incomplete Knowledge of Costs:
In financial accounting data relating to cost is not available according to different products or jobs or processes in order to judge the profitability of each. Information regarding wastages and losses is also not available from the financial accounts. It is also difficult to fix the prices of the products without the availability of a detailed analysis of costs which is not available in financial accounts.
No-Provision for Cost Control:
Costs cannot control through financial accounting as there is no provision for corrective action because of expenses being record after their incurrence. No technique to check the reasonableness of any expenditure or no system for fixing definite responsibility on any authority for wastage or excessive expenditure is available in financial accounting.
No-Evaluation of Business Policies and Plans:
There is no device in financial accounting by which the actual progress can measure against the targets in order to evaluate the business policies and plans, to know the reasons for deviations and how to correct them if need be.
Not Helpful in Decision-Making:
As the data available is of historical nature, financial accounting is not of much help to the management in selecting a profitable alternative. There are many situations where management is requiring to take decisions but the information provided by financial accounting is not adequate.
Though cost accounting came into existence to remove the limitations of financial accounting its scope as compared to management accounting is limited as it deals primarily with the cost data. In actual practice, cost accountants are doing the jobs of management accountants. Further, most of the techniques of management accounting are also being used by the cost accountants.
That is why; management accounting is treating as the extension of cost accounting. But for our purpose of the study we treat the management accounting more broad as compared to cost accounting as management accounting, includes many more aspects of the study besides the cost accounting. Thus, the science of accounting is not in a finished state. It is in the process of evolution. The role of accounting has changed after the Second World War.
Now, it is not a mere recording of business transactions in the books of original entry, then classifying them into the ledger and finally summarizing them by preparing the profit and loss account and balance sheet as is done in financial accounting or calculation and control of cost as is done in cost accounting.
Rather accounting helps in forecasting, planning and controlling the business events and taking managerial decisions. Keeping this in view a new branch of accounting known as Management Accounting has been developing to cope with the limitations of financial accounting and cost accounting. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।
Management Accounting of Functions, Advantages, and Limitations. Image Credit from #Pixabay.
Understanding and Learn What? Basic of Accounting!
The business enterprises use accounting to calculate the profit from the business activities at the end of the given period. Accounting or accountancy is the measurement, processing, and communication of financial information about financial institutions like businesses and corporations. Also, Learn What? Basic of Accounting!
There is two basis for calculating the profit, namely, the cash basis and accrual basis.
Cash basis of accounting: In this basis of accounting, the income is calculated as the excess of actual cash receipts in respect of the sale of goods, services, properties, etc., over actual cash payments regarding the purchase of goods, expenses on rent, electricity, salaries, etc. Credit transactions are not considered at all including adjustments for outstanding expenses and accrued income items. This method is useful for professional people like doctors, engineers, advocates, chartered accountants, brokers and small traders. It is simple to adopt because there are no adjustment entries. But this basis does not disclose the true profits because it does not consider the income and expense items which relate to the accounting period but not paid in cash. Moreover, this method is not applicable where the number of transactions is very large and expenditure on fixed assets is high. The income or profit is calculated with the help of receipts and payments account.
Accrual basis of accounting: Under this method, the items of income (revenue) are recognized when they are earned and not when the money is actually received later on. Similarly, expense items are recognized when incurred and not when actual payments are made for them. It means revenue and expenses are taken into consideration for the purpose of income determination on the basis of the accounting period to which they relate. The accrual basis makes a distinction between actual receipts of cash and the right to receive cash for revenues and the actual payments of cash and legal obligations to pay expenses. It means that income accrued in the current year becomes the income of current year whether the cash for that item of income is received in the current year or it was received in the previous year or it will be received in the next year. The same is true of expense items. Expense item is recorded if it becomes payable in the current year whether it is paid in the current year or it was paid in the previous year or it will be paid in the next year.
The advantages of this system are:
It is based on all business transaction of the year and, therefore, discloses the current profit or loss.
The method is used in all types of business units.
It is more scientific and rational application, and.
It is most suitable for the application of matching principle.
The disadvantages are:
It is not the simple one and requires the use of estimates and personal judgment.
It fails to disclose the actual cash flows.
The mixed or Hybrid basis of accounting: Under these method revenues (items of income) is recognized on the cash basis while the expenses are recorded on the accrual basis. The purpose is to remain cautious, safe and hundred percent certain for revenues items and make adequate provisions for expenses.
Although not everyone has the opportunity to study accounting, a CEO needs to keep track of all aspects of successful business, even if a company is recruiting outsourced bookkeeping. Here are ten accounting term definitions to communicate effectively with your online accounting service provider. Ten-Key or Ten-Tips are:
Property: Property is the money that has been deposited by the business and is owned by no debt or debt. This can be things that are vulnerable to the time or goods sold to customers. This may include cash and investment, building and property, accounts receivable, warehouse inventory, equipment, and supplies.
Balance Sheet: Balance Sheet is an important aspect of the business. This assets/liabilities + stockholder records the original accounting formula of monthly, quarterly or annual at a certain point in time of equity/capital. With the balance sheet, the financial health of the business can be traced.
General Account holder: General account holder is the account holder’s account holder, with the balance sheet and income statement accounts. All business transactions are recorded here, including sales, credit purchase, office expenses and income loss.
Gross Margin: The total number of sales made from related costs like gross margin or profit, sale cost, wholesale cost, materials, and supply.
Loss: When a service or product sells it for less than the cost of supply or construction, or when the expenditure exceeds the revenue of a particular property, then it is called loss.
Credit/Account: On the credit/account it means that the products or services have been sold with credit or use. Payment for these items has not been provided immediately, and there may be accounts that result in interest charges.
Receipts: Receipts are the total amount of cash collected in business transactions for one day. Other revenue collected does not include it.
Revenue: Income and revenue are compromising on the aggregate amount of all the income collected on each other. It may include cash sales, credit purchases, membership fees and interest income. This is different from the receipts, as it can include money that cannot be collected at the time of delivery.
Business Discounts: Exemption from a trade discount purchase price is the percentage and is based on the number of items ordered at one point. With small discounts for short orders, higher discounts may apply to larger orders.
Trial Balance: The test balance is filed in the general account holder and it includes both a debit and a credit for a particular account. Sheets should be balanced with the equivalent debt.
Learn What? Explain the Internal and External Sources of Employee Recruitment!
The searching of suitable candidates and informing them about the openings in the enterprise is the most important aspect of the recruitment process. The Concept of the study Explains – the Internal and External Sources of Employee Recruitment: Internal Sources and their advantages and disadvantages, External Sources and their advantages and disadvantages. Now, Explain the Internal and External Sources of Employee Recruitment!
The candidates may be available inside or outside the organization. Basically, there are two sources of recruitment i.e., internal and external sources.
(A) Internal Sources:
Best employees can be found within the organization… When a vacancy arises in the organization, it may be given to an employee who is already on the payroll. Internal sources include promotion, transfer and in certain cases demotion. When a higher post is given to a deserving employee, it motivates all other employees of the organization to work hard. The employees can be informed of such a vacancy by internal advertisement.
Key Points on Internal sources of recruitment:
Internal sources of recruitment are:
Publicity: Publicity means to give the employee a higher position, position, salary, and responsibility. Therefore, the vacancy can be filled up by promoting the right candidate of the same organization.
Transfer: The meaning of shifting means employment change, position, pay and change in the place of employment without the employee’s responsibility. Therefore, vacancies can be filled by transferring the suitable candidate of the same organization.
Internal advertising: Here, the vacancy is advertised within the organization. Existing employees are asked to apply for the vacancy. So, it is recruited from within the organization.
Retired Manager: Sometimes, retired managers can be remembered for a short period. This is done when the organization cannot find the suitable candidate.
Remember with a long leave: The organization can remember a manager who has gone on a long leave. This is done when the organization has to face a problem which can only be solved by that particular manager. After solving the problem, his leave has been increased.
Methods of Internal Sources:
The Internal Sources Are Given Below:
Transfers:
The transfer involves shifting of persons from present jobs to other similar jobs. These do not involve any change in rank, responsibility or prestige. The numbers of persons do not increase with transfers.
Promotions:
Promotions refer to shifting of persons to positions carrying better prestige, higher responsibilities, and more pay. The higher positions falling vacant may be filled up from within the organization. A promotion does not increase the number of persons in the organization.
A person going to get a higher position will vacate his present position. The promotion will motivate employees to improve their performance so that they can also get the promotion.
Present Employees:
The present employees of a concern are informed about likely vacant positions. The employees recommend their relations or persons intimately known to them. Management is relieved of looking out prospective candidates.
The persons recommended by the employees may be generally suitable for the jobs because they know the requirements of various positions. The existing employees take full responsibility for those recommended by them and also ensure their proper behavior and performance.
Advantages of Internal Sources:
The Following are The Advantages of Internal Sources:
Improves morale:
When an employee from inside the organization is given the higher post, it helps in increasing the morale of all employees. Generally, every employee expects promotion to a higher post carrying more status and pays (if he fulfills the other requirements).
No Error in Selection:
When an employee is selected from inside, there is the least possibility of errors in selection since every company maintains the complete record of its employees and can judge them in a better manner.
Promotes Loyalty:
It promotes loyalty among the employees as they feel secure on account of chances of advancement.
No Hasty Decision:
The chances of hasty decisions are completely eliminated as the existing employees are well tried and can be relied upon.
The economy in Training Costs:
The existing employees are fully aware of the operating procedures and policies of the organization. The existing employees require little training and it brings economy in training costs.
Self-Development:
It encourages self-development among the employees as they can look forward to occupying higher posts.
Disadvantages of Internal Sources:
It discourages capable persons from outside to join the concern.
It is possible that the requisite number of persons possessing qualifications for the vacant posts may not be available in the organization.
For posts requiring innovations and creative thinking, this method of recruitment cannot be followed.
If the only seniority is the criterion for promotion, then the person filling the vacant post may not be really capable.
In spite of the disadvantages, it is frequently used as a source of recruitment for lower positions. It may lead to nepotism and favoritism. The employees may be employed on the basis of their recommendation and not suitability.
(B) External Sources:
All organizations have to use external sources for recruitment to higher positions when existing employees are not suitable. More persons are needed when expansions are undertaken.
Key Points on External sources of recruitment:
External sources of recruitment are:
Management Consultants: Management Consultants are used to selecting high-level employees. They act as the employer’s representative. They make all necessary arrangements for recruitment and selection. In return for their services, they take a service fee or commission.
Public Advertisement: The company’s personnel department advertises vacancies in newspapers, internet, etc. This advertisement gives information about the essential qualities of the company, the job, and the candidate. It invites applications from suitable candidates. This source is the most popular source of recruitment. That’s because it gives a very wide choice. However, it is very expensive and time-consuming.
Campus recruitment: The organization organizes interviews in the premises of the management institutes and engineering colleges. Interviews are given for final year students, who are soon to get graduation. Proper candidates are selected by the organization on the basis of their academic records, communication skills, intelligence etc. This source is used for the recruitment of qualified, trained but inexperienced candidates.
Recommendations: The organization can recruit candidates on the basis of recommendations from existing managers or sister companies.
Deputation Personnel: The organization can also recruit the candidates sent on deputation by the government or financial institutions or by holding or subsidiary companies.
The external sources are discussed below:
Methods of External Sources:
Advertisement:
It is a method of recruitment frequently used for skilled workers, clerical and higher staff. Advertisement can be given in newspapers and professional journals. These advertisements attract applicants in a large number of highly variable quality.
Preparing good advertisement is a specialized task. If a company wants to conceal its name, a ‘blind advertisement’ may be given asking the applicants to apply to Post Bag or Box Number or to some advertising agency.
Employment Exchanges:
Employment exchanges in India are run by the Government. For unskilled, semi-skilled, skilled, clerical posts etc., it is often used as a source of recruitment. In certain cases, it has been made obligatory for the business concerns to notify their vacancies to the employment exchange. In the past, employers used to turn to these agencies only as a last resort. The job-seekers and job-givers are brought into contact by the employment exchanges.
Schools, Colleges, and Universities:
Direct recruitment from educational institutions for certain jobs (i.e. placement) which require technical or professional qualification has become a common practice. A close liaison between the company and educational institutions helps in getting suitable candidates. The students are spotted during the course of their studies. Junior level executives or managerial trainees may be recruited in this way.
Recommendation of Existing Employees:
The present employees know both the company and the candidate is recommended. Hence some companies encourage their existing employees to assist them in getting applications from persons who are known to them.
In certain cases, rewards may also be given if candidates recommended by them are actually selected by the company. If recommendation leads to favoritism, it will impair the morale of employees.
Factory Gates:
Certain workers present themselves at the factory gate every day for employment. This method of recruitment is very popular in India for unskilled or semi-skilled labor. The desirable candidates are selected by the first line supervisors. The major disadvantage of this system is that the person selected may not be suitable for the vacancy.
Casual Callers:
That personnel who casually come to the company for employment may also be considered for the vacant post. It is the most economical method of recruitment. In the advanced countries, this method of recruitment is very popular.
Central Application File:
A file of past applicants who were not selected earlier may be maintained. In order to keep the file alive, applications in the files must be checked at periodical intervals.
Labour Unions:
In certain occupations like construction, hotels, maritime industry etc., (i.e., industries where there is instability of employment) all recruits usually come from unions. It is advantageous from the management point of view because it saves expenses of recruitment. However, in other industries, unions may be asked to recommend candidates either as a goodwill gesture or as a courtesy towards the union.
Labour Contractors:
This method of recruitment is still prevalent in India for hiring unskilled and semi-skilled workers in brick kiln industry. The contractors keep themselves in touch with the labor and bring the workers to the places where they are required. They get the commission for the number of persons supplied by them.
Former Employees:
In case employees have been laid off or have left the factory on their own, they may be taken back if they are interested in joining the concern (provided their record is good).
Other Sources:
Apart from these major sources of external recruitment, there are certainly other sources which are exploited by companies from time to time. These include special lectures delivered by the recruiter in different institutions, though apparently, these lectures do not pertain to recruitment directly.
Then there are video files which are sent to various concerns and institutions so as to show the history and development of the company. These films present the story of the company to various audiences, thus creating interest in them.
Various firms organize trade shows which attract many prospective employees. Many a time advertisements may be made for a special class of workforce (say married ladies) who worked prior to their marriage.
These ladies can also prove to be the very good source of the workforce. Similarly, there is the labor market consisting of physically handicapped. Visits to other companies also help in finding new sources of recruitment.
Advantages of External Sources:
Availability of Suitable Persons:
Internal sources, sometimes, may not be able to supply suitable persons from within. External sources do give a wide choice to the management. A large number of applicants may be willing to join the organization. They will also be suitable as per the requirements of skill, training, and education.
Brings New Ideas:
The selection of persons from outside sources will have the benefit of new ideas. The persons having experience in other concerns will be able to suggest new things and methods. This will keep the organization in a competitive position.
Economical:
This method of recruitment can prove to be economical because new employees are already trained and experienced and do not require much training for the jobs.
Disadvantages of External Sources:
Demoralisation:
When new persons from outside join the organization then present employees feel demoralized because these positions should have gone to them. There can be a heart burning among old employees. Some employees may even leave the enterprise and go for better avenues for other concerns.
Lack of Co-Operation:
The old staff may not co-operate with the new employees because they feel that their right has been snatched away by them. This problem will be acute especially when persons for higher positions are recruited from outside.
Expensive:
The process of recruiting from outside is very expensive. It starts with inserting costly advertisements in the media and then arranging written tests and conducting interviews. In spite of all this if suitable persons are not available, then the whole process will have to be repeated.
The problem of Maladjustment:
There may be a possibility that the new entrants have not been able to adjust to the new environment. They may not temperamentally adjust with the new persons. In such cases either the persons may leave themselves or management may have to replace them. These things have the adverse effect on the working of the organization.
Suitability of External Sources of Recruitment:
External Sources of Recruitment are Suitable for The Following Reasons:
The required qualities such as will, skill, talent, knowledge etc., are available from external sources.
It can help in bringing new ideas, better techniques and improved methods to the organization.
The selection of candidates will be without preconceived notions or reservations.
The cost of employees will be minimal because candidates selected in this method will be placed on the minimum pay scale.
The entry of new persons with varied experience and talent will help in human resource mix.
The existing employees will also broaden their personality.
The entry of qualitative persons from outside will be in the long-run interest of the organization.
